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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 20-F

|           |  |                                                                                               
|---------- |  | ----------------------------------------------------------------------------------------------
|(Mark One)
|o          |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|  |  |                                                                                     
|  |  | For the fiscal year ended December 31, 2002.                                        

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|  |  |                                                                                         
|  |  | For the transition period from ________________ to ________________.                    

Commission File Number 0-29214



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HAWKER RESOURCES INC.

(Exact name of Registrant as specified in its charter)


Alberta, Canada
(Jurisdiction of incorporation or organization)

3200, 350  7th Avenue S.W.
Calgary, Alberta, T2P 3N9
(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act:

None.

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|Common Shares       |  | Toronto Stock Exchange                   

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act:

Not Applicable.



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As at December 31, 2002, the issuers authorized share capital consisted
of an unlimited number of Common Shares and an unlimited number of preferred
shares issuable in series, of which 4,959,937 Common Shares and no
preferred shares were outstanding. As at June 24, 2003, the issuers
authorized share capital consisted of an unlimited number of Common Shares, an
unlimited number of Class A Shares and an unlimited number of preferred shares
issuable in series, of which up to 2,152,465 Series V Shares and up to
3,874,437 Series W Shares had been created and authorized for issuance. As at
June 24, 2003, 21,897,200 Common Shares, 3,874,437 Class A Shares and no
preferred shares were outstanding.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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.
x Yes o No

Indicate by check mark which financial statement item the registrant has
elected to follow. x
Item 17 o Item 18



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TABLE OF CONTENTS



|                                                  |                                                                                       |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|GLOSSARY                                         
|ABBREVIATIONS                                    
|CONVERSION                                       
|FORWARD-LOOKING STATEMENTS                       
|PART I                                           
|                                                  | Item 1. Identity of Directors, Senior Management and Advisers                        
|                                                  | Item 2. Offer Statistics and Expected Timetable                                      
|                                                  | Item 3. Key Information                                                              
|                                                  | Item 4. Information on the Company                                                   
|                                                  | Item 5. Operating and Financial Review and Prospects                                 
|                                                  | Item 6. Directors, Senior Management and Employees                                   
|                                                  | Item 7. Major Shareholders and Related Party Transactions                            
|                                                  | Item 8. Financial Information                                                        
|                                                  | Item 9. The Offer and Listing                                                        
|                                                  | Item 10. Additional Information                                                      
|                                                  | Item 11. Quantitative and Qualitative Disclosures About Market Risk                  
|                                                  | Item 12. Description of Securities Other than Equity Securities                      
|PART II                                          
|                                                  | Item 13. Defaults, Dividend Arrearages and Delinquencies                             
|                                                  | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|                                                  | Item 15. Controls and Procedures                                                     
|                                                  | Item 16A. Audit Committee Financial Expert                                           
|                                                  | Item 16B. Code of Ethics                                                             
|                                                  | Item 16C. Principal Accountant Fees and Services                                     
|PART III                                         
|                                                  | Item 17. Financial Statements                                                        
|                                                  | Item 18. Financial Statements                                                        
|                                                  | Item 19. Exhibits                                                                    
|CERTIFICATIONS                                   
|FINANCIAL STATEMENTS                             
|INDEX TO EXHIBITS                                
|Articles of Arrangement of the Company           
|Restated Articles of Incorporation of the Company
|Articles of Amendment and Restated Articles      
|Articles of Amendment and Restated Articles      
|Certification Under Section 906                  



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TABLE OF CONTENTS

|                           |  |           |     |                                                                              |  |  |    | 
|-------------------------- |  | --------- | --- | ---------------------------------------------------------------------------- |  |  | -- | 
|GLOSSARY                   |  |           |     | 1                                                                            | 
|ABBREVIATIONS              |  |           |     | 2                                                                            | 
|CONVERSION                 |  |           |     | 3                                                                            | 
|FORWARD-LOOKING STATEMENTS |  |           | 3   |                                                                             
|PART I                     |  |           |     | 4                                                                            | 
|                           |  | Item 1.   |     | Identity of Directors, Senior Management and Advisers                        |  |  | 4  | 
|                           |  | Item 2.   |     | Offer Statistics and Expected Timetable                                      |  |  | 4  | 
|                           |  | Item 3.   |     | Key Information                                                              |  |  | 4  | 
|                           |  | Item 4.   |     | Information on the Company                                                   |  |  | 11 | 
|                           |  | Item 5.   |     | Operating and Financial Review and Prospects                                 |  |  | 25 | 
|                           |  | Item 6.   |     | Directors, Senior Management and Employees                                   |  |  | 29 | 
|                           |  | Item 7.   |     | Major Shareholders and Related Party Transactions                            |  |  | 36 | 
|                           |  | Item 8.   |     | Financial Information                                                        |  |  | 37 | 
|                           |  | Item 9.   |     | The Offer and Listing                                                        |  |  | 38 | 
|                           |  | Item 10.  |     | Additional Information                                                       |  |  | 39 | 
|                           |  | Item 11.  |     | Quantitative and Qualitative Disclosures About Market Risk                   |  |  | 50 | 
|                           |  | Item 12.  |     | Description of Securities Other than Equity Securities                       |  |  | 51 | 
|PART II                    |  |           |     | 51                                                                           | 
|                           |  | Item 13.  |     | Defaults, Dividend Arrearages and Delinquencies                              |  |  | 51 | 
|                           |  | Item 14.  |     | Material Modifications to the Rights of Security Holders and Use of Proceeds |  |  | 51 | 
|                           |  | Item 15.  |     | Controls and Procedures                                                      |  |  | 51 | 
|                           |  | Item 16A. |     | Audit Committee Financial Expert                                             |  |  | 51 | 
|                           |  | Item 16B. |     | Code of Ethics                                                               |  |  | 51 | 
|                           |  | Item 16C. |     | Principal Accountant Fees and Services                                       |  |  | 51 | 
|PART III                   |  |           |     | 51                                                                           | 
|                           |  | Item 17.  |     | Financial Statements                                                         |  |  | 51 | 
|                           |  | Item 18.  |     | Financial Statements                                                         |  |  | 52 | 
|                           |  | Item 19.  |     | Exhibits                                                                     |  |  | 52 | 
|CERTIFICATIONS             |  |           |     | 55                                                                           | 
|FINANCIAL STATEMENTS       |  |           | F-1 |                                                                             
|INDEX TO EXHIBITS          |  |           | I-1 |                                                                             







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GLOSSARY

In this document, unless the context otherwise requires, the following words
and phrases have the meanings set forth below:

2% Debenture means a debenture of the Company issued as part of the Financing
on April 3, 2003 in the principal amount of $8.40, bearing interest at the rate
of 2% per annum from the date of issue payable on the earlier of the maturity
date of December 31, 2003 and the date of surrender;

Arrangement means the arrangement involving BidCo and Southward pursuant to
section 193 of the Business Corporations Act(Alberta) completed on April 30,
2003;

ARTC means Alberta Royalty Tax Credit;

BidCo means 1022971 Alberta Ltd., all of the outstanding shares of which were
acquired by the Company for an aggregate consideration of $1.00 on March 31,
2003;

Class A Share means a class A share in the capital of the Company;

Common Share means a common share in the capital of the Company;

Conversion means the deemed exercise of all of the Warrants pursuant to which
the former holders of the Warrants were issued, for each Warrant, 5 Common
Shares and 9 Class A Shares upon the surrender of 5 Series V Shares, 9 Series W
Shares and one 2% Debenture;

Company or Hawker means Hawker Resources Inc.;

Equity Shares means Common Shares and Class A Shares;

established reserves means proved reserves plus risked probable reserves;

FinanceCo means 970183 Alberta Ltd., a wholly owned subsidiary of Matco;

Financing means the financing completed by the Company on April 3, 2003
pursuant to which the Company issued 223,798 Common Shares and 430,493 Units
for aggregate gross proceeds of approximately $3.7 million (which Units were
converted to 6,026,902 Equity Shares pursuant to the Conversion);

gross means Hawkers working interest or royalty interest share of reserves
or production, as the case may be, before the deduction of royalties and, with
respect to land and wells, means the total number of acres or wells, as the
case may be, in which Hawker has a working interest or a royalty interest;

Matco means Matco Investments Ltd.;

Matco Capital means Matco Capital Ltd., a company controlled by Matco;

McDaniel means McDaniel and Associates Consultants Ltd., independent oil and
natural gas reservoir engineers;

McDaniel Report means the engineering report prepared by McDaniel evaluating
the crude oil, natural gas liquids and natural gas reserves attributable to a
50% undivided interest in the Optioned Properties effective as of May 1, 2003
based upon detailed engineering evaluations made by McDaniel effective as of
January 1, 2003, adjusted to take into account actual and estimated production
from January 1, 2003 to May 1, 2003 and based on an engineering evaluation of
wells drilled from January 1, 2003 to May 1, 2003, and which was prepared on
the basis of both constant and escalating price and cost assumptions;

net means Hawkers working interest share of production or reserves, as the
case may be, after the deduction of royalties, and, with respect to land and
wells, means Hawkers working interest share therein;

Optioned Properties means all of the petroleum and natural gas rights and
related assets of Southward other than those which are both west of the fifth
meridian and in the Province of Alberta, as described under the heading Item
4D  Information on the Company  Property, plant and equipment;

probable additional reserves means those reserves which an analysis of
drilling, geological, geophysical and engineering data does not demonstrate to
be proved under current technology and existing economic conditions, but where
such analysis suggests the likelihood of their existence and future recovery.
Probable additional reserves to

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be obtained by the application of enhanced recovery processes will be the
increased recovery over and above that estimated in the proved category which
can be realistically estimated for the pool on the basis of enhanced recovery
processes which can be reasonably expected to be instituted in the future;

proved reserves means those reserves estimated as recoverable under current
technology and existing economic conditions from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir;

Purchase Option means the option in favour of the Company to purchase an
undivided interest of up to 49% in the Optioned Properties at a purchase price
based on an ascribed price, as at May 1, 2003 and subject to adjustment, of
$136,900,000 for a 100% interest in the Optioned Properties;

risked probable reserves means probable additional reserves discounted by
one-half to account for the additional risk of recovery for probable reserves;

royalty interest means an interest in an oil and gas property consisting of a
royalty granted in respect of production from the property;

SEC means the United States Securities and Exchange Commission;

Series V Share means a series V voting preferred share in the capital of the
Company;

Series W Share means a series W non-voting preferred share in the capital of
the Company;

Southward means Southward Energy Ltd.;

Statements of Revenues and Operating Expenses means the statements of
revenues and operating expenses relating to the proposed acquisition by the
Company of an aggregate 50% undivided interest in the Optioned Properties
audited by Deloitte & Touche LLP;

TSX means the Toronto Stock Exchange;

Tax Actmeans the Income Tax Act(Canada);

Unit means a Unit issued by the Company on April 3, 2003 pursuant to the
Financing for a subscription price of $8.46787851 per Unit consisting of: (i) a
2% Debenture; (ii) a Warrant; (iii) 5 Series V Shares; and (iv) 9 Series W
Shares;

Warrant means a series A warrant of the Company which entitled the holder
thereof to purchase 5 Common Shares and 9 Class A Shares upon the surrender of
5 Series V Shares and 9 Series W Shares and either the surrender of a 2%
Debenture or the payment of $8.40. Pursuant to the Conversion, all of the
Warrants were deemed to be exercised; and

working interest means the percentage undivided interest held by a party in
an oil and gas property.

Unless otherwise indicated, references herein to $ or dollars are to
Canadian dollars.




ABBREVIATIONS

|                                  |  |                                          |  |        |  |                            
|--------------------------------- |  | ---------------------------------------- |  | ------ |  | ---------------------------
|Crude Oil and Natural Gas Liquids |  | Natural Gas                              |  |       
|                                  |  |                                          |  |       
|bbls                              |  | barrels                                  |  | mcf    |  | thousand cubic feet        
|bbls/d                            |  | barrels per day                          |  | mmcf   |  | million cubic feet         
|mbbls                             |  | thousand barrels                         |  | bcf    |  | billion cubic feet         
|boe                               |  | barrels of oil equivalent of natural gas |  | mcf/d  |  | thousand cubic feet per day
|                                  |  | and crude oil on the basis of 1 bbl of   |  | mmcf/d |  | million cubic feet per day 
|                                  |  | crude oil for 6 mcf of natural gas       |  | GJ     |  | gigajoules                 
|boe/d                             |  | barrels of oil equivalent per day        |  | GJ/d   |  | gigajoules per day         
|mboe                              |  | thousand boe                             |  |        |  |                            
|NGLs                              |  | natural gas liquids                      |  |        |  |                            
|mmbtu                             |  | million British thermal units            |  |        |  |                            
|stb                               |  | standard stock tank barrel               |  |        |  |                            

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CONVERSION

The following table sets forth certain standard conversions from Standard
Imperial units to the International System of Units (or metric units).

|                      |  |                                 |  |             |        | 
|--------------------- |  | ------------------------------- |  | ----------- | ------ | 
|To Convert From       |  | To                              |  | Multiply By
|                      |  |                                 |  |            
|mcf                   |  | Thousand cubic metres (103m3) |  |             | 0.0282 | 
|Thousand cubic metres |  | mcf                             |  |             | 35.494 | 
|bbls                  |  | Cubic metres (m3)             |  |             | 0.159  | 
|Cubic metres          |  | bbls                            |  |             | 6.290  | 
|Feet                  |  | Metres                          |  |             | 0.305  | 
|Metres                |  | Feet                            |  |             | 3.281  | 
|Miles                 |  | Kilometres                      |  |             | 1.609  | 
|Kilometres            |  | Miles                           |  |             | 0.621  | 
|Acres                 |  | Hectares                        |  |             | 0.405  | 
|Hectares              |  | Acres                           |  |             | 2.471  | 




FORWARD-LOOKING STATEMENTS

Certain statements contained in this document constitute forward-looking
statements. When used in this document, the words may, would, could,
will, intend, plan, anticipate, believe, seek, propose,
estimate, expect, and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. Such statements reflect
the Companys current views with respect to future events and are subject to
certain risks, uncertainties and assumptions. Many factors could cause the
Companys actual results, performance or achievements to vary from those
described in this document. Should one or more of these risks or uncertainties
materialize, or should assumptions underlying forward-looking statements prove
incorrect, actual results may vary materially from those described in this
document as intended, planned, anticipated, believed, estimated or expected.
The Company does not intend, and does not assume any obligation, to update
these forward-looking statements.

In particular, this document contains forward-looking statements pertaining to the following:



| |  | the quantity of the Companys reserves;                                                                                                   
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | oil and natural gas production levels;                                                                                                    
| 
| |  | capital expenditure programs;                                                                                                             
| 
| |  | projections of market prices and costs;                                                                                                   
| 
| |  | supply and demand for oil and natural gas;                                                                                                
| 
| |  | expectations regarding the Companys ability to raise capital and to
continually add to reserves through acquisitions and development; and
| 
| |  | treatment under governmental regulatory regimes.                                                                                          

The Companys actual results could differ materially from those anticipated in
these forward-looking statements as a result of the risk factors set forth
below and elsewhere in this document:



| |  | volatility in market prices for oil and natural gas;                                                              
|- |  | ------------------------------------------------------------------------------------------------------------------
| 
| |  | liabilities and risks inherent in oil and gas operations;                                                         
| 
| |  | uncertainties for, among other things, capital, acquisitions of
reserves, undeveloped lands and skilled personnel;
| 
| |  | incorrect assessments of the value of acquisitions; and                                                           
| 
| |  | geological, technical, drilling and processing problems.                                                          

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PART I




Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.




Item 2. Offer Statistics and Expected Timetable

Not applicable.




Item 3. Key Information

A.  Selected financial data.

The following selected consolidated financial data, for the periods
indicated, has been derived from the Companys consolidated financial
statements, which are included elsewhere herein, and was prepared in accordance
with Canadian generally accepted accounting principles (Canadian GAAP).
Canadian GAAP differs in certain respects from U.S. generally accepted
accounting principles (U.S. GAAP). For a description of the material
differences between Canadian GAAP and U.S. GAAP with respect to the Companys
consolidated financial statements, see note 14 to the financial statements
contained herein. The following selected financial data is qualified in its
entirety by, and should be read in conjunction with the consolidated financial
statements and the notes thereto appearing elsewhere in this annual report and
Item 5. Operating and Financial Review and Prospects. The historical
results below are not necessarily indicative of the results to be expected for
any future period.

The Companys financial statements are stated in Canadian Dollars (CDN$
or $).

Selected Consolidated Financial Information
Consolidated Statement of Earnings and Deficit Data

|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |       |  | 
|----------------------- | --------------------------------------------- |  | ------ | ----------- | - | ----------------------- | ----- | ---------------------------------------- |  | ---- | ------ | ----- |  | ---- | ------ | ----- |  |  | ------ | ------ |  |  | ------ | ----- |  | 
|                        |                                               |  |        | Pro Forma   |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|                        |                                               |  |        | Year        |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|                        |                                               |  |        | Ended       |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|                        |                                               |  |        | December    |   | Year Ended December 31,
|                        |                                               |  |        | 31, 2002    |   |                        
|                        |                                               |  |        | (unaudited) |   | 2002                    |       | 2001                                     |  | 2000 |        | 1999  |  | 1998
|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |     
|                        |                                               |  |        |             |   |                         |       | (in thousands, except per share amounts)
|Earnings Statement Data |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|Revenues:               |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|                        | Oil and natural gas sales                     |  | $      | 24,395      |   |                         | $     |                                         |  |      | $      |      |  |      | $      |      |  |  | $      |       |  |  | $      |      | 
|                        | Royalties, net                                |  |        | (6,088      | ) |                         |       |                                         |  |      |        |      |  |      |        |      |  |  |        |       |  |  |        |      | 
|                        | Interest and other income                     |  |        | 139         |   |                         |       | 139                                      |  |      |        | 729   |  |      |        | 1,513 |  |  |        | 694    |  |  |        | 633   | 
|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |       | 
|Net revenues            |                                               |  | 18,446 |             |   |                         | 139   |                                          |  |      | 729    |       |  |      | 1,513  |       |  |  | 694    |        |  |  | 633    |      
|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |       | 
|Expenses:               |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |      
|                        | Production                                    |  |        | 3,708       |   |                         |       |                                         |  |      |        |      |  |      |        |      |  |  |        |       |  |  |        |      | 
|                        | Research and development                      |  |        |            |   |                         |       |                                         |  |      |        | 9,255 |  |      |        | 7,889 |  |  |        | 11,248 |  |  |        | 9,325 | 
|                        | General and administrative                    |  |        | 4,931       |   |                         |       | 1,596                                    |  |      |        | 7,106 |  |      |        | 3,648 |  |  |        | 3,934  |  |  |        | 4,080 | 
|                        | Interest                                      |  |        | 2,126       |   |                         |       | 71                                       |  |      |        | 787   |  |      |        | 1,176 |  |  |        | 1,434  |  |  |        | 245   | 
|                        | Maintenance of patents                        |  |        | 243         |   |                         |       | 243                                      |  |      |        |      |  |      |        |      |  |  |        |       |  |  |        |      | 
|                        | Depletion, depreciation
and asset write-downs |  |        | 19,422      |   |                         |       | 7,216                                    |  |      |        | 9,655 |  |      |        | 1,404 |  |  |        | 687    |  |  |        | 471   | 
|                        | Site restoration                              |  |        | 411         |   |                         |       |                                         |  |      |        |      |  |      |        |      |  |  |        |       |  |  |        |      | 
|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |       | 
|Total expenses          |                                               |  | 30,841 |             |   |                         | 9,126 |                                          |  |      | 26,803 |       |  |      | 14,117 |       |  |  | 17,303 |        |  |  | 14,121 |      
|                        |                                               |  |        |             |   |                         |       |                                          |  |      |        |       |  |      |        |       |  |  |        |        |  |  |        |       | 

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|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |   |       |  
|---------------------------------------------------------------- | -------------------------------------------------- | ------------- | ------- | ----------- | - | ----------------------- | --------- | ---------------------------------------- | ---- | ---- | --------- | ------ | ----- | ---- | --------- | ----- | ----- | - | --------- | ----- | ----- | - | --------- | - | ----- | -
|                                                                 |                                                    |               |         | Pro Forma   |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |  
|                                                                 |                                                    |               |         | Year        |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |  
|                                                                 |                                                    |               |         | Ended       |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |  
|                                                                 |                                                    |               |         | December    |   | Year Ended December 31,
|                                                                 |                                                    |               |         | 31, 2002    |   |                        
|                                                                 |                                                    |               |         | (unaudited) |   | 2002                    |           | 2001                                     |      | 2000 |           | 1999   |       | 1998
|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |     
|                                                                 |                                                    |               |         |             |   |                         |           | (in thousands, except per share amounts)
|Loss before the following:                                       |                                                    |               | (12,395 | )           |   |                         | (8,987    | )                                        |      |      | (26,074   | )      |       |      | (12,604   | )     |       |   | (16,609   | )     |       |   | (13,488   | )
|                                                                 | Gain on sale and
distribution of Oncolytics
shares |               |         | 13,224      |   |                         |           | 13,224                                   |      |      |           | 3,004  |       |      |           |      |       |   |           |      |       |   |           |  |      
|                                                                 | Share of loss from equity
investment in Oncolytics |               |         | (471        | ) |                         |           | (471                                     | )    |      |           | (1,831 | )     |      |           | (691  | )     |   |           |      |       |   |           |  |      
|                                                                 | Gain on dilution of
investment in Oncolytics       |               |         |            |   |                         |           |                                         |      |      |           | 357    |       |      |           | 4,933 |       |   |           | 1,236 |       |   |           |  |      
|                                                                 | Gain on sale of INH                                |               |         |            |   |                         |           |                                         |      |      |           |       |       |      |           | 568   |       |   |           |      |       |   |           |  |      
|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |   |      
|Earnings (loss) before tax                                       |                                                    |               | 358     |             |   |                         | 3,766     |                                          |      |      | (24,544   | )      |       |      | (7,794    | )     |       |   | (15,373   | )     |       |   | (13,488   | )
|Non-controlling interest                                         |                                                    |               |        |             |   |                         |          |                                          |      |      |          |        |       |      |          |       |       |   | 291       |       |       |   |          |  
|Income tax recovery (expense)                                    |                                                    |               | 3,628   |             |   |                         |          |                                          |      |      | 1,556     |        |       |      | (95       | )     |       |   |          |       |       |   |          |  
|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |   |      
|Net earnings (loss), Canadian
GAAP                               |                                                    | $             | 3,986   |             |   | $                       | 3,766     |                                          |      | $    | (22,988   | )      |       | $    | (7,889    | )     |       | $ | (15,082   | )     |       | $ | (13,488   | )
|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |   |      
|Net earnings (loss), U.S. GAAP                                   |                                                    |               |         |             |   | $                       | 9,511     |                                          |      | $    | (20,367   | )      |       | $    | (12,802   | )     |       | $ | (18,535   | )     |       | $ | (13,488   | )
|                                                                 |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |   |      
|Basic and diluted net earnings (loss) per share                  |                                                    |               |         |             |   |                         |           |                                          |      |      |           |        |       |      |           |       |       |   |           |       |       |   |           |  
|                                                                 |                                                    | Canadian GAAP |         |             |   |                         |           | $                                        | 0.76 |      |           | $      | (4.64 | )    |           | $     | (1.63 | ) |           | $     | (4.43 | ) |           | $ | (5.40 | )
|                                                                 |                                                    | U.S. GAAP     |         |             |   |                         |           | $                                        | 1.92 |      |           | $      | (4.11 | )    |           | $     | (2.65 | ) |           | $     | (5.45 | ) |           | $ | (5.40 | )
|Weighted average number of common and Class A
shares outstanding |                                                    |               |         |             |   |                         | 4,959,937 |                                          |      |      | 4,955,199 |        |       |      | 4,828,812 |       |       |   | 3,400,342 |       |       |   | 2,498,244 |  

Selected Consolidated Financial Information
Consolidated Balance Sheet Data

|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |         |  
|------------------------------- | --------------------------- | - | ------------ | ------ | ----------------------- | - | ---------------------------------------- | ------ | ---- | - | ------ | ------- | ---- | - | ------ | ------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                |                             |   | Pro Forma    |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |       
|                                |                             |   | Year Ended   |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |       
|                                |                             |   | December 31, |        | Year Ended December 31,
|                                |                             |   | 2002         |        |                        
|                                |                             |   | (unaudited)  |        | 2002                    |   | 2001                                     |        | 2000 |   | 1999   |         | 1998
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |     
|                                |                             |   |              |        |                         |   | (in thousands, except per share amounts)
|Current assets                  |                             | $ | 25,985       |        |                         | $ | 492                                      |        |      | $ | 6,056  |         |      | $ | 19,137 |         |   | $ | 12,031 |         |   | $ | 13,252 |        
|Investments                     |                             |   |             |        |                         |   |                                         |        |      |   | 5,745  |         |      |   | 7,695  |         |   |   |       |         |   |   |       |        
|Property and equipment          |                             |   | 73,973       |        |                         |   | 3,523                                    |        |      |   | 10,783 |         |      |   | 19,494 |         |   |   | 21,483 |         |   |   | 16,189 |        
|Goodwill                        |                             |   | 25,649       |        |                         |   |                                         |        |      |   |       |         |      |   |       |         |   |   |       |         |   |   |       |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|                                |                             | $ | 125,607      |        |                         | $ | 4,015                                    |        |      | $ | 22,584 |         |      | $ | 46,326 |         |   | $ | 33,514 |         |   | $ | 29,441 |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|Current liabilities             |                             | $ | 14,162       |        |                         | $ | 80                                       |        |      | $ | 10,781 |         |      | $ | 4,195  |         |   | $ | 4,143  |         |   | $ | 3,988  |        
|Other liabilities               |                             |   | 23,772       |        |                         |   | 387                                      |        |      |   | 387    |         |      |   | 1,943  |         |   |   | 2,778  |         |   |   | 387    |        
|Bank loan                       |                             |   | 38,342       |        |                         |   |                                         |        |      |   |       |         |      |   | 5,910  |         |   |   | 8,276  |         |   |   | 11,063 |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|Total liabilities               |                             |   | 76,276       |        |                         |   | 467                                      |        |      |   | 11,168 |         |      |   | 12,048 |         |   |   | 15,197 |         |   |   | 15,438 |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|Shareholders equity            |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|                                | Share capital               |   |              | 58,524 |                         |   |                                          | 12,741 |      |   |        | 84,271  |      |   |        | 84,145  |   |   |        | 58,834  |   |   |        | 39,438  |  
|                                | Retained earnings (deficit) |   |              | (9,193 | )                       |   |                                          | (9,193 | )    |   |        | (72,855 | )    |   |        | (49,867 | ) |   |        | (40,517 | ) |   |        | (25,435 | )
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|                                | Total                       |   |              | 49,331 |                         |   |                                          | 3,548  |      |   |        | 11,416  |      |   |        | 34,278  |   |   |        | 18,317  |   |   |        | 14,003  |  
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|                                |                             | $ | 125,607      |        |                         | $ | 4,015                                    |        |      | $ | 22,584 |         |      | $ | 46,326 |         |   | $ | 33,514 |         |   | $ | 29,441 |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        
|Shareholders equity- U.S. GAAP |                             |   |              |        |                         | $ | 3,548                                    |        |      | $ | 5,671  |         |      | $ | 25,912 |         |   | $ | 14,864 |         |   | $ | 14,003 |        
|                                |                             |   |              |        |                         |   |                                          |        |      |   |        |         |      |   |        |         |   |   |        |         |   |   |        |        

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Dividends

The Company has neither declared nor paid dividends on any of its
outstanding common shares, and does not intend to do so in the foreseeable
future. The Company intends to retain any future earnings to finance the
expansion of its business. Any future determination to pay dividends will be at
the discretion of the Board of Directors of the Company and will be dependent
upon the Companys earnings, capital requirements and financial position, as
well as any other factors deemed relevant by the Board of Directors.

Currency and Exchange Rates

Canadian Dollar Value for $1.00 U.S. (as published by the Federal Reserve
Bank of New York):

On June 24, 2003, the noon buying rate in New York City for cable transfer
in Canadian dollars as certified for customs purposes by the Federal Reserve
Bank of New York was $1.00 U.S. = $1.3610 Canadian.

All exchange rate calculations below are based on the noon buying rate in
New York City for cable transfers in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York.

The average exchange rates for each of the past 5 fiscal years were
calculated using the average of the exchange rates in effect on the last day of
each month during the period indicated.

|                             |  |  |        | 
|---------------------------- |  |  | ------ | 
|Year Ended December 31, 1998 |  |  | 1.4894 | 
|Year Ended December 31, 1999 |  |  | 1.4827 | 
|Year Ended December 31, 2000 |  |  | 1.4875 | 
|Year Ended December 31, 2001 |  |  | 1.5519 | 
|Year Ended December 31, 2002 |  |  | 1.5698 | 

|              |  |           |        |          |  |  |        | 
|------------- |  | --------- | ------ | -------- |  |  | ------ | 
|              |  | High Rate |        | Low Rate
|              |  |           |        |         
|January 2003  |  |           | 1.5672 |          |  |  | 1.5184 | 
|February 2003 |  |           | 1.5297 |          |  |  | 1.4840 | 
|March 2003    |  |           | 1.4944 |          |  |  | 1.4628 | 
|April 2003    |  |           | 1.4785 |          |  |  | 1.4334 | 
|May 2003      |  |           | 1.4197 |          |  |  | 1.3507 | 
|June 2003(1)  |  |           | 1.3758 |          |  |  | 1.3342 | 

Note:

(1) June 1, 2003 through June 24, 2003.

All dollar amounts set forth herein are in Canadian dollars, except where
otherwise indicated.

B. Capitalization and indebtedness.

Not applicable.

C. Reasons for the offer and use of proceeds.

Not applicable.

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D. Risk factors

An investment in the Companys securities should be considered highly
speculative due to the Companys recent change of business and the nature of
such business as well as the Companys present stage of development. A
prospective investor should consider carefully the risk factors set out below.

Exploration, Development and Production Risks

An investment in the Common Shares is speculative due to the nature of the
Companys intended involvement in the exploration, development and production
of oil and natural gas and its present stage of development. Oil and gas
operations involve many risks which even a combination of experience and
knowledge and careful evaluation may not be able to overcome. The long-term
commercial success of the Company depends on its ability to find, acquire,
develop and commercially produce oil and natural gas reserves. Without the
continual addition of new reserves, any existing reserves the Company may have
at any particular time and the production therefrom will decline over time as
such reserves are exploited. A future increase in the Companys reserves will
depend not only upon the Companys ability to explore and develop any
properties it may have, but also on its ability to select and acquire suitable
producing properties. No assurance can be given that the Company will be able
to continue to locate satisfactory properties for acquisition or to participate
in other ventures or be able to identify and reach agreement with suitable
partners. Moreover, if such acquisitions or partners are identified, the
Company may determine that current markets, terms of acquisition and
participation or pricing conditions make any such opportunities uneconomic.
There is no assurance that commercial quantities of oil and natural gas will be
discovered or acquired by the Company.

Future oil and gas exploration may involve unprofitable efforts, not only
from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. Completion of a well does not assure a profit on the investment or
recovery of drilling, completion and operating costs. In addition, drilling
hazards or environmental damage could greatly increase the cost of operations,
and various field operating conditions may adversely affect the production from
successful wells. These conditions include delays in obtaining governmental
approvals or consents, shut-ins of connected wells resulting from extreme
weather conditions, insufficient storage or transportation capacity or other
geological and mechanical conditions. While close well supervision and
effective maintenance operations can contribute to maximizing production rates
over time, production delays and declines from normal field operating
conditions cannot be eliminated and can be expected to adversely affect revenue
and cash flow levels to varying degrees.

In addition, oil and gas operations are subject to the risks of
exploration, development and production of oil and natural gas properties,
including encountering unexpected formations or pressures, premature declines
of reservoirs, blow-outs, cratering, sour gas releases, fires and spills.
Losses resulting from the occurrence of any of these risks could have a
materially adverse effect on future results of operations, liquidity and
financial condition.

Insurance

The Companys involvement in the exploration for and development of oil
and gas properties may result in the Company becoming subject to liability for
pollution, blow-outs, property damage, personal injury or other hazards.
Although prior to drilling the Company will obtain insurance in accordance with
industry standards to address such risks, such insurance has limitations on
liability that may not be sufficient to cover the full extent of such
liabilities. In addition, such risks may not in all circumstances be insurable
or, in certain circumstances, the Company may elect not to obtain insurance to
deal with specific risks due to the high premiums associated with such
insurance or other reasons. The payment of such uninsured liabilities would
reduce the funds available to the Company. The occurrence of a significant
event that the Company is not fully insured against, or the insolvency of the
insurer of such event, could have a material adverse effect on the Companys
financial position, results of operations or prospects.

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Prices, Markets and Marketing of Crude Oil and Natural Gas

Oil and natural gas are commodities whose prices are determined based on
world demand, supply and other factors, all of which are beyond the control of
the Company. World prices for oil and natural gas have fluctuated widely in
recent years. Any material decline in prices could result in a reduction of
net production revenue. Certain wells or other projects may become uneconomic
as a result of a decline in world oil prices and natural gas prices, leading to
a reduction in the volume of the Companys oil and gas reserves. The Company
might also elect not to produce from certain wells at lower prices. All of
these factors could result in a material decrease in the Companys future net
production revenue, causing a reduction in its oil and gas acquisition and
development activities. In addition, bank borrowings available to the Company
are in part determined by the borrowing base of the Company. A sustained
material decline in prices from historical average prices could limit or reduce
the Companys borrowing base, thereby reducing the debt financing available to
the Company, and could require that a portion of any existing debt financing of
the Company be repaid.

The marketability and price of oil and natural gas which may be acquired
or discovered by the Company will be affected by numerous factors beyond its
control. The Company may be affected by the differential between the price
paid by refiners for light quality oil and the grades of oil produced by the
Company. The ability of the Company to market its natural gas may depend upon
its ability to acquire space on pipelines which deliver natural gas to
commercial markets. The Company may also likely be affected by deliverability
uncertainties related to the proximity of its reserves to pipelines and
processing facilities and related to operational problems with such pipelines
and facilities and extensive government regulation relating to price, taxes,
royalties, land tenure, allowable production, the export of oil and natural gas
and many other aspects of the oil and natural gas business.

Substantial Capital Requirements; Liquidity

The Company anticipates that it will make substantial capital expenditures
for the acquisition, exploration, development and production of oil and natural
gas reserves in the future. There can be no assurance that debt or equity
financing or cash generated by operations will be available or sufficient to
meet these requirements or for other corporate purposes or, if debt or equity
financing is available, that it will be on terms acceptable to the Company.
Moreover, future activities may require the Company to alter its capitalization
significantly. The inability of the Company to access sufficient capital for
its operations could have a material adverse effect on the Companys financial
condition, results of operations or prospects.

Competition

The Company will compete for reserve acquisitions, exploration leases,
licences and concessions and skilled industry personnel with a substantial
number of other oil and gas companies, many of which have significantly greater
financial resources than the Company. The Companys competitors include major
integrated oil and natural gas companies and numerous other independent oil and
natural gas companies and individual producers and operators. The Companys
ability to increase reserves in the future will depend not only on its ability
to explore and develop the properties to be acquired upon the exercise of the
Purchase Option, but also on its ability to select and acquire suitable
producing properties or prospects for exploratory drilling. Competitive
factors in the distribution and marketing of oil and natural gas include price
and methods and reliability of delivery.

The oil and gas industry is highly competitive. The Companys competitors
for the acquisition, exploration, production and development of oil and natural
gas properties, and for capital to finance such activities, include companies
that have greater financial and personnel resources available to them than the
Company.

The Companys ability to successfully bid on and acquire additional
property rights, to discover reserves, to participate in drilling opportunities
and to identify and enter into commercial arrangements with customers will be
dependent upon developing and maintaining close working relationships with its
future industry partners and joint operators and its ability to select and
evaluate suitable properties and to consummate transactions in a highly
competitive environment.

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Environmental Risks

All phases of the oil and natural gas business present environmental risks
and hazards and are subject to environmental regulation pursuant to a variety
of international conventions and state and municipal laws and regulations.
Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in
association with oil and gas operations. The legislation also requires that
wells and facility sites be operated, maintained, abandoned and reclaimed to
the satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner expected to result in
stricter standards and enforcement, larger fines and liability and potentially
increased capital expenditures and operating costs. The discharge of oil,
natural gas or other pollutants into the air, soil or water may give rise to
liabilities to governments and third parties and may require the Company to
incur costs to remedy such discharge. No assurance can be given that
environmental laws will not result in a curtailment of production or a material
increase in the costs of production, development or exploration activities or
otherwise adversely affect the Companys financial condition, results of
operations or prospects.

Reserves Replacement

The Companys future oil and natural gas reserves, production, and cash
flows to be derived therefrom are highly dependent on the Company successfully
acquiring or discovering new reserves. Without the continual addition of new
reserves, any existing reserves the Company may have at any particular time and
the production therefrom will decline over time as such existing reserves are
exploited. A future increase in the Companys reserves will depend not only on
the Companys ability to develop any properties it may have from time to time,
but also on its ability to select and acquire suitable producing properties or
prospects. There can be no assurance that the Companys future exploration and
development efforts will result in the discovery and development of additional
commercial accumulations of oil and natural gas.

Reliance on Operators and Key Employees

To the extent the Company is not the operator of its oil and gas
properties, the Company will be dependent on such operators for the timing of
activities related to such properties and will largely be unable to direct or
control the activities of the operators. In addition, the success of the
Company will be largely dependent upon the performance of its management and
key employees. The Company does not have any key man insurance policies, and
therefore there is a risk that the death or departure of any member of
management or any key employee could have a material adverse effect on the
Company. In assessing the risk of an investment in the Common Shares,
potential investors should recognize that they are relying on the ability and
integrity of the management of the Company.

Corporate Matters

To date, the Company has not paid any dividends on its outstanding Common
Shares and does not anticipate the payment of any dividends on its Common
Shares in the near future.

Certain of the directors and officers of the Company are also directors
and officers of other oil and gas companies involved in natural resource
exploration and development, and conflicts of interest may arise between their
duties as officers and directors of the Company and as officers and directors
of such other companies. Such conflicts must be disclosed in accordance with,
and are subject to such other procedures and remedies as apply under, the
Business Corporations Act(Alberta).

Permits and Licenses

The operations of the Company may require licenses and permits from
various governmental authorities. There can be no assurance that the Company
will be able to obtain all necessary licenses and permits that may be required
to carry out exploration and development of its projects.

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Additional Funding Requirements

The Companys cash flow from its properties may not be sufficient to fund
its ongoing activities and implement its business plan. From time to time, the
Company may require additional financing in order to carry out its oil and gas
acquisition, exploration and development activities. Failure to obtain such
financing on a timely basis could cause the Company to forfeit its interest in
certain properties, miss certain acquisition opportunities and reduce or
terminate its operations. If the Companys future revenues from its future
reserves decrease as a result of lower oil and natural gas prices or otherwise,
it will affect the Companys ability to expend the necessary capital to replace
its reserves or to maintain its production. If the Companys cash flow from
operations is not sufficient to satisfy its capital expenditure requirements,
there can be no assurance that additional debt or equity financing will be
available to meet these requirements or be available on favourable terms.

Issuance of Debt

The Companys activities may be financed partially or wholly with debt,
which may increase the Companys debt levels above industry standards. Neither
the Companys articles nor its by-laws limit the amount of indebtedness that
the Company may incur. The level of the Companys indebtedness from time to
time could impair the Companys ability to obtain additional financing in the
future on a timely basis to take advantage of business opportunities that may
arise.

Availability of Drilling Equipment and Access Restrictions

Oil and natural gas exploration and development activities are dependent
on the availability of drilling and related equipment in the particular areas
where such activities will be conducted. Demand for such equipment or access
restrictions may affect the availability of such equipment to the Company and
may delay exploration and development activities.

Title Defects

Although title reviews will generally be conducted prior to the purchase
of most oil and natural gas producing properties or the commencement of
drilling wells, such reviews may not discover unforeseen title defects that
could adversely affect the Companys title to the property or entitlement to
revenue from the property.

Uncertainty of Reserve Information

There are numerous uncertainties inherent in estimating quantities of
reserves and cash flows to be derived from exploration and production
activities, including many factors that are beyond the control of the Company.
The reserve and cash flow information set forth in this annual report represent
estimates only. The reserves and estimated future net cash flow from the
Companys properties have been independently evaluated effective May 1, 2003.
These evaluations include a number of assumptions relating to factors such as
initial production rates, production decline rates, ultimate recovery of
reserves, timing and amount of capital expenditures, marketability of
production, future prices of oil and natural gas, operating costs and royalties
and other government levies that may be imposed over the producing life of the
reserves. These assumptions were based on price forecasts in use at the date
the relevant evaluations were prepared and many of these assumptions are
subject to change and are beyond the control of the Company. Actual production
and cash flows derived therefrom will vary from these evaluations, and such
variations could be material. The foregoing evaluations are based in part on
the assumed success of activities intended to be undertaken in future years.
The reserves and estimated cash flows to be derived therefrom contained in such
evaluations will be reduced to the extent that such activities do not achieve
the level of success assumed in the evaluations.

Canadian and United States practices differ in reporting reserves and
production

The Company reports its production and reserve quantities in accordance
with Canadian practices. These practices are different from the practices used
to report production and to estimate reserves in reports and other materials
filed with the SEC by companies in the United States.

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The Company includes additional information with respect to production and
reserves which is either not generally included or prohibited under rules of
the SEC and practices in the United States. The Company follows the Canadian
practice of reporting gross production and reserve volumes; however, the
Company also follows the United States practice of separately reporting these
volumes on a net basis (after the deduction of royalties and similar payments).
In addition, the Company also follows the Canadian practice of using forecast
prices and costs when it estimates its reserves; however, the Company also
separately estimates its reserves using prices and costs held constant in
accordance with the Canadian reserve reporting requirements. These
requirements are similar to the constant pricing reserve methodology utilized
in the United States.

The Company also includes in this annual report estimates of probable
reserves along with estimates of proved reserves. The SEC generally prohibits
the inclusion of estimates of probable reserves in filings made with it;
however, the Company is permitted under the SEC rules to include such
information in this annual report as such information is required to be
disclosed under Canadian disclosure requirements.

Acquisition of Optioned Properties

The Company will be assuming its working interest share of all
liabilities, including environmental liabilities, relating to the Optioned
Properties. Although the Company is not aware of any material liabilities
relating to the Optioned Properties, it is possible that liabilities may arise
which could have a material adverse effect on the Company.

Kyoto Protocol

Canada is a signatory to the United Nations Framework Convention on
Climate Change and has ratified the Kyoto Protocol established thereunder to
set legally binding targets to reduce nation-wide emissions of carbon dioxide,
methane, nitrous oxide and other so-called greenhouse gases. The Companys
exploration and production facilities and other operations and activities will
emit greenhouse gases which may subject the Company to legislation regulating
emissions of greenhouse gases. The Government of Canada has put forward a
Climate Change Plan for Canada which suggests further legislation will set
greenhouse gases emission reduction requirements for various industrial
activities, including oil and gas exploration and production. Future federal
legislation, together with provincial emission reduction requirements, such as
those proposed in Albertas Bill 32: Climate Change and Emissions Management
Act, may require the reduction of emissions or emissions intensity from the
Companys operations and facilities. The direct or indirect costs of these
regulations may adversely affect the business of the Company.

Government Regulation and Taxation

Oil and gas operations are subject to extensive Canadian federal,
provincial and local laws and regulations governing exploration, development,
transportation, production, exports, labour standards, occupational health,
waste disposal, protection and redemption of the environment, mine safety,
hazardous materials, toxic substances, taxation and other matters. It is
believed that the Company is in substantial compliance with all applicable laws
and regulations. Amendments to current laws and regulations governing oil and
gas operations and the more stringent implementation thereof are actively
considered form time to time and the implementation thereof could have a
material adverse impact on the Company. In addition, taxation laws and
regulations as well as the current administrative practices of both the federal
and provincial tax authorities may be amended or construed in such a way that
is detrimental to the Company or its activities.




Item 4. Information on the Company

A. History and development of the Company.

The Company

The Company was incorporated as 599386 Alberta Ltd. under the Business
Corporations Act(Alberta) on February 14, 1994 and changed its name to SYNSORB
Biotech Inc. on March 31, 1994. Effective May 8, 2002:

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(i) each former holder of common shares received one new common share for each
eight cancelled common shares they previously held; (ii) the stated capital of
the Company was reduced in respect of the common shares of the Company by
$59,896,000; and (iii) 4,000,235 common shares of Oncolytics Biotech Inc. held
by the Company were distributed to its shareholders. On April 3, 2003, the
name of the Company was changed to Hawker Resources Inc. and a new class of
non-voting equity shares was created.

The head
office of the Company is located at 3200, 350  7th Avenue S.W.,
Calgary, Alberta, T2P 3N9, and its telephone number at that address is (403)
294-0067. The registered office of the Company is located at 4500,
855  2nd
Street S.W., Calgary, Alberta, T2P 4K7.

History

Prior to December 10, 2001, the Company was a biotechnology company
focusing primarily on the discovery and development of pharmaceutical products
for gastroenteric diseases. On that date, the Company announced that it was
terminating the clinical trials of its remaining product and would consider
future strategic alternatives.

Over the course of the fiscal year ended December 31, 2002, the Company
divested itself of its position in Oncolytics Biotech Inc. by distributing
4,000,235 of such shares to its shareholders and by selling 2,255,565 of such
shares through the TSX for aggregate gross proceeds of $6,898,000. During that
period, the Company completed staff reductions and the winding-down of its
clinical trials and continued to evaluate strategic alternatives. The Company
held discussions with several industry parties in an attempt to reach a
transaction with another pharmaceutical entity that would make use of the
Companys technology and its specialized manufacturing plant and equipment.
These discussions did not lead to the Company receiving any acceptable proposal
for such a transaction.

On October 30, 2002, the Company retained Network Capital Inc. as its
financial advisor to seek a transaction to maximize value for shareholders,
including pursuing transactions that would substantially reorganize the
business of the Company.

On November 26, 2002, Southward announced a shareholder value maximization
process, established an independent committee to oversee the process and
retained a financial advisor. The process initiated by Southward required that
binding offers be submitted by interested parties on or prior to March 3, 2003.

In late December 2002, the Company approached an investor group led by
David Tuer with respect to the transformation of the Company from a
pharmaceutical research company into an oil and gas enterprise and the
completion of the Financing. On January 6, 2003, the transformation of the
Company to an oil and gas enterprise and the proposed Financing were announced,
subject to obtaining shareholder approval, which was to be sought at the annual
and special meeting of the Company on April 3, 2003.

In January 2003, the Company sold its manufacturing equipment for
approximately $900,000 in net proceeds and in February 2003, the Company
granted a third party an exclusive license to certain of its patents relating
to toxin binding sugars for net proceeds of US $240,000. The Company is
continuing to attempt to sell its manufacturing facility and related land.

In early March 2003, BidCo entered into an agreement with a third party
which provided, as amended, that in the event that BidCo was successful in
purchasing all of the common shares of Southward, the third party would
purchase all of the petroleum and natural gas rights and related assets of
Southward, except for a 1% interest in the Optioned Properties and 100% of the
seismic data relating to the Optioned Properties, for a purchase price of
$164,631,000, of which $135,531,000 was allocated for internal purposes to a
99% interest in the Optioned Properties.

In mid-March 2003, the Purchase Option was granted which provided the
right to purchase an undivided interest of up to 49% in the Optioned Properties
at a purchase price, subject to adjustment, equal to $1,369,000 for each 1%
undivided interest in the Optioned Properties acquired pursuant to the Purchase
Option. The right to exercise the Purchase Option was conditional upon the
completion of the sale of the Southward assets to the grantor of the option,
which condition was satisfied on April 30, 2003. The Purchase Option provided
that it could be

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assigned to the Company, but that it could not be assigned to any other
party without the prior written consent of the grantor of the option.

On March 16, 2003, BidCo entered into an arrangement agreement with
Southward which contemplated that, subject to the terms and conditions of the
agreement, BidCo and Southward would implement the Arrangement. The
Arrangement provided that: (i) shareholders of Southward would transfer all of
the outstanding common shares to BidCo in consideration for $4.77 per share;
and (ii) all of the outstanding options to acquire common shares of Southward
would be terminated, and in consideration for such termination the former
holders of the options would receive the difference between the exercise price
of each of their options and $4.77, provided that if such amount was less than
$0.10 in respect of any option, the former holder thereof would receive $0.10.

On March 31, 2003, the Company acquired the Purchase Option and all of the
shares of BidCo for an aggregate consideration of $1.00.

At the annual and special meeting of the shareholders of the Company held
on April 3, 2003 a new board of directors was elected, including the
appointment of Mr. Tuer, an experienced oil and gas senior executive, as the
new Chairman of the Board and Chief Executive Officer of the Company, and the
shareholders approved, among other things: (i) the Financing; (ii) the creation
of the Class A Shares; and (iii) the name change to Hawker Resources Inc.

On April 3, 2003, the Company completed the Financing and issued 223,798
Common Shares and 430,493 Units for aggregate proceeds of approximately $3.7
million. During the period of March 13, 2003 to April 3, 2003, all outstanding
in-the-money stock options were exercised, resulting in the issuance of an
additional 275,000 Common Shares for aggregate proceeds of $192,000.

On April 28, 2003 the Arrangement was approved by the shareholders and
optionholders of Southward and was also approved by the Court of Queens Bench
of Alberta. On April 30, 2003, the Arrangement was completed by Southward and
BidCo in accordance with the arrangement agreement. Pursuant to the
Arrangement, BidCo paid an aggregate of approximately $120 million to the
shareholders and optionholders of Southward and Southward became a wholly owned
subsidiary of BidCo.

Concurrent with the completion of the Arrangement, Southward completed the
sale of all of its oil and gas assets, with the exception of: (i) a 1%
interest in the Optioned Properties; and (ii) 100% of the seismic data relating
to the Optioned Properties, which were retained by Southward. Gross proceeds
from the sale were $164,631,000, which were used by Southward as follows: (i)
$46 million was used by Southward to repay existing bank indebtedness,
including bank indebtedness incurred in connection with the termination of
options and satisfaction of various employee obligations and transaction
expenses; (ii) $117 million was advanced to BidCo to repay indebtedness
incurred to acquire the common shares of Southward and compensate the holders
of terminated options pursuant to the Arrangement; and (iii) the remaining
proceeds of approximately $1.6 million were retained by Southward. Prior to
the completion of the Arrangement, the Company granted a call option which
gives the purchaser of the oil and gas assets of Southward the right to acquire
from the Company a 99% interest in the seismic data in respect of the Optioned
Properties, for a purchase price of $3,710,000. If this call option is
exercised, and the Company exercises the Purchase Option, in whole or in part,
the Company will be required to purchase an equivalent proportion of the
seismic data in respect of the Optioned Properties at a purchase price based on
an ascribed price of $4 million for a 100% interest in the seismic data.

On May 30, 2003, pursuant to the Conversion, the securities which
comprised the Units were converted into an aggregate of 6,026,902 Equity Shares
immediately after a receipt was issued for the Companys prospectus qualifying
the issuance of up to $45,000,900 of Common Shares. Pursuant to the
Conversion, Matco Capital and Mr. Tuer beneficially acquired 28.8% and 14.4%,
respectively, of the outstanding Equity Shares. See
Item 6A  Directors,
Senior Management and Employees  Directors and senior management.

On June 12, 2003, the Company completed a public offering of 14,286,000
Common Shares at a price of $3.15 per share for aggregate gross proceeds of
approximately $45 million. Net proceeds from the offering will be used to
finance the acquisition of the Optioned Properties.

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B. Business overview.

General Development of the Business

The Company is a publicly traded Canadian company listed on the TSX
(symbol: HKR) that has recently transformed itself from a pharmaceutical
research company into an oil and gas enterprise. The Company intends to report
the financial results of its oil and gas activities as one industry segment.
For operational purposes, the Company intends to manage all of its oil and gas
activities as one integrated unit.

Corporate Strategy

Vision The Companys primary ongoing business objective is to become a full
cycle oil and gas company with a dual focus on exploration and development
activities and on an aggressive acquisition strategy, with a particular
emphasis on natural gas opportunities.

Drilling Program Management intends to employ a cheap deep approach to
exploration by implementing a high density drilling program with low cost
options to look at deeper horizons, while continuing to seek out additional
opportunities to add to the Companys land base.

Responsible Fiscal Management Approximately 50% of the Companys anticipated
cash flow will be directed towards the replacement of existing reserves,
leaving a significant amount of cash flow available for a focused exploration
program or to pay down debt. The Company intends to prudently add value
through its drilling and exploration activities and carefully manage its costs,
thereby positioning itself to add to its inventory of opportunities and
undeveloped land holdings.

Prudent
Use of Equity Management recognizes that, at this early stage of
development, equity must be used sparingly, and it intends to rely heavily on
operational revenues and debt financing to satisfy liquidity requirements. The
Company will attempt to minimize the dilution that would be caused to existing
shareholders if large amounts of equity were issued.

Business Strengths

Strength of Management Mr. Tuer has over 28 years of petroleum engineering
and management experience in Canada and internationally, including experience
as President and Chief Executive Officer of one of Canadas largest energy
companies. Mr. Terry Schmidtke has over 24 years of operational experience in
the areas of reservoir engineering, field operations, strategic planning and
acquisitions and divestitures. Mr. Herring has over 22 years of accounting and
oil and gas experience.

Experienced, Interested Board The Companys board of directors is comprised
of individuals with broad backgrounds and demonstrated experience in creating
shareholder value. In particular, Mr. Tuer, Mr. Ronald Mathison, Mr. Martin
Lambert and Mr. Stan Grad have extensive industry and transactional experience.
Several of the directors have significant financial stakes in the Company.

Focused Production Areas Following its acquisition of the Optioned
Properties, Hawker will commence its energy business with high quality, tightly
focused properties that management believes can be exploited through additional
developmental drilling. The Optioned Properties contain close to 100
geophysically and geologically defined locations, and include over 140,000 net
acres of undeveloped land.

Emphasis on Gas Hawkers initial production will be 100% natural gas. As
the Company expands, its portfolio of oil producing properties will increase,
but the emphasis on natural gas will remain part of Hawkers business plan.

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Price Certainty Through Hedging An integral part of the Companys strategy in
acquiring an interest in the Optioned Properties was the prior negotiation of
the right to secure certain hedging arrangements in respect of a portion of the
production from the properties. These forward sales contracts reduce the
economic uncertainty of the acquisition of an interest in the Optioned
Properties by providing certainty to the price for a material portion of
Hawkers 2003 and first quarter 2004 gas production.

Advantageous Tax Position
The Company has non-capital losses and unclaimed expenditures of $34 million
and $43 million, respectively, that are available for application against
future taxable income. The Company also has $5.7 million of unclaimed
investment tax credits available to reduce future years income tax. The
acquisition by Hawker of an additional 49% undivided interest in the Optioned
Properties will add to the Companys tax pools by an amount equal to the
purchase price of $67 million.

Recent Developments

As discussed above, the Company has indirectly acquired all of the issued
and outstanding securities of Southward pursuant to the Arrangement and, in
conjunction therewith, was granted the Purchase Option. The Purchase Option
gives the Company the right to purchase an undivided interest of up to 49% in
the Optioned Properties, which together with the 1% undivided interest held by
the Company in the Optioned Properties will give the Company an aggregate 50%
undivided interest in the Optioned Properties upon the full exercise of the
option.

The Optioned Properties are located east of Edmonton in the Lavoy and Cold
Lake/Bonnyville areas of Alberta. The McDaniel Report estimates production for
the last 8 months of 2003 from a 50% undivided interest in the Optioned
Properties to be held by the Company to be an average of 19.0 mmcf/d, before
royalties. Production from the Optioned Properties consists of sweet dry gas,
with drilling depths typically less than 850 metres. The Optioned Properties
include interests in 164.0 producing gas wells (141.2 wells net), related
facilities and gathering systems, associated seismic and 284,325 acres (140,523
acres net) of undeveloped land.

The Purchase Option provides that the purchase price for the undivided
interest in the Optioned Properties to be acquired by the Company will be based
on an ascribed price, as at May 1, 2003 and subject to adjustment, of
$136,900,000 for 100% of the Optioned Properties. The Purchase Option gives
the Company the right to purchase an undivided interest of up to 49% in the
Optioned Properties for a maximum purchase price of $67,081,000. The Company
intends to fully exercise the Purchase Option and thereby own an aggregate 50%
undivided interest in the Optioned Properties.

The Purchase Option provides that the closing of the acquisition of the
Optioned Properties must occur on or prior to July 29, 2003 with an effective
date of May 1, 2003. Accordingly, the Company will be entitled to the revenues
attributable to the undivided interest acquired in the Optioned Properties from
May 1, 2003, and will be obligated to pay interest on the purchase price from
May 1, 2003 until closing at an interest rate equal to the prime rate of a
designated Canadian chartered bank plus 1%.

The Company currently intends to exercise the Purchase Option on or before
June 30, 2003. The McDaniel Report estimates that the cash flows attributable
to the 49% interest in the Optioned Properties the Company intends to acquire
on the exercise of the Purchase Option, net of royalties and capital
expenditures and before income taxes, would be an aggregate of $5.3 million
from May 1, 2003 to June 30, 2003. Interest on the purchase price under the
Purchase Option as of June 30, 2003 would be approximately $670,810.
Accordingly, the Company anticipates a favourable purchase price adjustment,
based upon an anticipated June 30, 2003 closing of the purchase of the 49%
interest in the Optioned Properties pursuant to the exercise of the Purchase
Option, of approximately $4.63 million thereby effectively reducing the
purchase price from approximately $67.1 million to approximately $62.5 million.

On June 12, 2003, the Company completed a public offering of 14,286,000
Common Shares at a price of $3.15 per share for aggregate gross proceeds of
approximately $45 million. Net proceeds from the offering will be used to
finance the acquisition of the Optioned Properties.

The Purchase Option provides that if the Company acquires an undivided
interest in the Optioned Properties equal to or greater than 33-1/3%, it will
be entitled to operate the Optioned Properties located in the Cold

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Lake/Bonnyville area. As the Company will hold an aggregate 50% interest
in the Optioned Properties upon the closing of this offering, the Company
intends to assume operatorship of the Optioned Properties in the Cold
Lake/Bonnyville area.

The Company believes that the Optioned Properties have undeveloped
potential and accordingly the Company intends to pursue exploration and
development activities in the area with a view to developing additional
reserves. There can be no assurance that such activities will be economically
successful.

Geographic Markets and Revenues

During the fiscal years ending December 31, 2002 and 2001, 100% of the
Companys revenues were generated from customers in Canada. During the fiscal
year ended December 31, 2000, approximately 94% and 6% of the Companys
revenues were generated from Canadian and international customers,
respectively. During the fiscal years ending December 31, 2002, 2001 and 2000,
100% of the revenues from the Optioned Properties were generated in Canada.

Seasonality

The Company expects to have seasonal impacts with regard to its
exploration and development program. The Company expects to experience reduced
activity in the second quarter of the fiscal year as limitations on the
transportation of heavy equipment on municipal roads curtails the ability of
drilling rigs and other oilfield equipment to get to and from well sites.

Commodity Price Volatility

Crude oil and natural gas prices are volatile and subject to a number of
external factors. Prices are cyclical and fluctuate as a result of shifts in
the balance between supply and demand for crude oil and natural gas, world and
North American market forces, inventory and storage levels, OPEC policy,
weather patterns and other factors. In early 2002, the industry initially saw a
general weakening of prices for both oil and natural gas. However, through the
second half of the year, commodity prices rebounded above historical averages.
Currently, tight supply/demand balance has kept prices high for both crude oil
and natural gas.

Crude oil is influenced by a world economy and OPECs ability to adjust
supply to world demand. Recent success by OPEC and low North American crude
stocks have kept crude oil prices high. However, the Company expects world
prices of crude oil to decrease to historical average levels of approximately
US $24 per barrel (WTI), but also expect continued global political factors to
hold prices at those levels.

Natural gas prices are greatly influenced by market forces in North
America. It is generally believed that natural gas has greater stability than
crude oil in terms of short-term pricing as there is a shortage of natural gas
production and natural gas storage levels are low. The Company expects natural
gas prices to moderate somewhat through 2003, but expect the supply of North
American natural gas to continue to be constrained by North American production
decline rates.

Industry Consolidation and Competition

Over the past few years, consolidation within the Canadian oil and gas
industry has resulted in a significant reduction of the number of junior to
intermediate-sized exploration and production companies. American companies
have also been acquiring companies and assets in Canada. The strong demand for
natural gas production and reserves is expected to result in a continued high
level of corporate and asset transactions as buyers strive to increase their
natural gas assets and sellers take advantage of high transaction prices.

Along with this merger and acquisition activity, a number of traditional
exploration and production companies have recently converted into income or
royalty trusts. This trend, which has increased competition for investment
dollars and property acquisitions, is expected to continue in the short-term.

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As occurred in 2000 and early 2001, the strength of commodity prices
resulted in significantly increased operating cash flows and has led to
increased drilling activity. The Canadian Association of Oilwell Drilling
Contractors forecasts an 11% increase in industry drilling in 2003, approaching
the number of wells drilled in 2001, which was a record year. This industry
activity will increase competition for oilfield goods and services and may
cause drilling and operating costs to increase.

Provincial Royalties and Incentives

For crude oil, natural gas and related product production from federal or
provincial Crown lands, the royalty regime is a significant factor in the
profitability of such production operations. Royalties payable on production
from lands other than Crown lands are determined by negotiations between the
freehold mineral owner and the lessee, although production from such lands is
also subject to certain provincial taxes and royalties. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production. The rate of royalties payable
generally depends in part on the type of product being produced, well
productivity, geographical location and field discovery date. From time to
time the various provincial governments in western Canada have established
incentive programs which have included royalty rate reductions, royalty
holidays and tax credits for the purpose of encouraging oil and gas exploration
and development. The trend in recent years has been for provincial governments
to allow such programs to expire without renewal, and consequently few such
programs are currently operative.

Crude oil and natural gas royalty holidays for specific wells and royalty
reduction reduce the amount of Crown royalties paid by the Company to the
provincial governments. In Alberta, the Alberta royalty tax credit program
also provides a rebate, to certain eligible producers, on Alberta Crown
royalties paid in respect of eligible producing properties. These incentives
result in increased profitability from operations of the Company.

Trademarks and Intellectual Property Rights

Now that the Company has transformed itself from a pharmaceutical research
company into an oil and gas enterprise, there are no intellectual property
rights, licenses or industrial, commercial or financial contracts that are
material to the Companys business or profitability.

Competitive Conditions

The oil and gas industry is highly competitive. The Company will compete
for reserve acquisitions, exploration leases, licences and concessions and
skilled industry personnel with a substantial number of other oil and gas
companies, many of which have significantly greater financial resources than
the Company. The Companys competitors include major integrated oil and
natural gas companies and numerous other independent oil and natural gas
companies and individual producers and operators. The Companys ability to
increase reserves in the future will depend not only on its ability to explore
and develop its properties, but also on its ability to select and acquire
suitable producing properties or prospects for exploratory drilling.
Competitive factors in the distribution and marketing of oil and natural gas
include price and methods and reliability of delivery.

The Companys ability to successfully bid on and acquire additional
property rights, to discover reserves, to participate in drilling opportunities
and to identify and enter into commercial arrangements with customers will be
dependent upon developing and maintaining close working relationships with its
future industry partners and joint operators and its ability to select and
evaluate suitable properties and to consummate transactions in a highly
competitive environment.

Government Regulation

The oil and natural gas industry is subject to extensive controls and
regulation imposed by various levels of government. In Western Canada, the
various provincial governments have legislation and regulations, which govern
land tenure, royalties, production rates, environmental protection and the
prevention of waste. The oil and natural gas industry is also subject to
regulation and intervention by governments in such matters as the award of
exploration and production rights, the imposition of specific drilling
obligations, environmental protection controls,

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control over the development and abandonment of fields (including
restrictions on production) and, possibly, expropriation or cancellation of
contract rights. It is not expected that these controls and regulation will
affect the operations of the Company in a manner materially different than they
would affect other oil and gas companies of similar size. All current
legislation is a matter of public record and the Company is unable to predict
what additional legislation or amendments may be enacted.

C. Organizational structure.

Hawker owns, directly or indirectly, all of the issued and outstanding
securities of 1022971 Alberta Ltd. and Southward Energy Ltd., both companies
incorporated under the Business Corporations Act(Alberta) and registered to
carry on business in Alberta. Hawker also owns, directly or indirectly, all
interests of Southward Energy Partnership, a partnership formed under the laws
of Alberta.

D. Property, plant and equipment.

Description of Properties

The following description of the Optioned Properties describes an
undivided 50% interest in the properties.

Lavoy Area

The Lavoy area is located approximately 100 kilometres east of Edmonton,
Alberta near the town of Vegreville, Alberta. The Company will acquire an
interest in 140.0 producing gas wells (122.4 net wells) and 10 facilities, all
of which are non-operated. These facilities have a combined working interest
capacity of approximately 40 mmcf/d of sweet dry gas and are comprised of
compressors and dehydration equipment.

Gross production in 2002 from the Lavoy area averaged 29 mmcf/d of sweet
dry gas. The sweet dry gas produced in the Lavoy area contains no liquids, and
does not require hydrocarbon dewpoint control at the transportation stage. The
majority of the wells in the Lavoy area are controlled through SCADA, an
electronic system for natural gas processing and control, using a data
acquisition system that is controlled and sourced real-time from Calgary.

The Lavoy area is characterized by multi-zone potential from 14 producing
horizons from the Paleozoic to the Upper Cretaceous. Zonal rights in the Lavoy
area are typically 100% working interest from surface to basement. Drilling
depths in the Lavoy area are typically less than 850 metres. In 2002, 29
wells (14 net wells) were drilled in Lavoy with a 79% success rate. In 2002,
each successful well in the Lavoy area averaged approximately 520 mmcf of
reserves, illustrating that the property is not mature from the perspective of
development drilling.

Access to these properties is available year round, and the area lends
itself to seismic acquisition, fracture technology, air drilling and coil
tubing advancements. Two central dehydration and compression facilities were
established in 2002 at East Warwick and West Lavoy. These facilities process
6.4 mmcf/d net of the Companys production. The Company owns various working
interests in a non-operated extensive gathering system that is closely
accessible to all lands in the area, and there is ample gas transportation out
of the area.

Cold Lake/Bonnyville

The Cold Lake/Bonnyville area is located approximately 250 kilometres
northeast of Edmonton. The Company will acquire an interest in 24.0 producing
gas wells (18.9 net wells) and one facility in the Cold Lake/Bonnyville area.

The Cold Lake/Bonnyville area is characterized by a large reserve
potential at shallow depths, with multi-zone potential from four producing
Cretaceous zones and drilling depths that are typically less than 500 metres.

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Gross production in 2002 from the Cold Lake/Bonnyville area averaged 4.9
mmcf/d of sweet dry gas. As with the Lavoy area, the sweet dry gas produced in
the Cold Lake/Bonnyville area contains no liquids, and does not require
hydrocarbon dewpoint control at the transportation stage.

No wells were drilled on this property in 2002. The Company currently
anticipates exploring two low risk locations into the Clearwater B pool, and is
evaluating the project inventory in the area with a view to exploiting
potential upside in the Colony McLaren and Clearwater zones.

The Company intends to assume operatorship of this property. Production
from the Cold Lake/Bonnyville area is processed at a non-operated facility.
Two field compressors were installed during 2002.

Location of Wells

The following table sets forth the producing wells and wells capable of
producing included in the Optioned Properties as at December 31, 2002.

|      |                      |  |           |       |            |  |          |      |        |  |      |      |  |  |      |      | 
|----- | -------------------- |  | --------- | ----- | ---------- |  | -------- | ---- | ------ |  | ---- | ---- |  |  | ---- | ---- | 
|      |                      |  | Gas Wells
|      |                      |  |          
|      |                      |  | Producing |       | Shut-in(3)
|      |                      |  |           |       |           
|      |                      |  | Gross(1)  |       | Net(2)     |  | Gross(1) |      | Net(2)
|      |                      |  |           |       |            |  |          |      |       
|      | Lavoy                |  |           | 140.0 |            |  |          | 61.7 |        |  |      | 36.0 |  |  |      | 17.3 | 
|      | Cold Lake/Bonnyville |  |           | 28.0  |            |  |          | 11.0 |        |  |      | 8.0  |  |  |      | 3.3  | 
|      |                      |  |           |       |            |  |          |      |        |  |      |      |  |  |      |      | 
|Total |                      |  | 168.0     |       |            |  | 72.7     |      |        |  | 44.0 |      |  |  | 20.6 |     
|      |                      |  |           |       |            |  |          |      |        |  |      |      |  |  |      |      | 

Notes:



|(1) |  | Gross Wells means all wells in which the Company will acquire a working
interest.                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net Wells means the total wells in which the Company will acquire an
interest, multiplied by the working interest therein that relates to a 50%
interest in the Optioned Properties.                                                                    
|   
|(3) |  | Shut-in Wells are wells which are capable of economic production or
which the Company considers capable of production but which, for a variety
of reasons, including but not limited to lack of markets or development,
are not currently on production.

Land Holdings

The following table summarizes the undeveloped land included in the
Optioned Properties as at March 31, 2003.

|                     |  |                 |         |               |  |  |         | 
|-------------------- |  | --------------- | ------- | ------------- |  |  | ------- | 
|Property             |  | Gross Acres (1) |         | Net Acres (2)
|                     |  |                 |         |              
|Lavoy                |  |                 | 273,295 |               |  |  | 135,852 | 
|Cold Lake/Bonnyville |  |                 | 10,240  |               |  |  | 4,564   | 
|Manitoba             |  |                 | 80      |               |  |  | 18      | 
|British Columbia     |  |                 | 710     |               |  |  | 89      | 
|                     |  |                 |         |               |  |  |         | 
|Total                |  |                 | 284,325 |               |  |  | 140,523 | 
|                     |  |                 |         |               |  |  |         | 

Notes:



|(1) |  | Gross Acres means the total acres in which the Company will acquire an
interest.                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net Acres means the total acres in which the Company will acquire an
interest, multiplied by the working interest therein that relates to a 50%
interest in the Optioned Properties.

The undeveloped land holdings of the Company have been evaluated by
Antelope Land Services Ltd. which ascribed a value of $10,590,389 to a 50%
undivided interest in the undeveloped lands included in the Optioned
Properties.

The Company has retained 100% of the seismic data relating to the Optioned
Properties, which consists of approximately 6,234 kilometres of 2-D and 33.4
square kilometres of 3-D seismic data. Of this data, 3,337 kilometres of 2-D
and 28 square kilometres of 3-D is purchased trade data in which the Company
does not own any

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proprietary rights and will earn no revenue. The remaining
2,897 kilometres of 2-D and 5.4 square kilometres of 3- D seismic data constitutes proprietary seismic data. This seismic data
will be used as a technological database to interpret and generate exploration
and development prospects.

The Company has granted a call option in respect of this seismic data
which gives the grantee the right to acquire an undivided 99% in this seismic
data for a purchase price of $3,710,000. If this call option is exercised, and
the Company exercises the Purchase Option, in whole or in part, the Company
will be required to purchase an equivalent proportion of this seismic data at a
purchase price based on an ascribed price of $4 million for a 100% interest in
the seismic data.

Drilling Activity

The following table sets forth the number of gross and net exploratory and
development wells included in the Optioned Properties and which were completed,
capped or abandoned during the periods indicated.

|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 
|----------------------- | ------ |  | ----------------------- | ---- | ------------- |  | --------------- | --- | ------------- |  | ---- | ---- |  |  | ---- | ---- | 
|                        |        |  | Years Ended December 31
|                        |        |  |                        
|                        |        |  | 2002                    |      | 2001         
|                        |        |  |                         |      |              
|                        |        |  | Gross Wells (1)         |      | Net Wells (2) |  | Gross Wells (1) |     | Net Wells (2)
|                        |        |  |                         |      |               |  |                 |     |              
|Exploratory             |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |     
|                        | Gas    |  |                         | 8.0  |               |  |                 | 4.0 |               |  |      |     |  |  |      |     | 
|                        | Dry(3) |  |                         | 3.0  |               |  |                 | 1.5 |               |  |      |     |  |  |      |     | 
|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 
|Total Exploratory       |        |  | 11.0                    |      |               |  | 5.5             |     |               |  |     |      |  |  |     |     
|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 
|Development             |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |     
|                        | Gas    |  |                         | 15.0 |               |  |                 | 7.0 |               |  |      | 31.0 |  |  |      | 15.4 | 
|                        | Dry(3) |  |                         | 3.0  |               |  |                 | 1.5 |               |  |      | 21.0 |  |  |      | 10.5 | 
|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 
|Total Development       |        |  | 18.0                    |      |               |  | 8.5             |     |               |  | 52.0 |      |  |  | 25.9 |     
|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 
|Total Drilling Activity |        |  | 29.0                    |      |               |  | 14.0            |     |               |  | 52.0 |      |  |  | 25.9 |     
|                        |        |  |                         |      |               |  |                 |     |               |  |      |      |  |  |      |      | 

Notes:



|(1) |  | Gross Wells means the total wells in which the Company will acquire an
interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net Wells means the total wells in which the Company will acquire an
interest, multiplied by the working interest therein that relates to a 50%
interest in the Optioned Properties.                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) |  | Dry Well means a well which is not a productive well or a service well.
A productive well is a well which is capable of producing oil and gas in
commercial quantities or in quantities considered by the operator to be
sufficient to justify the costs required to complete, equip and produce
the well. A service well means a well such as a water or gas-injection,
water-source or water-disposal well. Such wells do not have marketable
reserves of crude oil or natural gas attributed to them but are essential
to the production of the crude oil and natural gas reserves.

Reserve Estimates

McDaniel has prepared the McDaniel Report in which it evaluated the crude
oil, natural gas liquids and natural gas reserves attributable to an undivided
50% interest in the Optioned Properties, effective May 1, 2003, and estimated
the net present worth value of such reserves. The information used to prepare
the McDaniel Report was made available to McDaniel by Southward or was obtained
from public sources or McDaniels own files. The following tables summarize the
reserve determinations contained in the McDaniel Report and the estimated
future net present worth values therefrom.

The reserve determinations and estimated net present worth values included
in the tables below do not include the ARTC and are stated prior to provision
for income taxes and indirect costs, such as general and administrative
expenses and facility site restoration, and may not necessarily be
representative of the fair market value of the reserves. The probable reserves
and the present worth value of such reserves as set forth in the tables below
have been reduced by 50% to reflect the degree of risk associated with recovery
of such reserves.

The reserve determinations and estimated net present worth values included
in the tables below represent a 50% undivided interest in the Optioned
Properties. These tables reflect a summary of the Companys reserves presented
using two different sets of price and cost assumptions, one being based on
escalated costs and prices and the other being based on constant costs and
prices. Both the escalated and

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constant cost and price cases are based on the
McDaniel Report. Other assumptions and qualifications relating to costs,
prices for future production and other matters are summarized in the notes
following the tables. For a description of certain differences between estimating
reserves under U.S. reserve disclosure guidelines and Canadian reserve
disclosure guidelines, please see Item 3D. Key Information
 Risk factors 
Canadian and United States practices differ in reporting reserves and
production.

Optioned Properties (50% Interest)
Petroleum and Natural Gas Reserves and Pre-Tax Estimated Net Present Worth
Escalating Prices and Costs

|                         |               |  |             |        |                                     |  |        |        |     |  |               |        |     |  |        |        |  |  |        |        |  |  |        |        | 
|------------------------ | ------------- |  | ----------- | ------ | ----------------------------------- |  | ------ | ------ | --- |  | ------------- | ------ | --- |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                         |               |  | Natural Gas |        | Pre-Tax Estimated Net Present Worth
|                         |               |  | (mmcf)      |        | (thousands of dollars)             
|                         |               |  |             |        |                                    
|                         |               |  |             |        |                                     |  |        |        |     |  | Discounted at
|                         |               |  |             |        |                                     |  |        |        |     |  |              
|                         |               |  | Gross       |        | Net                                 |  | 0%     |        | 10% |  | 15%           |        | 20%
|                         |               |  |             |        |                                     |  |        |        |     |  |               |        |    
|Proved Reserves          |               |  |             |        |                                     |  |        |        |     |  |               |        |     |  |        |        |  |  |        |        |  |  |        |       
|                         | Producing     |  |             | 18,607 |                                     |  |        | 14,450 |     |  |               | 65,104 |     |  |        | 52,721 |  |  |        | 48,523 |  |  |        | 45,124 | 
|                         | Non-Producing |  |             | 3,592  |                                     |  |        | 2,629  |     |  |               | 11,983 |     |  |        | 9,628  |  |  |        | 8,897  |  |  |        | 8,314  | 
|                         |               |  |             |        |                                     |  |        |        |     |  |               |        |     |  |        |        |  |  |        |        |  |  |        |        | 
|Total Proved Reserves    |               |  | 22,199      |        |                                     |  | 17,079 |        |     |  | 77,087        |        |     |  | 62,349 |        |  |  | 57,420 |        |  |  | 53,438 |       
|Risked Probable Reserves |               |  | 4,195       |        |                                     |  | 3,181  |        |     |  | 13,502        |        |     |  | 8,678  |        |  |  | 7,332  |        |  |  | 6,341  |       
|                         |               |  |             |        |                                     |  |        |        |     |  |               |        |     |  |        |        |  |  |        |        |  |  |        |       
|Established Reserves     |               |  | 26,394      |        |                                     |  | 20,260 |        |     |  | 90,589        |        |     |  | 71,027 |        |  |  | 64,752 |        |  |  | 59,779 |       

Optioned Properties (50% Interest)
Petroleum and Natural Gas Reserves and Pre-Tax Estimated Net Present Worth
Constant Prices and Costs

|                         |               |  |             |        |                                     |  |        |        |     |  |         |        |     |  |        |        |  |  |        |        |  |  |        |        | 
|------------------------ | ------------- |  | ----------- | ------ | ----------------------------------- |  | ------ | ------ | --- |  | ------- | ------ | --- |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                         |               |  | Natural Gas |        | Pre-Tax Estimated Net Present Worth
|                         |               |  | (mmcf)      |        | (thousands of dollars)             
|                         |               |  |             |        |                                    
|                         |               |  |             |        | Discounted at                      
|                         |               |  |             |        |                                     |  |        |        |     |  |        
|                         |               |  | Gross       |        | Net                                 |  | 0%     |        | 10% |  | 15%     |        | 20%
|                         |               |  |             |        |                                     |  |        |        |     |  |         |        |    
|Proved Reserves          |               |  |             |        |                                     |  |        |        |     |  |         |        |     |  |        |        |  |  |        |        |  |  |        |       
|                         | Producing     |  |             | 18,607 |                                     |  |        | 14,450 |     |  |         | 87,183 |     |  |        | 68,053 |  |  |        | 61,720 |  |  |        | 56,662 | 
|                         | Non-Producing |  |             | 3,592  |                                     |  |        | 2,629  |     |  |         | 15,154 |     |  |        | 11,778 |  |  |        | 10,734 |  |  |        | 9,910  | 
|                         |               |  |             |        |                                     |  |        |        |     |  |         |        |     |  |        |        |  |  |        |        |  |  |        |        | 
|Total Proved Reserves    |               |  | 22,199      |        |                                     |  | 17,079 |        |     |  | 102,337 |        |     |  | 79,831 |        |  |  | 72,454 |        |  |  | 66,572 |       
|Risked Probable Reserves |               |  | 4,195       |        |                                     |  | 3,181  |        |     |  | 19,516  |        |     |  | 12,243 |        |  |  | 10,224 |        |  |  | 8,742  |       
|                         |               |  |             |        |                                     |  |        |        |     |  |         |        |     |  |        |        |  |  |        |        |  |  |        |       
|Established Reserves     |               |  | 26,394      |        |                                     |  | 20,260 |        |     |  | 121,853 |        |     |  | 92,074 |        |  |  | 82,678 |        |  |  | 75,314 |       

Notes to Reserve Determinations

The following notes provide important information relating to the preceding
reserve determinations.



|(1) |  | Gross Reserves are defined as the total of the Companys working
interests and/or royalty interests share of reserves before deducting
royalties owned by others.                                                                                                                                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net Reserves are defined as the total of the Companys working
interests and/or royalty interests share of reserves after deducting the
amounts attributable to the royalties owned by others.                                                                                                                                                                                                                                                                           
|   
|(3) |  | Net Present Worth values are based on net reserves and are expressed
after giving effect to estimated operating expenses and capital
expenditures but before provision for income taxes, overhead and general
administrative expenses, and for the escalating price assumptions case,
the operating expenses and capital expenditures have been escalated at
2.0% per year.                                                                                              
|   
|(4) |  | Proved Reserves are defined as those reserves estimated as recoverable
under current technology and existing economic conditions, from that
portion of a reservoir which can be reasonably evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical
and engineering data, including the reserves to be obtained by enhanced
recovery processes demonstrated to be economic and technically successful
in the subject reservoir.
|   
|(5) |  | Proved Producing Reserves are defined to include both those proved
reserves that are actually on production, or if not producing, that could
be recovered from existing wells or facilities and where the reasons for
the current non-producing status is the choice of the owner. An
illustration of such a situation is where a well or zone is capable of
production but is shut-in because its deliverability is not required to
meet contract commitments.          
|   
|(6) |  | Proved Non-Producing Reserves are defined as those reserves estimated
as recoverable from existing wells that require relatively minor capital
expenditures to produce.                                                                                                                                                                                                                                                                                                  

- 21 -



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##### Table of Contents





|(7)  |  | Proved Undeveloped Reserves are defined as those reserves expected to
be recovered from new wells on undrilled acreage or from existing wells
where a relatively major capital expenditure will be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | Probable Additional Reserves are defined as those reserves which an
analysis of drilling, geological, geophysical and engineering data does
not demonstrate to be proved under current technology and existing
economic conditions, but where
such analysis suggests the likelihood of their existence and future
recovery. Probable additional reserves to be obtained by the application of
enhanced recovery processes will be the increased recovery over and above
that estimated in the proved category which can be realistically estimated
for the pool on the basis of enhanced recovery processes which can be
reasonably expected to be instituted in the future.
|    
|(9)  |  | Risked Probable Reserves means probable additional reserves discounted
by one-half to account for the additional risk of recovery for probable
reserves;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(10) |  | Established Reserves means proved reserves plus risked probable
reserves;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(11) |  | The constant price assumptions table is based on the following prices and
held constant over the life of the reserves (West Texas Intermediate
(WTI) - $US 30.00/bbl; Edmonton Light $Cdn. 43.10/bbl; Alberta Average
Natural Gas $Cdn. 6.90/mmbtu).                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(12) |  | The escalating price assumptions table is based on the McDaniel price
forecast (March 1, 2003) and escalating over the life of the reserves. An
excerpt of the price forecast from the McDaniel Report, being the WTI oil
price at Cushing, Oklahoma, the Edmonton Oil Price for 40 API, 0.5%
sulphur crude, and the Alberta Average field price for gas, appears below.                                                                                                                                                                                                                                                                                                      

|     |  |           |       |                |  |                 |       |  |  |  |      | 
|---- |  | --------- | ----- | -------------- |  | --------------- | ----- |  |  |  | ---- | 
|     |  | Crude Oil |       | Natural Gas   
|     |  |           |       |               
|     |  | WTI       |       | Edmonton Light |  | Alberta Average
|Year |  | ($US/bbl) |       | ($Cdn/bbl)     |  | ($Cdn/mmbtu)   
|     |  |           |       |                |  |                
|2003 |  |           | 30.00 |                |  |                 | 43.10 |  |  |  | 6.90 | 
|2004 |  |           | 26.00 |                |  |                 | 37.20 |  |  |  | 5.65 | 
|2005 |  |           | 24.00 |                |  |                 | 34.30 |  |  |  | 5.05 | 
|2006 |  |           | 23.00 |                |  |                 | 32.80 |  |  |  | 4.80 | 
|2007 |  |           | 23.30 |                |  |                 | 33.20 |  |  |  | 4.65 | 
|2008 |  |           | 23.80 |                |  |                 | 33.90 |  |  |  | 4.70 | 
|2009 |  |           | 24.30 |                |  |                 | 34.60 |  |  |  | 4.80 | 
|2010 |  |           | 24.80 |                |  |                 | 35.30 |  |  |  | 4.90 | 
|2011 |  |           | 25.30 |                |  |                 | 36.00 |  |  |  | 5.00 | 
|2012 |  |           | 25.80 |                |  |                 | 36.70 |  |  |  | 5.10 | 
|2013 |  |           | 26.30 |                |  |                 | 37.50 |  |  |  | 5.20 | 
|2014 |  |           | 26.80 |                |  |                 | 38.20 |  |  |  | 5.30 | 
|2015 |  |           | 27.30 |                |  |                 | 38.90 |  |  |  | 5.40 | 
|2016 |  |           | 27.80 |                |  |                 | 39.60 |  |  |  | 5.50 | 
|2017 |  |           | 28.40 |                |  |                 | 40.40 |  |  |  | 5.60 | 
|2018 |  |           | 29.00 |                |  |                 | 41.30 |  |  |  | 5.70 | 
|2019 |  |           | 29.60 |                |  |                 | 42.20 |  |  |  | 5.85 | 
|2020 |  |           | 30.20 |                |  |                 | 43.00 |  |  |  | 5.95 | 
|2021 |  |           | 30.80 |                |  |                 | 43.90 |  |  |  | 6.10 | 
|2022 |  |           | 31.40 |                |  |                 | 44.70 |  |  |  | 6.20 | 



|(13) |  | The value of the ARTC has not been included in the Net Present Worth
values.                                                                                                                                                                                            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(14) |  | The McDaniel Report estimates that capital expenditures to be incurred in
2003, 2004 and 2005 and thereafter and in total, net to the Company,
necessary to achieve the estimated net present worth values from proved
plus probable additional reserves are as follows:

|                             |       |                            |   |           |  |  |  |       |  |  |   |           | 
|---------------------------- | ----- | -------------------------- | - | --------- |  |  |  | ----- |  |  | - | --------- | 
|Escalating Price Assumptions |       | Constant Price Assumptions
|                             |       |                           
|                             | 2003  |                            | $ | 1,117,000 |  |  |  | 2003  |  |  | $ | 1,110,300 | 
|                             | 2004  |                            |   | 175,600   |  |  |  | 2004  |  |  |   | 168,800   | 
|                             | 2005+ |                            |   | 287,300   |  |  |  | 2005+ |  |  |   | 262,300   | 
|                             |       |                            |   |           |  |  |  |       |  |  |   |           | 
|                             | Total |                            | $ | 1,579,900 |  |  |  |       |  |  | $ | 1,541,400 | 
|                             |       |                            |   |           |  |  |  |       |  |  |   |           | 



|(15) |  | All of the proved producing reserves in the Optioned Properties are
currently on production.                                                                                                                                                 
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(16) |  | The McDaniel Report estimates future abandonment costs of $20,000 for
each well that has been assigned reserves. Actual abandonment costs may
exceed this estimate. No allowance was included for future abandonment
costs of any facilities.

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##### Table of Contents



Reconciliation of Reserves

The following table summarizes the changes to the proved reserves (before
royalties) associated with a 50% undivided interest in the Optioned Properties
from December 31, 2001 to December 31, 2002.

|                |                 |  |                    |        |          |  |       |       |   |  |        |        |  
|--------------- | --------------- |  | ------------------ | ------ | -------- |  | ----- | ----- | - |  | ------ | ------ | -
|                |                 |  | Natural Gas (mmcf)
|                |                 |  |                   
|                |                 |  | Proved             |        | Probable |  | Total
|                |                 |  |                    |        |          |  |      
|January 1, 2002 |                 |  | 22,920             |        |          |  | 4,889 |       |   |  | 27,809 |       
|                | Production      |  |                    | (6,310 | )        |  |       |      |   |  |        | (6,310 | )
|                | Acquisitions    |  |                    |       |          |  |       |      |   |  |        |       |  
|                | New Development |  |                    | 5,920  |          |  |       | 2,060 |   |  |        | 7,980  |  
|                | Dispositions    |  |                    | (269   | )        |  |       | (9    | ) |  |        | (278   | )
|                | Revisions       |  |                    | (1,319 | )        |  |       | (531  | ) |  |        | (1,850 | )
|                |                 |  |                    |        |          |  |       |       |   |  |        |       
|January 1, 2003 |                 |  | 20,942             |        |          |  | 6,409 |       |   |  | 27,351 |       
|                |                 |  |                    |        |          |  |       |       |   |  |        |       

Production History

The following table shows the average daily production volumes from an
undivided 50% interest in the Optioned Properties, before the deduction of
royalties, for each of the fiscal quarters of 2001 and 2002.

|                    |  |              |        |              |  |              |        |              |  |              |        |              |  |              |        |              |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|------------------- |  | ------------ | ------ | ------------ |  | ------------ | ------ | ------------ |  | ------------ | ------ | ------------ |  | ------------ | ------ | ------------ |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                    |  | 2002         |        | 2001        
|                    |  |              |        |             
|                    |  | Three Months |        | Three Months |  | Three Months |        | Three Months |  | Three Months |        | Three Months |  | Three Months |        | Three Months
|                    |  | Ended        |        | Ended        |  | Ended        |        | Ended        |  | Ended        |        | Ended        |  | Ended        |        | Ended       
|                    |  | March 31     |        | June 30      |  | September 30 |        | December 31  |  | March 31     |        | June 30      |  | September 30 |        | December 31 
|                    |  |              |        |              |  |              |        |              |  |              |        |              |  |              |        |             
|Natural Gas (mcf/d) |  |              | 16,714 |              |  |              | 16,071 |              |  |              | 16,460 |              |  |              | 19,258 |              |  |  | 16,071 |  |  |  | 16,534 |  |  |  | 18,096 |  |  |  | 18,190 | 

Netback History

The
following table summarizes the average netbacks ($ per mcf) received
for natural gas production from an undivided 50% interest in the Optioned
Properties for each of the fiscal quarters of 2001 and 2002.

|                            |  |              |      |              |  |              |      |              |  |              |      |              |  |              |      |              |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|--------------------------- |  | ------------ | ---- | ------------ |  | ------------ | ---- | ------------ |  | ------------ | ---- | ------------ |  | ------------ | ---- | ------------ |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                            |  | 2002         |      | 2001        
|                            |  |              |      |             
|                            |  | (unaudited)  |      | (unaudited) 
|                            |  | Three Months |      | Three Months |  | Three Months |      | Three Months |  | Three Months |      | Three Months |  | Three Months |      | Three Months
|                            |  | Ended        |      | Ended        |  | Ended        |      | Ended        |  | Ended        |      | Ended        |  | Ended        |      | Ended       
|                            |  | March 31     |      | June 30      |  | September 30 |      | December 31  |  | March 31     |      | June 30      |  | September 30 |      | December 31 
|                            |  |              |      |              |  |              |      |              |  |              |      |              |  |              |      |             
|Sales Price                 |  | $            | 3.10 |              |  | $            | 3.10 |              |  | $            | 3.37 |              |  | $            | 4.72 |              |  | $ | 9.26 |  |  | $ | 6.07 |  |  | $ | 3.99 |  |  | $ | 3.55 | 
|Processing and
Other Income |  |              |     |              |  |              |     |              |  |              |     |              |  |              |     |              |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|Royalties                   |  |              | 0.83 |              |  |              | 0.93 |              |  |              | 0.97 |              |  |              | 1.12 |              |  |   | 2.46 |  |  |   | 1.60 |  |  |   | 0.84 |  |  |   | 0.75 | 
|Operating Costs             |  |              | 0.55 |              |  |              | 0.66 |              |  |              | 0.51 |              |  |              | 0.56 |              |  |   | 0.39 |  |  |   | 0.42 |  |  |   | 0.50 |  |  |   | 0.41 | 
|                            |  |              |      |              |  |              |      |              |  |              |      |              |  |              |      |              |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|Netback                     |  |              | 1.72 |              |  |              | 1.51 |              |  |              | 1.89 |              |  |              | 3.04 |              |  |   | 6.41 |  |  |   | 4.05 |  |  |   | 2.65 |  |  |   | 2.39 | 
|                            |  |              |      |              |  |              |      |              |  |              |      |              |  |              |      |              |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 

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Capital Expenditures

The following table summarizes the capital expenditures in respect of an
undivided 50% interest in the Optioned Properties in the categories indicated
for each of the fiscal quarters of 2001 and 2002.

|                                   |  |              |           |              |  |              |           |              |  |              |           |              |  |              |         |              |  |   |           |  |  |   |           |  |  |   |           |  |  |   |           | 
|---------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------ |  | ------------ | ------- | ------------ |  | - | --------- |  |  | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                   |  | 2002         |           | 2001        
|                                   |  |              |           |             
|                                   |  | (unaudited)  |           | (unaudited) 
|                                   |  | Three Months |           | Three Months |  | Three Months |           | Three Months |  | Three Months |           | Three Months |  | Three Months |         | Three Months
|                                   |  | Ended        |           | Ended        |  | Ended        |           | Ended        |  | Ended        |           | Ended        |  | Ended        |         | Ended       
|                                   |  | March 31     |           | June 30      |  | September 30 |           | December 31  |  | March 31     |           | June 30      |  | September 30 |         | December 31 
|                                   |  |              |           |              |  |              |           |              |  |              |           |              |  |              |         |             
|Land acquisitions                  |  | $            | 197,314   |              |  | $            | 67,739    |              |  | $            | 320,420   |              |  | $            | 126,603 |              |  | $ | 839,101   |  |  | $ | 1,354,036 |  |  | $ | 1,727,559 |  |  | $ | 487,130   | 
|Exploration
(including
drilling)   |  |              | 1,128,209 |              |  |              | 1,273,520 |              |  |              | 913,588   |              |  |              | 328,622 |              |  |   | 1,873,729 |  |  |   | 3,465,651 |  |  |   | 1,162,818 |  |  |   | 1,745,135 | 
|Development
(including
facilities) |  |              | 266,080   |              |  |              | 592,692   |              |  |              | 1,363,206 |              |  |              | 389,783 |              |  |   | 890,289   |  |  |   | 1,537,726 |  |  |   | 1,169,140 |  |  |   | 888,443   | 
|                                   |  |              |           |              |  |              |           |              |  |              |           |              |  |              |         |              |  |   |           |  |  |   |           |  |  |   |           |  |  |   |           | 
|Total                              |  |              | 1,591,603 |              |  |              | 1,933,951 |              |  |              | 2,597,214 |              |  |              | 845,008 |              |  |   | 3,603,119 |  |  |   | 6,357,413 |  |  |   | 4,059,517 |  |  |   | 3,120,708 | 
|                                   |  |              |           |              |  |              |           |              |  |              |           |              |  |              |         |              |  |   |           |  |  |   |           |  |  |   |           |  |  |   |           | 

Future Commitments

As a pre-condition to BidCo entering into the arrangement agreement,
Southward agreed that at the direction of BidCo it would enter into fixed price
forward sales contracts in respect of up to 12,875 GJ/d of gas production from
the Optioned Properties. At BidCos direction, on March 17, 2003, Southward
entered into four forward sales contracts in respect of an aggregate of 12,880
GJ/d for 2003 and the first quarter of 2004, of which the Company will retain
an interest in contracts in respect of 6,440 GJ/d, representing 36% of gas
production attributable to a 50% undivided interest in the Optioned Properties
for the last 8 months of 2003 (based on the McDaniel Report) at prices ranging
from $6.24 to $7.15 per GJ. These forward sales contracts reduce the economic
uncertainty of the acquisition of an interest in the Optioned Properties by
providing certainty to the prices for a portion of the production from the
properties.

In addition to the forward sales contracts noted above, pursuant to the
Purchase Option, the Company will acquire an interest in forward sales
contracts and financial hedging contracts with respect to production from the
Optioned Properties as follows:

|                         |  |        |       |                   |  |        |               |     |  |                  |  | 
|------------------------ |  | ------ | ----- | ----------------- |  | ------ | ------------- | --- |  | ---------------- |  | 
|                         |  | Volume |       | Contract Price(1) |  |        |               |    
|Transaction Type         |  | (GJ/d) |       | (GJ/d)            |  | Expiry
|                         |  |        |       |                   |  |       
|Fixed Summer             |  |        | 1,658 |                   |  | $      | 4.10          |     |  | October 31, 2003
|Fixed Summer             |  |        | 3,220 |                   |  | $      | 6.64          |     |  | October 31, 2003
|Costless Collar Summer   |  |        | 3,220 |                   |  | $      | 6.24 - $7.00  |     |  | October 31, 2003
|Costless Collar Winter   |  |        | 4,830 |                   |  | $      | 6.36 -  $7.15 |     |  | March 31, 2004  
|Fixed Winter             |  |        | 1,610 |                   |  | $      | 6.76          |     |  | March 31, 2004  
|Fixed Summer             |  |        | 1,450 |                   |  | $      | 5.06          |     |  | October 31, 2003
|Cogeneration Fuel Supply |  |        | 263   |                   |  | $      | 1.959         | (2) |  | October 31, 2008
|Daily Declining Profile  |  |        | 977   | (3)               |  |        | netback       | (4) |  | October 31, 2011
|Reserve Based            |  |        | 101   | (5)               |  |        | netback       | (6) |  | life of reserves

Notes:



|(1) |  | The contract price net of costs is obtained by subtracting costs of $0.20
from the contract price.                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The contract price increases over the term of the contract, with the
price for each of the 12 month periods remaining in the term as follows:

|                 |  |       |       | 
|---------------- |  | ----- | ----- | 
|Date             |  | Price
|                 |  |      
|November 1, 2003 |  | $     | 2.008 | 
|November 1, 2004 |  | $     | 2.058 | 
|November 1, 2005 |  | $     | 2.110 | 
|November 1, 2006 |  | $     | 2.163 | 
|November 1, 2007 |  | $     | 2.217 | 

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|(3) |  | The Companys obligations under this contract will, on November 1 of this
year and each succeeding year, decline to the following:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|                                |                  |                   |     |     | 
|------------------------------- | ---------------- | ----------------- | --- | --- | 
|Date                            |                  | Obligation (GJ/d)
|                                |                  |                  
|                                | November 1, 2003 |                   |     | 841 | 
|                                | November 1, 2004 |                   |     | 724 | 
|                                | November 1, 2005 |                   |     | 623 | 
|November 1, 2006 and thereafter |                  |                   | 568 |    



|(4) |  | TransCanada Pipelines Limited netback pricing.                    
|--- |  | ------------------------------------------------------------------
|   
|(5) |  | Reserve based with respect to production from Mannville 2-19 well.
|   
|(6) |  | Progas Limited netback pricing.                                   

Hawkers aggregate future commitments represent an aggregate of 50% of its
estimated 2003 production from total proved reserves at a weighted average
price of $5.98 per GJ and 44% of its estimated first quarter 2004 production

from total proved reserves at a weighted average price of $6.57 per GJ.

Environmental Regulation

The oil and natural gas industry is currently subject to environmental
regulation pursuant to provincial and federal legislation. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced or utilized in association with certain oil and
gas industry operations. In addition, legislation requires that well and
facility sites be abandoned and reclaimed to the satisfaction of provincial
authorities. Compliance with such legislation can require significant
expenditures. A breach of such legislation may result in the imposition of
material fines and penalties, the revocation of necessary licenses and
authorizations and civil liability for pollution damage.

In 1994, the United Nations Framework Convention on Climate Change came
into force and three years later led to the Kyoto Protocol which will require,
upon ratification, nations to reduce their emissions of carbon dioxide and
other greenhouse gases. As a result of Canadas ratification of the Kyoto
Protocol reductions in greenhouse gases from the Companys operations may be
required which could result in increased capital expenditures and reductions in
production of oil and gas.

The Company does not face any environmental issues or impacts that are
unique to the Company. However, like all participants in the Canadian oil and
gas industry, reclamation and restoration of abandoned wells and facilities is
recognized as a corporate responsibility. The expenses associated with meeting
this responsibility are provided for on a unit of production basis.




Item 5.  Operating and Financial Review and Prospects

A.     Operating results

Overview

Prior to December 10, 2001, the Company was a biotechnology company
focusing primarily on the discovery and development of pharmaceutical products
for gastroenteric diseases or conditions which could benefit from new or
additional therapies. On December 10, 2001, the Company terminated development
of SYNSORB Cd®, its sole development drug. Subsequent to that date, the
Company has had no drug under active development and has no regular source of
operating revenue or cash flow. After that date, the Company reduced its
spending and terminated all contracts and commitments that were considered not
critical to an orderly wind down of the clinical trials and the preservation of
its asset base. During 2002, the employees of the Company were reduced to one
full-time and one part-time employee.

Provision for SYNSORB Cd® Wind-down Costs

A provision for the future wind-down costs of clinical trials, reduction
in staff and elimination of their costs associated with the development of the
SYNSORB Cd® totalling $3,830,000 was included in the results for the year

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ended December 31, 2001. Of this amount, approximately $946,000 related
directly to the wind down of clinical activity, $1,339,000 related to staff
reductions and $1,545,000 related to other costs associated with halting
SYNSORB Cd® related activity. An additional provision amount of $50,000 was
included for the period ended June 30, 2002. As at December 31, 2002, the
entire provision amount had been utilized. No further wind-down costs are
anticipated.

Write-downs of Capital Assets

The decision to halt clinical trials led to a write-down of certain
capital assets. In 2001, the Company wrote down its patents associated with
SYNSORB related technology to nil, and the charge of $2,060,000 was included in
amortization expense. In 2000, the Company wrote down its patents associated
with SYNSORB Pk® to nil, and the charge of $602,000 was included in
amortization expense.

As part of its drug development activity, in 1998 SYNSORB built a
cGMP-compliant manufacturing facility. In 2001, the Company determined that
continued ownership of this facility was unnecessary and wrote-down the value
of the facility and associated equipment on December 31, 2001 to the estimated
net realizable value based on its potential sale as a cGMP-compliant
manufacturing facility. In 2001, this resulted in the Company writing-down the
value of its building and land to $8,600,000 and writing-down the value of its
manufacturing equipment to $2,000,000, and the total associated charge of
$5,876,000 was included in amortization expense. Efforts to market the
facility as a manufacturing facility were unsuccessful and the Company now
expects to realize commercial value for the building and land. Accordingly,
the Company wrote-down the value of the building and land to $2,500,000 and the
associated charge of $6,100,000 is included in amortization expense. While the
Company feels that these write-downs are appropriate, the book value of the
building and land may not reflect the ultimate realizations which may be
achieved on their disposition.

The manufacturing equipment was auctioned subsequent to December 31, 2002.
The value of the manufacturing equipment as at December 31, 2002 was written
down to $1,000,000 and the associated charge of $997,000 is included in
amortization expense.

For the year ended December 31, 2001 the Company wrote off leasehold
improvements, computer equipment and office furniture and equipment and the
total charge of $267,000 was included in amortization expense.

Distribution of Shares of Oncolytics Biotech Inc.

At December 31, 2001 the Company owned 6,255,800 common shares of
Oncolytics Biotech Inc. (Oncolytics).

Effective May 15, 2002 the Company distributed to its shareholders
4,000,235 common shares of Oncolytics which was accounted for as a return of
capital. The deemed value of these shares, net of expenses, was $11,600,000
resulting in a gain on distribution of $8,325,000. As part of this
transaction, the Companys holding of 1,500,000 shares in BCY Life Sciences
Inc. was transferred to Oncolytics. No gain or loss was recorded as a result
of that transfer.

Year ended December 31, 2002 compared with Year ended December 31, 2001

During the year ended December 31, 2002 the Company sold 2,255,565 common
shares of Oncolytics for net proceeds of $6,898,000 resulting in a gain on sale
of $4,899,000. As at December 31, 2002 the Company did not hold any common
shares of Oncolytics.

For the year ended December 31, 2002, the Company had total revenue of
$139,000 compared to $729,000 for the year ended December 31, 2001. Interest
income for the 12 months ended December 31, 2002 decreased significantly
compared to the same period in 2001 as a result of lower average cash balances
on hand and lower interest rates in 2002.

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Expenses for the year ended December 31, 2002 of $9,126,000 were less than
the expenses of $26,803,000 for the comparable period in 2001. Because the
Company had terminated research and development in late 2001 and made a
provision in that year for future wind down costs associated with drug
development, research development expenses in 2002 were nil. Operating
expenses for the 2002 period were $1,596,000, a significant reduction from
$7,106,000 for 2001. The reduction is due to the termination of almost all
employees, the termination of certain office space effective April 11, 2002 and
the consolidation of all activity at the manufacturing facility.

Interest on long term debt in 2002 was $71,000, a significant reduction
from $787,000 in 2001 due to the payment by the Company during 2002 of all of
its long and short-term debt. Amortization in 2002 was $7,216,000 compared to
$9,655,000 in 2001. Included in the 2001 amortization amounts was property and
other capital asset write-downs of $8,203,000 arising from the termination of
the Companys drug development program. The amortization in 2002 included
additional write-downs of the Companys equipment and manufacturing facility
based on the Companys determination that those assets could only be sold on
the basis of general commercial conditions and not their drug specific
attributes.

Year ended December 31, 2001 compared with Year ended December 31, 2000

For the year ended December 31, 2001, the Company recorded total revenue
of $729,000 compared to $1,513,000 for the year ended December 31, 2000.
Milestone payments totalled $214,000 for the year ended December 31, 2001
compared to $106,000 for the same period in 2000. A payment of $94,000 was
also received from a partnering agreement in 2000. Interest income for the
twelve months ended December 31, 2001 decreased by 61% compared to the same
period in 2000 as a result of a lower average cash on hand balance and lower
interest rates in 2001.

Expenses for the years ended December 31, 2001 and 2000 of $9,255,000 and
$7,889,000 respectively for research and development and clinical trials
represented approximately 35% and 56% respectively of the Companys total
expenses. Included in 2001 research and development expenses were $1,384,000
of future wind-down costs since further development of SYNSORB Cd® was
terminated in December 2001. Of this amount $946,000 relates directly to the
wind down of the clinical trial and $438,000 relates to other costs associated
with halting development of SYNSORB Cd®. There were minimal expenses
associated with SYNSORB Pk® during 2001 as active development of the drug was
suspended in December 2000.

During 2001, the Company spent $974,000 for research programs and other
expenses to develop and broaden the SYNSORB technology, primarily in the field
of carbohybrids. Ongoing research and development has been suspended since the
termination of development of SYNSORB Cd®.

Operating expenses totalled $7,106,000 and $3,648,000 for the years ended
December 31, 2001 and 2000 respectively. The increase of $3,458,000 primarily
reflects $2,446,000 in future wind down costs and $507,000 in December 2001
staff termination costs. Included in the future wind down costs are $1,339,000
related to future staff terminations and $1,107,000 in other administrative
costs relating to the termination of development of SYNSORB Cd® such as legal
and audit fees, insurance, rent and other office costs.

Capital Expenditures

Capital expenditures for the year ended December 31, 2001 totalled
$944,000, including $720,000 in patent costs incurred for the Companys
intellectual property, $92,000 in leasehold improvements, $127,000 in office
and computer equipment, and $25,000 in manufacturing equipment. All capital
expenditures, except those deemed necessary to maintain intellectual property,
were suspended subsequent to the decision on December 10, 2001 to halt
development of SYNSORB Cd®. The Company has offered its manufacturing facility
for sale. Capital expenditures for the year ended December 31, 2000 totalled
$980,000. At year-end 2001, the Company had no commitments for future capital
spending.

Annual amortization of capital investments totalled $9,655,000 or
approximately 36% of the Companys total expenses for the year 2001 compared to
$1,404,000 or 10% for 2000. Included in the 2001 amortization amount are
property and other capital assets write downs of $8,203,000 arising as a result
of the termination of development of

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SYNSORB Cd®. Depreciation of the manufacturing facility commenced on
January 1, 2001 at the rate of 5% per annum on a declining balance.

B.     Liquidity and capital resources

Year ended December 31, 2002 compared with Year ended December 31, 2001

At December 31, 2002 the Companys cash and working capital positions were
$289,000 and $412,000, respectively, compared at December 31, 2001 balances of
$5,841,000 and ($4,725,000) respectively.

As at December 21, 2002 the Company had no long term or short term debt.
At December 31, 2001 the current portion of long term debt of the Company was
$5,910,000, all of which was repaid during 2002.

The Companys primary source of liquidity during 2002 was the liquidation
of its assets. In 2002 the Company sold 2,255,565 common shares of Oncolytics
for net proceeds of $6,898,000 resulting in a gain on sale of $4,899,000. As
at December 31, 2002 the Company did not hold any common shares of Oncolytics.
During 2002 the Company attempted to dispose of both its manufacturing
equipment and its manufacturing facility. Subsequent to December 31, 2002 the
Company disposed of most of its manufacturing equipment through auction
realizing proceeds, net of expenses, of approximately $900,000 and has listed
its manufacturing building and related land for sale as commercial premises.
The Company also holds miscellaneous intellectual property rights with respect
to certain drug technologies, which it may license, dispose of or abandon. In
February 2003 the Company received U.S.$230,000 for an exclusive license of
certain of its patents regarding toxin binding sugars. No assurance can be
given as to whether any assets can be disposed of or what, if any, proceeds can
or will be received with respect thereto.

serIn addition to the liquidation of assets, the Company may receive
milestone payments and royalties with respect to the previous sale of its INH
subsidiary or may choose to sell these rights. The Company cannot predict the
likelihood, timing or amount of any milestone or royalty receipts.

Year ended December 31, 2001 compared with Year ended December 31, 2000

The Companys cash and working capital position at December 31, 2001 were
$5,841,000 and ($4,725,000) respectively, compared to December 31, 2000
balances of $18,821,000 and $14,942,000 respectively. The working capital
deficiency of ($4,725,000) included $5,910,000 as the current portion of long
term debt, all of which was repaid subsequent to year-end. On December 10,
2001, when it announced its decision to halt development of SYNSORB Cd®, the
Company had cash of approximately $7,000,000 and long term debt, including
current portion, totalling $6,383,625.

During 2001 the Company entered into a Common Share Purchase Agreement
(CSPA) allowing the Company to access funds through the sale of a maximum of
1,000,000 Oncolytics common shares pursuant to a common share equity line.
Under this agreement the Company was able, at its option, to sell the
Oncolytics common shares over a period of 12 months commencing on June 19, 2001
at a discount from the average daily price of the common shares. During the
year ended December 31, 2001 the Company sold 494,200 Oncolytics common shares,
representing 7% of the Companys total holdings in Oncolytics, for net proceeds
of $3,481,070 under the terms of the CSPA. Subsequent to year-end the Company
terminated the CSPA with no penalty.

On April 20, 2001 the Company issued 126,000 common shares on the exercise
of options for proceeds of $126,000. No other equity was issued during 2001.
During the year the Company repaid $2,866,000 of the principal outstanding with
respect to its long-term debt and a further $5,910,000 was outstanding at
December 31, 2001. Effective December 31, 2001, the Company agreed to a
revised repayment schedule for its $5,000,000 credit facility drawn down during
construction of the manufacturing facility. Therefore, all of the amount
outstanding at December 31, 2001 was repayable within one year. Interest paid
in 2001 with respect to these debt facilities was $787,000 compared to
$1,176,000 for 2000.

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On February 5, 2002 the Company prepaid the remaining $838,586 owing under
a loan bearing an interest rate of 13.73% per annum, with certain intellectual
property pledged as collateral. On March 1, 2002 the Company repaid the
remaining principal of $4,000,000 outstanding on its floating rate debt.

Income Taxes

As at December 31, 2002 the Company had non-capital losses of
approximately $34,123,000 available to reduce future taxable income. These
losses will expire in the years 2005 through 2008. In addition, the Company
had unclaimed expenditures of approximately $43,000,000 available to reduce
future taxable income and $5,754,000 of unclaimed investment tax credits
available to reduce future income tax payable. The acquisition by Hawker of an
additional 49% undivided interest in the Optioned Properties will add to the
Companys tax pools by an amount equal to the purchase price of $67 million,
subject to adjustment.

Risks and Uncertainties

Throughout the conduct of its clinical trials, the Company has maintained
product liability insurance at levels consist with the current industry
practice. No assurance can be given that this coverage will provide full
protection against all risks.

C.     Research and development, patents and licenses, etc.

During 2001 and the previous two years, the research and development costs
of the Company were expensed as incurred. Under Canadian GAAP, development
costs should be capitalized if certain criteria are met. Companies with major
products in clinical trials do not necessarily meet these criteria. In the
United States all research and development costs are expensed in accordance
with U.S. GAAP. The Companys development costs in 2001, and the previous two
years, did not meet the following two capitalization criteria: (i) the
technical feasibility of the product or process must have been established; and
(ii) the future market for the product or process must be clearly defined.
With regard to (i), the Company was conducting clinical trials for SYNSORB Cd®
and SYNSORB Pk® and the technical feasibility of these products was not known.
With regard to (ii), the future market for these products was not clearly
defined. For these reasons, the Companys development costs were expensed and
not capitalized.

D.     Trend information.

There are no trends not already detailed in this annual report that the
Company is aware of at this time that may impact the business or future
prospects of the Company.

E.     Off-balance sheet arrangements.

Not applicable.

F.     Disclosure of contractual obligations.

None.




Item 6.  Directors, Senior Management and Employees

A.     Directors and senior management.

The following are the directors and officers of the Company, their
municipality of residence, their positions with the Company and the periods
during which each has served in such capacity, their principal occupations
within the past five years, and the number and percentage of Common Shares
owned or controlled by them.

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|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|-------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ----------------- | ---
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Number and        
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Percentage of     
|Name and                               |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Common Shares     
|Municipality of                        |  | Position with the                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Beneficially Owned
|Residence                              |  | Company                                                      |  | Principal Occupation For Past Five Years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | or Controlled(1)  
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|David A. Tuer
Calgary, Alberta         |  | Chief Executive
Officer and a
Director since
January 6, 2003 |  | Chief Executive Officer and a Director
of Hawker and Chairman, Calgary Health
Region. Prior to October 2001,
President, Chief Executive Officer and
a Director of PanCanadian Petroleum
Limited                                                                                                                                                                                                                                                                                                                                                       |                    | 715,466 (3.27%)   | (2)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Ronald P. Mathison
Calgary, Alberta    |  | Chairman and a
Director since
April 3, 2003                  |  | President and Director of Matco
Investments Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                    | 1,447,534 (6.61%) | (3)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Stan G.P. Grad
Calgary, Alberta        |  | Director since
April 21, 2003                                |  | Independent Businessman                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                    | 21,450 (0.09%)    | (4)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Bruce J. Kenway, C.A.
Calgary, Alberta |  | Director since
March 31, 1994                                |  | Partner, Kenway Mack Slusarchuk Stewart
LLP, Chartered Accountants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                    | 60,637 (0.28%)    |    
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Martin A. Lambert
Calgary, Alberta     |  | Director since
April 3, 2003                                 |  | Partner, Bennett Jones LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                    | 1,430,934 (6.53%) | (5)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Keith T. Smith
Calgary, Alberta        |  | Director since
April 3, 2003                                 |  | President and Chief Executive Officer
of zed.i solutions inc. from April
2001. Prior thereto, Vice President,
Corporate Development with zed.i
solutions inc. since April 2000 and
Executive Vice President of Acanthus
Resources Ltd., a private oil and gas
company, from August 1998 to April
2000. Prior thereto, Executive Vice
President of WestCastle Energy Corp.,
the Manager of WestCastle Energy Trust,
and a Director of WestCastle
Acquisition Corp., the operating
company of WestCastle Energy Trust from
February 1997 to August 1998 |                    | 3,575 (0.02%)     | (6)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Barry R. Herring
Calgary, Alberta      |  | Chief Financial
Officer since May
6, 2003                    |  | Chief Financial Officer of the Company
since May 6, 2003. Prior thereto, Vice
President, Finance and Chief Financial
Officer of Southward Energy Ltd. from
January 2002 to April 2003, Senior Vice
President of Calpine Canada from June
2000 to September 2000, Vice President,
Finance and Operations of Quintana
Minerals Canada Corp. from May 1999 to
June 2000 and Vice President, Finance
and Operations of Ocean Energy Inc.
from 1997 to 1999.                                                                                               |                    | 40,725 (0.19%)    | (7)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Terry C. Schmidtke
Calgary, Alberta    |  | Chief Operating
Officer since April
21, 2003                 |  | Chief Operating Officer of the Company
since April 21, 2003. Prior thereto,
Senior Vice President, Central Plains
Region for EnCana Company from April
2002 to March 2003, and General Manager
of various business units of
PanCanadian Petroleum Limited since
1994.                                                                                                                                                                                                                                                                                 |                    | 62,750 (0.29%)    | (8)
|                                       |  |                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                    |                   |    
|Darrell R. Peterson
Calgary, Alberta   |  | Corporate Secretary
since April 3, 2003                      |  | Partner, Bennett Jones LLP since March
2003. Prior thereto, Associate of
Bennett Jones LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                    | 3,575 (0.02%)     | (9)

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Notes:



|(1) |  | Information as to Common Shares beneficially owned, not being within the
knowledge of the Company, has been furnished by the respective officers
and directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Does not include 1,062,840 Class A held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | These shares do not include 2,302,380 Class A Shares controlled by Ronald Mathison. Of these Common Shares, 1,430,934 are owned by Matco Capital. Matco Capital is controlled by Matco Investments Ltd. and Matco Investments Ltd. is controlled by Ronald Mathison. To the knowledge of the Company, the only entities with an interest
of greater than 10% in Matco Capital are Matco Investments Ltd. and Mountain Moon Capital Inc. To the knowledge of the Company, the only shareholder holding, directly or indirectly, greater than 10%
of the outstanding shares of Matco Investment Ltd. is Ronald Mathison and the only shareholders holding, directly or indirectly, greater than 10% of Mountain Moon Capital Inc. are members of Martin Lamberts immediate family.
In addition to his beneficial ownership of Common Shares resulting from his control of Matco Investments Ltd., Mr. Mathison beneficially owns 16,600 Common Shares as a  result of shared power to dispose of such shares.
|   
|(4) |  | Does not include 38,610 Class A Shares held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) |  | These shares do not include
2,125,683 Class A Shares controlled by Martin Lambert. The
Common Shares are owned by Matco
Capital. Matco Capital is controlled by Matco Investments Ltd. and Matco Investments Ltd. is controlled by Ronald Mathison. To the knowledge of the Company, the only entities with an interest of greater than 10% in Matco Capital are Matco Investments Ltd.
and Mountain Moon Capital Inc. To the knowledge of the Company, the only shareholder holding, directly or indirectly, greater than 10% of the outstanding shares of Matco Investments Ltd. is Ronald Mathison and the only shareholders holding, directly or indirectly, greater than 10% of Mountain Moon Capital Inc. are members
of Martin Lamberts immediate family.                                                                                                                                                                                                                                           
|   
|(6) |  | Does not include 6,435 Class A Shares held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(7) |  | Does not include 19,305 Class A Shares and options to acquire 100,000
Common Shares held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(8) |  | Does not include 64,350 Class A Shares and options to acquire 75,000
Common Shares held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(9) |  | Does not include 6,435 Class A Shares held by this individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

B.     Compensation.

Compensation of Executive Officers

The following table presents, for the most recently completed financial
year of the Company, the remuneration of the executive officers in place
(collectively, the Named Executive Officers). No other executive officer of
the Company received a combined salary and bonus of more than $100,000 in the
fiscal year ended December 31, 2002.

|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |         |        |                 |        |         |  |              |         |  |         |  |  | 
|-------------------------------------------------------------------------------- |  | ---- | ---- | --- |  | ------------------- | ------- | ------------ |  | --------------- | ----- | ------- | ------ | --------------- | ------ | ------- |  | ------------ | ------- |  | ------- |  |  | 
|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |         |        |                 |        |         |  | Long-Term    |         |  |         | 
|                                                                                 |  |      |      |     |  | Annual Compensation |         | Compensation |  |                
|                                                                                 |  |      |      |     |  |                     |         |              |  |                
|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |         |        |                 |        |         |  | Common       |         |  |         | 
|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |         |        |                 |        |         |  | Shares Under |         |  |         | 
|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |         |        | Other Annual    |        | Options |  | All Other   
|Name and Principal                                                               |  |      |      |     |  | Salary              |         | Bonus        |  | Compensation(1) |       | Granted |        | Compensation(2)
|Position                                                                         |  | Year |      | ($) |  | ($)                 |         | ($)          |  | (#)             |       | ($)    
|                                                                                 |  |      |      |     |  |                     |         |              |  |                 |       |        
|David J. Cox,
President and Chief
Executive Officer
(3)                          |  |      | 2002 |     |  |                     | 118,792 |              |  | nil             |       |         | 63,412 |                 |        | nil     |  |              | 374,250 | 
|Bill Hogg,
President and Chief
Executive Officer
(4)                             |  |      | 2002 |     |  |                     | 99,110  |              |  |                 | 2,000 |         |        |                 | 27,109 |         |  | nil          |         |  | 300,000 | 
|Jim Silye,
President and Chief
Executive Officer
(5)                             |  |      | 2002 |     |  |                     | 85,250  |              |  | nil             |       | nil     |        |                 | 75,000 |         |  | nil         
|R. Murray Ratcliffe,
Vice President,
Research &
Development and
Manufacturing(6) |  |      | 2002 |     |  |                     | 70,808  |              |  | nil             |       |         | 30,938 |                 |        | nil     |  |              | 187,500 | 

Notes:



|(1) |  | Amounts paid by the Company on behalf of the executive officer into a
fund maintained by the Company, which were used to fund a Health and
Welfare Benefits Plan for the employees of the Company. Under this plan
the Company paid for certain health related expenses incurred by employees
and their dependants. Any annual amounts paid into the plan on behalf of
an employee that were not utilized by the employee during such year for
health related expenses could, at the direction of the employee, be
transferred into a registered retirement savings plan of the employee.
This plan is no longer in effect.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Severance payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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|(3) |  | Commenced employment with the Company October 13, 1997, and terminated
employment on March 31, 2002.                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Commenced permanent employment with the Company on March 26, 2001 and
prior thereto had been Acting Vice President and Chief Financial Officer
on contract. Appointed President and Chief Executive Officer March 19,
2002. Terminated employment with the Company effective May 7, 2002.
|   
|(5) |  | Appointed President and Chief Executive Officer on May 7, 2002.
Terminated employment as Chief Executive Officer effective January 6,
2003, and terminated employment as President April 3, 2003.                                                                                        
|   
|(6) |  | Commenced employment with the Company on February 27, 1997, and
terminated employment on March 13, 2002.                                                                                                                                                                                 

The following table details information with respect to the grant of
options by the Company to the Named Executive Officers during the fiscal year
of the Company ended December 31, 2002.

|                    |  |              |        |                 |  |                  |      |                      |  |               |      |  |  |                 |      |  |  |               |   | 
|------------------- |  | ------------ | ------ | --------------- |  | ---------------- | ---- | -------------------- |  | ------------- | ---- |  |  | --------------- | ---- |  |  | ------------- | - | 
|                    |  |              |        |                 |  |                  |      |                      |  |               |      |  |  | Market Value of |      |  |  |              
|                    |  | Common       |        | % of Total      |  |                  |      |                      |  | Common Shares |      |  |  |                
|                    |  | Shares Under |        | Options Granted |  | Exercise or Base |      | Underlying Options   |  |               |      | 
|                    |  | Options      |        | to Employees in |  | Price            |      | on the Date of Grant |  | Expiration   
|Name                |  | Granted      |        | Financial Year  |  | ($/Common Share) |      | ($/Common Share)     |  | Date         
|                    |  |              |        |                 |  |                  |      |                      |  |              
|David J. Cox        |  |              |       |                 |  |                  |     |                      |  |               |     |  |  |                 |     |  |  |               |  | 
|Bill Hogg           |  |              |       |                 |  |                  |     |                      |  |               |     |  |  |                 |     |  |  |               |  | 
|Jim Silye           |  |              | 25,000 |                 |  |                  | 9.1  | %                    |  |               | 0.69 |  |  |                 | 0.69 |  |  | Nov. 8, 2005 
|                    |  |              | 50,000 |                 |  |                  | 18.2 | %                    |  |               | 0.70 |  |  |                 | 0.70 |  |  | Nov. 15, 2005
|R. Murray Ratcliffe |  |              |       |                 |  |                  |     |                      |  |               |     |  |  |                 |     |  |  |               |  | 

The following table details information with respect to all options of the
Company exercised by Named Executive Officers during the last fiscal year of
the Company and all options held by Named Executive Officers and outstanding on
December 31, 2002.

|                    |  |               |   |                 |  |                           |   |                           |  |                            |          |  |  |                             |   | 
|------------------- |  | ------------- | - | --------------- |  | ------------------------- | - | ------------------------- |  | -------------------------- | -------- |  |  | --------------------------- | - | 
|                    |  |               |   |                 |  |                           |   |                           |  |                            |          |  |  | Value of Unexercised in the
|                    |  | Common Shares |   |                 |  |                           |   | Unexercised Options at    |  | Money Options at Financial
|                    |  | Acquired on   |   | Aggregate Value |  | Financial Year-End        |   | Year End                 
|                    |  | Exercise      |   | Realized        |  | Exercisable/unexercisable |   | Exercisable/unexercisable
|Name                |  | (#)           |   | ($)             |  | ($)                       |   | ($)                      
|                    |  |               |   |                 |  |                           |   |                          
|David J. Cox        |  |               |  |                 |  |                           |  |                           |  |                            |         |  |  |                             |  | 
|Bill Hogg           |  |               |  |                 |  |                           |  |                           |  |                            |         |  |  |                             |  | 
|Jim Silye           |  |               |  |                 |  |                           |  |                           |  |                            | 75,000/- |  |  | nil/-                      
|R. Murray Ratcliffe |  |               |  |                 |  |                           |  |                           |  |                            |         |  |  |                             |  | 

Employment Agreements

Pursuant to an employment agreement dated as of April 3, 2003, Mr. Tuer is
entitled to an annual base salary of $175,000 per year and to a discretionary
bonus of up to a maximum of 200% of his base salary as determined by the board
of directors of the Company in light of the Companys overall operational and
financial performance. In the event Mr. Tuer is terminated other than for
cause, he is entitled to a payment equal to his annual base salary at the date
of termination multiplied by 1.5 and his average bonus entitlement for the two
preceding years multiplied by 1.5. Mr. Tuers salary is effective from January
6, 2003, the date he became the Chief Executive Officer of the Company.

Compensation of Directors

During the fiscal year ended December 31, 2002, an aggregate of $138,350
in directors fees was paid to the directors. The following table sets out the
amounts paid to each individual director. Messrs. Casey and Crooke resigned
from the board on March 19, 2002 and Messrs. Quinn, Tonken, Silye and Tycholis
withdrew their names from consideration for re-election as directors upon the
approval of the Financing.

|              |  |           |        |                 |  |     |        | 
|------------- |  | --------- | ------ | --------------- |  | --- | ------ | 
|Director      |  | Fees Paid |        | Options Granted
|              |  |           |        |                
|Richard Casey |  | $         | 15,900 |                 |  | nil
|Stan Crooke   |  | $         | 7,950  |                 |  | nil
|Gerry Quinn   |  | $         | 60,250 |                 |  |     | 50,000 | 

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|                |  |           |         |                 |  |  |            |    
|--------------- |  | --------- | ------- | --------------- |  |  | ---------- | ---
|Director        |  | Fees Paid |         | Options Granted
|                |  |           |         |                
|Bruce
Kenway(1) |  | $         | 24,250  |                 |  |  | 50,000     |    
|David Tonken    |  | $         | 5,000   |                 |  |  | 25,000     |    
|Jim Silye       |  |           | nil     |                 |  |  | 75,000     | (2)
|Tim Tycholis    |  | $         | 25,000  |                 |  |  | 75,000     |    
|                |  |           |         |                 |  |  |            |    
|TOTAL           |  | $         | 138,350 |                 |  |  | 275,000(3) |    
|                |  |           |         |                 |  |  |            |    

Notes:



|(1) |  | During the fiscal year of the Company ended December 31, 2002, the
Company paid Kenway Mack Slusarchuk Stewart LLP an aggregate of $15,000
for services rendered by Mr. Kenway, a director of the Company and a
partner of Kenway Mack Slusarchuk Stewart LLP.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | 25,000 of these options were granted to Mr. Silye in his capacity as
President and Chief Executive Officer, with the remainder granted to Mr.
Silye in his capacity as a director.                                                                            
|   
|(3) |  | The 275,000 options listed above, being all of the options outstanding at
exercise prices below $9.44 per share, were exercised on or prior to April
3, 2003, as required by the Financing Agreement.                                                         

Directors of the Company are eligible to receive stock options. During
2002, the directors were granted a combined total of 275,000 options to
purchase Common Shares with a weighted average exercise price of $0.70.
Directors of the Company are also reimbursed for their reasonable out-of-pocket
disbursements incurred for the business of the Company.

C.     Board practices.

Directors are elected annually to the Board at the annual meeting of the
shareholders of the Company. No Director has a service contract with the
Company.

Duties and Obligations of the Board of Directors

The general duty of the Board of Directors of the Company is to oversee
the management of the business and affairs of the Company. In particular, the
Board of Directors is responsible for the following matters:

(a)  adopting a strategic planning process for the Company which
establishes the Companys long-term goals and strategies, and monitoring the
success of the Companys management in achieving those goals and implementing
the strategy;

(b)  identifying the principal risks with respect to all aspects of the
Companys business, ensuring that there are systems in place to effectively
monitor and manage such risks with a view to the long-term viability of the
Company, and achieving a proper balance between the risks incurred and the
potential return to the Companys members;

(c)  engaging in succession planning, including appointing, training and
monitoring senior management (which includes ensuring that objectives are in
place against which managements performance can be measured), establishing and
maintaining programs to train and develop management, providing for the orderly
succession of management, and assessing the performance and contribution of the
Chief Executive Officer of the Company against mutually established objectives;

(d)  ensuring that the Company has a policy in place to enable it to
communicate effectively with its shareholders, other stakeholders and the
general public, effectively interpreting the operations of the Company to
shareholders, accommodating feedback from shareholders, and ensuring that there
are effective controls and information systems in place for the Board of
Directors to discharge its responsibilities, such as an audit system which can
inform the Board of Directors about the integrity of the data and the
compliance of the financial information with appropriate accounting principles.

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Composition of the Board of Directors

The Board of Directors is currently composed of six persons: David Tuer,
Ronald Mathison, Stan Grad, Bruce Kenway, Martin Lambert and Keith Smith. All
of the directors other than Mr. Tuer and Mr. Mathison are considered by the
Board to be unrelated directors. The Toronto Stock Exchange Guidelines
describe an unrelated director as a director who is independent of management
and is free from any interest and any business or other relationship which
could, or could reasonably be perceived to, materially interfere with the
directors ability to act with a view to the best interests of the Company,
other than interests and relationships arising from shareholdings. In
determining whether a director is an unrelated director, the Board considers,
for example, whether the director has a relationship that could, or could be
perceived to, interfere with the directors ability to objectively assess the
performance of management. On this basis, Mr. Tuer, by reason of his office as
Chief Executive Officer, and Mr. Mathison, by reason of his office as Chairman,
are considered related directors.

The separation of the position of Chairman from the position of President
and Chief Executive Officer further ensures that the Board maintains its
independence from management.

Committees of the Board of Directors

There are currently three committees of the Board of Directors. The Audit
Committee and the Reserves Committee are comprised of three directors, two of
whom are unrelated directors. The Corporate Governance Committee is comprised
of two directors, one of whom is an unrelated director. The mandate and
activities of each committee are as follows:

Audit Committee: The Audit Committee currently consists of Ronald
Mathison, Bruce Kenway and Martin Lambert. The responsibilities of the Audit
Committee include:

(a)  assisting the directors with meeting their responsibilities with
respect to financial reporting;

(b)  reviewing and reporting to the Board of Directors on all audited
financial statements prepared by the Company and enhancing the credibility and
objectivity of all financial reports;

(c)  reviewing with management and with the external auditor any proposed
changes in major accounting policies, in the presentation and impact of
significant risks and uncertainties, and in key estimates and judgments of
management that may be material to financial reporting;

(d)  questioning management and the external auditor regarding significant
financial reporting issues discussed during the fiscal period and the method of
resolution;

(e)  reviewing any problems experienced by the external auditor in
performing the audit, including any restrictions imposed by management or
significant accounting issues on which there was a disagreement with
management; and

(f)  reviewing the post-audit or management letters containing the
recommendations of the external auditor and managements response, and
following up any identified weaknesses.

Corporate Governance Committee: The Corporate Governance Committee
currently consists of Ronald Mathison and Martin Lambert. The Corporate
Governance Committee assists the Board of Directors in discharging its
corporate governance obligations. The responsibilities of the Corporate
Governance Committee include considering the appropriate size and composition
of the Board of Directors and its committees, establishing director selection
criteria, reviewing credentials of nominee directors, making recommendations
relative to the composition of the committees, reviewing the effectiveness of
the Board of Directors operations and its relations with management, and
assessing the performance of the directors including, the Chairman of the Board
of Directors.

Reserves Committee: The Reserves Committee currently consists of Ronald
Mathison, Stan Grad and Keith Smith. The responsibilities of the Reserves
Committee are to assist the Board of Directors in respect of annual

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independent evaluations of the Companys petroleum and natural gas
reserves. In that regard, the Reserves Committee has the authority and
responsibility for reviewing and reporting to the Board of Directors in respect
of the appointment of independent consultants to assist the Company in the
annual evaluation of reserves and the scope of the annual evaluation of the
reserves by the independent consultants. In addition, the Reserves Committee
is responsible for meeting annually with the Companys senior reserve personnel
and the independent consultants of the Company to review and consider the
evaluation of the Companys petroleum and natural gas reserves and to address
matters of concern related thereto.

Decisions Requiring the Prior Approval of the Board of Directors

Each committee of the Board of Directors makes recommendations to the
Board on an ongoing basis. Generally, recommendations from a committee of the
Board of Directors require the approval of the full Board before they are
implemented.

D.     Employees.

As at December 31, 2002, the Company did not have any full-time employees
and as of June 24, 2003, the Company had 11 full-time employees.

E.     Share ownership.

Information as to share and option information for directors, officers and
key employees is discussed above in Item 6. A. Directors and Senior
Management and in Item 6. B. Compensation.

Stock Option Plan

Hawker has an incentive option plan (the Stock Option Plan), the purpose
of which is to develop the interests of the directors, officers, employees and
other persons who provide on-going services to the Company in the growth and
development of the Company by providing such individuals with the opportunity
to acquire an increased proprietary interest in the Company and to aid in
attracting as well as retaining and encouraging the continued involvement of
such persons with the Company. The total number of shares issuable pursuant to
the Stock Option Plan is 1,181,513 Common Shares, representing approximately
5.4% of the outstanding Common Shares as at June 24, 2003. The Company intends
to maintain the number of Common Shares issuable pursuant to outstanding stock
options at well under 10% of the number of outstanding Common Shares.

Under the Stock Option Plan, options may be issued to directors, officers,
employees of, and other service providers to, the Company in such numbers and
with vesting provisions as the Board may determine. The exercise price of
options shall be the closing price of the Common Shares on the TSX on the first
date preceding the date of grant on which the Common Shares traded on the TSX,
and the maximum term for options under the Stock Option Plan is ten years.

The Stock Option Plan provides that if an optionee ceases to be a
director, officer, or employee of, or service provider to, the Company or any
of its subsidiaries for any reason (other than death), the optionee may
exercise all of the vested options then held by the optionee, but only within
90 days after such cessation and prior to the normal expiry time. In the case
of death of an optionee, all options of such optionee are deemed to have vested
on the day immediately prior to the date of such optionees death, and the
optionees legal personal representative shall have the right to exercise all
or part of such options until the earlier of the date that is one year
thereafter or the normal expiry time.

There were no options outstanding other than 43,065 options issued under
the Stock Option Plan before Hawkers conversion into an oil and gas
enterprise. These options have exercise prices that significantly exceed
Hawkers current trading price. The weighted average exercise price of these
outstanding options is $45.39, and the weighted average remaining contractual
life as at December 31, 2002 was 3.68 years. An aggregate of 390,000 options
were issued under the Stock Option Plan to officers and employees of the
Company on May 30, 2003. These options have an exercise price of $3.45 and
expire on May 30, 2013.

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Item 7.  Major Shareholders and Related Party Transactions

A.     Major shareholders.

The following table sets forth information as of June 24, 2003,with respect to
each person known to the Company to own more than 5% of the Common Shares or
more than 5% of the Class A Shares. As used in this table, beneficial
ownership means the sole or shared power to vote or direct the voting or to
dispose or direct the disposition of any security. For purposes of this table,
a person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from June 24, 2003, through the exercise of any option
or warrant. Shares subject to options or warrants that are currently
exercisable or exercisable within 60 days are deemed outstanding for computing
the ownership percentage of the person holding such options or warrants, but
are not deemed outstanding for computing the ownership percentage of any other
person. The Class A Shares do not have voting rights and are not convertible
into Common Shares. None of the shareholders listed in the table below have
voting rights that are different from other holders of Common Shares. The
amounts and percentages are based upon 21,897,200 Common Shares and 3,874,437
Class A Shares issued and outstanding as of June 24, 2003.

|                   |  |                |  |           |  |                  |           |            |  |  |       |   |  |  |  | 
|------------------ |  | -------------- |  | --------- |  | ---------------- | --------- | ---------- |  |  | ----- | - |  |  |  | 
|                   |  | Designation of |  | Type of   |  |                  |           |            |  |  |       |  
|Shareholder        |  | Class          |  | Ownership |  | Number of Shares |           | % of Class
|                   |  |                |  |           |  |                  |           |           
|Matco Capital(1)   |  | Common Shares  |  | Note (2)  |  |                  | 1,430,934 |            |  |  | 6.53  | %
|                   |  | Class A Shares |  | Note (2)  |  |                  | 2,125,680 |            |  |  | 54.86 | %
|                  
|David Tuer         |  | Common Shares  |  | Note (2)  |  |                  | 715,466   |            |  |  | 3.26  | %
|                   |  | Class A Shares |  | Note (2)  |  |                  | 1,062,840 |            |  |  | 27.43 | %
|                  
|Ronald Mathison(1) |  | Common Shares  |  | Note (3)  |  |                  | 1,447,534 |            |  |  | 6.61  | %
|                   |  | Class A Shares |  | Note (3)  |  |                  | 2,125,680 |            |  |  | 54.86 | %

Notes:



|(1) |  | Matco Capital is controlled by Matco Investments Ltd. and Matco Investments Ltd. is controlled by Ronald Mathison. To the knowledge
of the Company, the only entities with an interest of greater than 10% in
Matco Capital are Matco Investments Ltd. and Mountain Moon Capital Inc.
To the knowledge of the Company, the only shareholder holding, directly or
indirectly, greater than 10% of the outstanding shares of Matco
Investments Ltd. is Ronald Mathison and the only shareholders holding,
directly or indirectly, greater than 10% of Mountain Moon Capital Inc. are
members of Martin Lamberts immediate family.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Legal and beneficial ownership.
|--- |  | -------------------------------



|(3) |  | In addition to his beneficial ownership of Common Shares resulting from his control of Matco Investments Ltd., Mr. Mathison beneficially owns 16,600 Common Shares as a result of shared power to dispose of such shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Of the Common Shares issued and outstanding as of June 24, 2003,
21,635,886 were registered to Canadian residents (64 shareholders), 261,027
were registered to residents of the United States (16 shareholders), and 287
were registered to residents of foreign countries (2 shareholders).

To the best of the Companys knowledge, the Company is not directly owned
or controlled by another corporation, by any foreign government or by any
natural or legal person.

B.     Related party transactions.

There are no other related party transactions other than those described
below.

During the year ended December 31, 2002, the Company paid $214,000 to
Scout Capital Company (Scout), a principal shareholder of the Company at the
time of the payment, as reimbursement of Scouts costs with respect to the
Companys annual general meeting, together with $34,000 to reimburse Scout for
expenses incurred on behalf of the Company. Scout also received $50,000
pursuant to an agreement that expired on May 31, 2003 under which Scout was to
provide the Company with certain administrative and executive services.

On April 3, 2003, the Company completed a private placement of 75,000
Common Shares for aggregate proceeds of $45,363.64 to Geoffrey Smith, the
President and Chief Executive Officer of Scout.

On May 12, 2003 and June 25, 2003, the Company advanced $782,000 and
$1,000,000, respectively, to Southward to fund ongoing working capital
requirements.

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There are potential conflicts of interest to which the directors and
officers of the Company will be subject in connection with the operations of
the Company. In particular, certain of the directors and officers of the
Company are involved in managerial and/or director positions with other oil and
gas companies whose operations may, from time to time, be in direct competition
with those of the Company or with entities which may, from time to time,
provide financing to, or make equity investments in, competitors of the
Company. Conflicts, if any, will be subject to the procedures and remedies
available under the Business Corporations Act(Alberta). The Business
Corporations Act(Alberta) provides that in the event that a director has an
interest in a contract or proposed contract or agreement, the director shall
disclose his interest in such contract or agreement and shall refrain from
voting on any matter in respect of such contract or agreement unless otherwise
provided by the Business Corporations Act(Alberta).

C.     Interests of experts and counsel.

Not applicable.




Item 8.  Financial Information

A.     Consolidated statements and other financial information.

Please see Item 17. Financial Statements for a list of the financial
statements filed as part of this annual report.

Legal Proceedings

In early 2002, three actions were filed against the Company and its
officers in New York, New York seeking damages as a result of alleged
misrepresentations regarding certain pharmaceutical trials between April 4,
2001 and December 10, 2001. The Company denies these allegations. The three
actions and all other claims arising from the purchase of securities of the
Company within this time period were consolidated into a single class action on
June 26, 2002.

Unspecified damages were sought in the class action. The Company paid
U.S.$125,000, being the deductible required pursuant to its insurance contract.

On February 4, 2003, an agreement in principle was executed by counsel for
the Company and its officers, and counsel for the members of the class (the
Settlement Agreement). The Settlement Agreement provides, among other terms,
that the Company will pay a specified amount in full satisfaction of all claims
of class members. The settlement payment and related expenses are expected to
be wholly funded by insurance and the insurer has approved the Settlement
Agreement. The Settlement Agreement is subject to Court approval and class
members have the right to opt out of its terms. However, management of the
Company has been advised that Court approval is likely and that typically very
few members opt out.

Settlement documentation is now finalized and counsel to the Company is
preparing a motion to the Court for an order certifying the class for purposes
of the settlement and for preliminary Court approval of the proposed
settlement, including the form of notice to class members. It is proposed that
counsel for the class members will notify potential class members by mail and
newspaper advertisement. Following the completion of the notification process,
another application will be made for Court approval of the settlement and
dismissal of the class action. The Company expects that this process will be
completed by December 31, 2003.

Dividend Policy

The Company has neither declared nor paid dividends on any of its
outstanding common shares, and does not intend to do so in the foreseeable
future. The Company intends to retain any future earnings to finance the
expansion of its business. Any future determination to pay dividends will be at
the discretion of the Board of Directors of the Company and will be dependent
upon the Companys earnings, capital requirements and financial position, as
well as any other factors deemed relevant by the Board of Directors.

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B.     Significant changes.

There have been no significant changes following the close of the last
financial year up to the date of this annual report that are known to us that
require disclosure in this annual report and for which disclosure was not made
in this annual report.




Item 9.  The Offer and Listing

A.     Offer and listing details.

The issued and outstanding Common Shares of the Company (21,897,200 shares
as of June 24, 2003) are listed and posted for trading on The Toronto Stock
Exchange under the trading symbol HKR. The Common Shares are registered
shares.

The following is a summary of the trading history (in Canadian dollars) of
the Common Shares of the Company on the TSX for:



| |  |  | the annual high and low market prices for the five most recent full
financial years;                                
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | the quarterly high and low market prices for the two most recent
full financial years and any subsequent period; and
|
| |  |  | the high and low monthly market prices for the most recent six
months.                                              

|                                       |                   |      |       |      |  |   |      |      | 
|-------------------------------------- | ----------------- | ---- | ----- | ---- |  | - | ---- | ---- | 
|Year                                   |                   | High |       | Low 
|                                       |                   |      |       |     
|Fiscal year ended December 31, 1998    |                   | $    | 12.00 |      |  | $ | 2.60 |     
|Fiscal year ended December 31, 1999    |                   | $    | 4.20  |      |  | $ | 1.75 |     
|Fiscal year ended December 31, 2000    |                   | $    | 15.00 |      |  | $ | 1.15 |     
|Fiscal year ended December 31, 2001    |                   | $    | 2.56  |      |  | $ | 0.47 |     
|Fiscal year ended December 31, 2002(1) |                   | $    | 2.00  |      |  | $ | 0.26 |     
|Quarter                                |                   |      |       |      |  |   |      |     
|Fiscal year ended December 31, 2001    |                   |      |       |      |  |   |      |     
|                                       | First Quarter     |      | $     | 2.56 |  |   | $    | 1.16 | 
|                                       | Second Quarter    |      | $     | 1.95 |  |   | $    | 1.13 | 
|                                       | Third Quarter     |      | $     | 1.76 |  |   | $    | 0.60 | 
|                                       | Fourth Quarter    |      | $     | 1.34 |  |   | $    | 0.47 | 
|Fiscal year ending December 31, 2002   |                   |      |       |      |  |   |      |     
|                                       | First Quarter     |      | $     | 0.59 |  |   | $    | 0.26 | 
|                                       | Second Quarter(1) |      | $     | 2.00 |  |   | $    | 0.35 | 
|                                       | Third Quarter     |      | $     | 1.35 |  |   | $    | 0.67 | 
|                                       | Fourth Quarter    |      | $     | 0.87 |  |   | $    | 0.56 | 
|                                      
|Most Recent Six Months                 |                   | High |       | Low 
|                                       |                   |      |       |     
|January 2003                           |                   | $    | 3.58  |      |  | $ | 0.70 |     
|February 2003                          |                   | $    | 3.39  |      |  | $ | 2.63 |     
|March 2003                             |                   | $    | 3.15  |      |  | $ | 2.25 |     
|April 2003                             |                   | $    | 3.40  |      |  | $ | 2.55 |     
|May 2003                               |                   | $    | 3.90  |      |  | $ | 3.20 |     
|June 2003(2)                           |                   | $    | 4.50  |      |  | $ | 3.25 |     

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Notes:



|(1) |  | On May 8, 2002, each former holder of Common Shares received one new
Common Share for each eight cancelled shares they previously held.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | June 1, 2003 through June 24, 2003.                                                                                                    

B.     Plan of distribution.

Not applicable.

C.     Markets.

The Common Shares are listed for trading on The Toronto Stock Exchange.
The Common Shares are not listed for trading on an exchange or in other markets
other than The Toronto Stock Exchange.

D   Selling shareholders.

Not applicable.

E.     Dilution.

Not applicable.

F.     Expenses of the issue.

Not applicable.




Item 10.  Additional Information

A.     Share capital.

Not applicable.

B.     Memorandum and Articles of Association

The Company was incorporated as 599386 Alberta Ltd. on February 14, 1994
under Certificate of Incorporation No. 20599386. On March 31, 1994, the
Company amended and altered its Articles of Incorporation to change its name to
SYNSORB Biotech Inc. Effective May 8, 2002: (i) each former holder of common
shares received one new common share for each eight cancelled common shares
they previously held; (ii) the stated capital of the Company was reduced in
respect of the common shares of the Company by $59,896,000; and (iii) 4,000,235
common shares of Oncolytics Biotech Inc. held by the Company were distributed
to its shareholders. On April 3, 2003, the Company amended its Articles of
Incorporation such that the name of the Company was changed to Hawker Resources
Inc. and a new class of non-voting equity shares was created.

The Companys Articles of Incorporation, as amended and restated, are
subject to all the provisions of the Business Corporations Act(Alberta) (the
ABCA). The ABCA provides that a company incorporated under that Act has all
the powers and capacities of a natural person. The ABCA further stipulates that
a company must not carry on a business that its articles prohibit. Thus, the
Company has the power and capacity of a natural person.

The following brief description of provisions of the ABCA, the Companys
amended and restated Articles of Incorporation and its by-laws does not purport
to be complete and is subject in all respects to the provisions of the ABCA,
the Companys restated Articles of Incorporation and its by-laws.

Directors Conflicts of Interest

Section 120 of the ABCA requires every director of the Company who is, in
any way, directly or indirectly, interested in a proposed material contract or
transaction of the Company, to disclose the nature and extent of the

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directors interest in writing or by requesting to have it entered in the
minutes of the meeting of directors or of meetings of committees of directors.

The ABCA further provides that a director or officer of the Company who is
required to disclose an interest may not vote on any resolution to approve the
contract or transaction unless the contract or transaction, (i) is an
arrangement by way of security for money lent to or obligations undertaken by
the director, or a body corporate in which the director has an interest, for
the benefit of the Company or an affiliate, (ii) relates primarily to the
directors or officers remuneration as a director, officer, employee or agent
of the Company or an affiliate, (iii) is for indemnity or insurance for the
director against liability incurred by the director or officer acting in his or
her capacity as director or officer of the Company, or (iv) is with an
affiliate.

Quorum

Pursuant to the Companys by-laws, the quorum for the transaction of
business at any meeting of its board of directors must consist of a majority of
the directors holding office or such greater number of directors as the
Companys board determines. However, directors must not transact business at a
meeting of the directors unless at least half of the directors present are
Canadian residents. Notwithstanding the foregoing, directors may transact
business at a meeting of the directors when less than half of the directors
present are Canadian residents if:



| | (a) |  | a Canadian resident director who is unable to be present approves
in writing or by telephone or other communications facilities the
business transacted at the meeting; and                                          
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | the number of Canadian resident directors present at the meeting,
together with any Canadian resident director who gives his approval
under clause (a), totals at least half of the directors present at the
meeting.

Borrowing Powers

Section 2.01 of the Companys bylaws provides that the banking business of
the Company including, without limitation, the borrowing of money and the
granting of security therefor shall be transacted with such bodies corporate or
organizations as may from time to time be designated or authorized by the board
of directors.

Pursuant to the Companys Articles, its directors may without the
authorization of its shareholders, borrow money on the credit of the Company,
issue, re-issue, sell or pledge debt obligations of the Company, give a
guarantee on behalf of the Company, mortgage, hypothecate, pledge or otherwise
create a security interest in all or any of the property of the Corporation,
owned or subsequently acquired, to secure any obligation of the Company. The
Companys directors may also, by resolution, delegate the borrowing powers
referred to above to one of its directors, a committee of directors or one of
its officers.

Directors

The number of directors shall be not less than one and not more than
eleven. The number of directors may be determined from time to time by an
ordinary resolution of the shareholders passed at a duly convened general
meeting. A director is not required to own any shares of the Company to be
qualified to serve as a director. A director is required to be at least 18
years of age but is not required to retire under any age-limit requirement.

Upon each annual meeting, all the directors are deemed to retire. The
number of directors to be elected at any such meeting will be the number of
directors then in office unless the directors or shareholders otherwise
determine.

If the shareholders remove any director before the expiration of his or
her period of office and appoint another person in his or her place, that
person so appointed shall hold office only during the remainder of the time
that the director in whose place he or she is appointed would have held the
office if he or she had not been removed. If the shareholders do not appoint
another director to replace the removed director the vacancy may be filled by
the directors.

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The directors, or any committee of directors, may take any action required
or permitted to be taken by them and may exercise any of the authorities,
powers and discretions for the time being vested in or exercisable by them by
way of a resolution either passed at a meeting at which a quorum is present or
consented to in writing under the applicable section of the ABCA.

The directors may appoint a president, one or more vice-presidents, a
secretary, a treasurer and other officers as determined by the board, including
assistants to the officers so appointed. The directors may specify the duties
of and delegate powers to manage the business and affairs of the Company to
these officers. The Company may also appoint a chairman of the board, who must
also be a director, and assign the powers and duties assigned to the managing
director or president, under the by-laws, or other powers and duties.

Rights Attached to Shares

The following is a description of the rights, preferences, and
restrictions attached to each class of the Companys shares:

Common Shares

The holders of Common Shares are entitled to receive notice of, and to one
vote per share at, every meeting of shareholders of the Company, to receive
such dividends as the board of directors declares and to share equally in the
assets of the Company remaining upon the liquidation of the Company after the
creditors of the Company have been satisfied, subject to the prior rights of
the preferred shares.

Class A Shares

The Class A Shares have all of the rights and privileges associated with
Common Shares, excluding the right to vote.

Preferred Shares

The preferred shares are issuable in series, with each series consisting
of such number of shares and having such rights, privileges, restrictions and
conditions as may be determined by the board of directors of the Company prior
to the issuance thereof. With respect to the payment of dividends and the
distribution of assets in the event of liquidation, dissolution or winding-up
of the Company, whether voluntary of involuntary, the preferred shares are
entitled to preferences over the Common Shares and the Class A Shares and any
other shares ranking junior to the preferred shares and may also be given such
other preferences over the Common Shares and the Class A Shares and any other
shares ranking junior to the preferred shares as may be determined at the time
of creation of each series.

Alteration of the Rights of Shareholders

No rights, privileges or restrictions attached to the shares of the
Company may be altered except with the approval by special resolution passed by
a majority of not less than two-thirds of the votes cast by shareholders who
voted in respect of that resolution or signed by all the shareholders entitled
to vote on that resolution.

There are no limitations in the Companys charter on the rights of
non-resident or foreign owners to hold Common Shares of the Company.

Shareholders Meetings

The ABCA requires the directors of the Company to call an annual meeting
of shareholders not later than fifteen months after the last annual meeting.
Every meeting, other than an annual meeting, shall be called a special meeting.
The directors may, whenever they think fit, convene a special meeting.

A notice of the time and place of a meeting of shareholders must be sent
not less than 21 days and not more than 50 days before the meeting. Notice of
a meeting must specify the time and place of a meeting, and, in case of

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special business, the general nature of that business and the text of any
resolution. The accidental omission to give notice of any meeting to, or the
non-receipt of any notice by any of the shareholders entitled to receive notice
does not invalidate any proceedings at that meeting.

The Companys directors may fix a date that is not less than 21 days and
not more than 50 days before the meeting as the record date for the
determination of the shareholders entitled to notice of the meeting. If a
record date is not fixed, the record date must be the close of business on the
date immediately preceding the date on which notice is given, or if notice is
not given, the date on which the meeting is held.

All business that is transacted at a meeting of shareholders, with the
exception of consideration of the financial statement and the auditors report
thereon, fixing the number of directors, the election of directors and the
appointment of the auditors, is deemed to be special business.

The Companys Articles stipulate that business shall be conducted at any
general meeting if there is quorum present at the opening of the meeting not
withstanding that there ceases to be a quorum present throughout the meeting.
A quorum is two shareholders entitled to vote or proxyholders thereof
representing not less than 5% of the outstanding shares of the Company entitled
to vote at the meeting.

The Articles stipulate that the Chairman of the Board, or in his absence,
the President of the Company, or in his absence a Vice-President of the Company
who is a shareholder, shall preside as chairman of every general meeting.

Unless the directors otherwise determine, the instrument appointing a
proxyholder shall be deposited at a place specified for that purpose in the
notice convening the meeting, not less than forty-eight hours before the time
for holding the meeting at which the proxyholder proposes to vote.

Notice of every general meeting should be sent to:



| | a) |  | each director;                                                                                                                                                                                                                                     
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | the auditor of the Company; and                                                                                                                                                                                                                    
|
| | c) |  | every shareholder entered in the securities registrar as the holder
of a share or shares carrying the right to vote at such meetings on the
record date or, if no record date was established by the directors, on
the date of mailing such notice.

No other person is entitled to receive notice of meetings of shareholders.

Change of Control

Except for the restrictions set out above that attach to the Companys
shares, there are no provisions in the Companys Articles or other constituent
documents that would delay, defer or prevent a change of control and that would
operate only with respect to a merger, acquisition or corporate restructuring
involving the Company.

Shareholder Ownership Disclosure

The Companys by-laws do not contain provisions that govern an ownership
threshold above which its shareholder ownership must be disclosed. However,
the Company is governed by the Securities Act(Alberta) and under that Act, a
person or company that becomes an insider (as that term is defined in such
Act), must file a report with the applicable securities commission disclosing
any direct or indirect beneficial ownership or control or direction over the
Companys securities. An insider includes all of the Companys directors and
senior officers, every director or senior office of a company that is itself an
insider of the Company, all its subsidiaries, any person or corporation that,
beneficially owns, directly or indirectly, voting securities of the Company,
exercises control or direction over its voting securities, or beneficially
owns, directly or indirectly, certain voting securities of the Company and
exercises control or direction over certain voting securities of the Company
that carry more than 10%

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of the voting rights attached to all of its voting securities, excluding
voting securities held by a person or company as underwriter in the course of a
distribution.

Capital Changes

The Companys Articles and other constituent documents do not contain
provisions that govern changes in its capital that are more stringent than
those required by Canadian securities laws.

C.     Material contracts.

Other than in relation to the Purchase Option and contracts entered into
in the ordinary course of business, the Company has not entered into any other
material contracts in the two years preceding this annual report that continue
to exist.

D.     Exchange controls.

Except for the Investment Canada Act(Canada) and Canadian withholding
taxes described below, there are no limitations on the right of non-residents
of Canada or foreign owners to hold or vote the Common Shares or any of its
other securities imposed by Canadian or provincial laws or any of its
constating documents and there are no Canadian federal or provincial laws,
decrees or regulations that restrict the export or import of capital or affect
the remittance of dividends, interest or other payments to holders of any of
the Companys securities who are not residents of Canada.

E.     Taxation.

The following summary of the material Canadian federal and U.S. federal
income tax considerations generally applicable in respect of the holding or
disposing of Common Shares is provided by the Company. This summary does not
address all possible tax consequences relating to an investment in the Common
Shares of the Company. There may be provincial, territorial, state and local
taxes applicable to a potential shareholder, depending on the shareholders
particular circumstances, which are not addressed in this summary. The tax
consequences to any particular holder, including a U.S. Holder of Common Shares
(defined below) will vary according to the status of that holder as an
individual, trust, corporation, or member of a partnership, the jurisdiction in
which the holder is subject to taxation, the place where the holder is resident
and generally, according to the holders particular circumstances.

United States Federal Income Tax Consequences

The following is a general discussion of certain material United States
federal income tax consequences, under current law, generally applicable to a
U.S. Holder (as hereinafter defined) of Common Shares of the Company. This
discussion does not address all potentially relevant federal income tax matters
and it does not address all of the tax consequences that may be relevant to a
particular holder in light of the holders circumstances, or to persons subject
to special provisions of federal income tax law, such as those described below.
In addition, this discussion does not cover any state, local or foreign tax
consequences. (see Canadian Federal Income Tax Consequences below).

The following discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the Code), Treasury Regulations, published
Internal Revenue Service (IRS) rulings, published administrative positions of
the IRS and court decisions that are currently applicable, any or all of which
could be materially and adversely changed, possibly on a retroactive basis, at
any time and which are subject to differing interpretations. This discussion
does not consider the potential effects, both adverse and beneficial, of any
proposed legislation which, if enacted, could be applied, possibly on a
retroactive basis, at any time. This discussion is for general information
only and it is not intended to be, nor should it be construed to be, legal or
tax advice to any holder or prospective holder of Common Shares of the Company
and no opinion or representation with respect to the United States federal
income tax consequences to any such holder or prospective holder is made.
Accordingly, holders and prospective holders of Common Shares of the Company
should consult their own tax advisors about the federal, state, local, and
foreign tax consequences of purchasing, owning and disposing of Common Shares
of the Company.

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U.S. Holders

As used herein, a U.S. Holder means a holder of Common Shares of the
Company who is (i) a citizen or individual resident of the United States, (ii)
a corporation or entity treated as a corporation for United States federal
income tax purposes that is created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income is taxable in the United States irrespective of source or (iv) a trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust, or that has a
valid election in effect under applicable U.S. Treasury Regulations to be
treated as a United States person. This summary does not address the tax
consequences to, and U.S. Holder does not include, persons subject to specific
provisions of federal income tax law, such as tax-exempt organizations,
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, persons or
entities that have a functional currency other than the U.S. dollar,
shareholders subject to the alternative minimum tax, shareholders who hold
Common Shares as part of a straddle, hedging, conversion transaction,
constructive sale or other arrangement involving more than one position,
partnerships or other pass-through entities, and shareholders who acquired
their Common Shares through the exercise of employee stock options or otherwise
as compensation for services. This summary is limited to U.S. Holders who own
Common Shares as capital assets within the meaning of Section 1221 of the Code.
This summary does not address the consequences to a person or entity holding
an interest in a shareholder or the consequences to a person of the ownership,
exercise or disposition of any options, warrants or other rights to acquire
Common Shares.

Distribution on Common Shares of the Company

U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to Common Shares of the Company are required to include
in gross income for United States federal income tax purposes the gross amount
of such distributions, equal to the U.S. dollar value of such distributions on
the date of receipt (based on the exchange rate on such date), to the extent
that the Company has current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holders federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holders federal taxable income by those who
itemize deductions. (See Foreign Tax Credit below). To the extent that
distributions exceed current or accumulated earnings and profits of the
Company, they will be treated first as a return of capital up to the U.S.
Holders adjusted basis in the Common Shares and thereafter as gain from the
sale or exchange of the Common Shares. Preferential tax rates for long-term
capital gains are applicable to a U.S. Holder that is an individual, estate or
trust. There are currently no preferential tax rates for long-term capital
gains for a U.S. Holder that is a corporation.

Under recently enacted legislation, subject to certain restrictions and
limitations (including, for example limitations based on holding period), U.S.
Holders that are individuals, estates or trusts may be eligible for the maximum
15% long-term capital gains tax rate on dividends received from qualified
foreign corporations. The term qualified foreign corporation includes a
foreign corporation that is eligible for the benefits of a comprehensive income
tax treaty with the United States which the U.S. Treasury Department determines
to be satisfactory and which includes an exchange of information provision.
The legislative history underlying the provision indicates that until the U.S.
Treasury Department issues guidance regarding the determination of treaties as
satisfactory for this purpose, a foreign corporation will be considered to be a
qualified foreign corporation if it is eligible for the benefits of a
comprehensive income tax treaty with the United States that includes an
exchange of information provision (other than the U.S.-Barbados Treaty). The
U.S.  Canada Income Tax Treaty contains such an exchange of information
provision. The legislative history provides further that a company will be
treated as eligible for the benefits of a comprehensive income tax treaty under
the foregoing rule if it would qualify for the benefits of the treaty with
respect to substantially all of its income in the taxable year in which the
dividend is paid. However, if the company constitutes a foreign personal
holding company, a foreign investment company, or a passive foreign
investment company, each as defined below, for its taxable year during which
it pays a dividend, or for its immediately preceding taxable year, the company
generally will not be treated as a qualified foreign corporation and
dividends received by U.S. Holders that are individuals, estates or trusts will
be subject to U.S. federal income tax at ordinary income tax rates (and not at
the preferential tax rate applicable to long-term capital gains). As described
below, the Company believes that it has qualified, and in the future may
qualify, as a passive foreign investment company. Accordingly, dividends, if
any, paid in a taxable year in which the Company is a passive

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foreign investment company or in the next taxable year would not qualify
for the preferential capital gains tax rate even if the Company is eligible for
the benefits of the U.S.  Canada Income Tax Treaty. At the present time, no
regulations or other guidance has been issued that would further clarify the
application of these rules.

In the case of foreign currency received as a dividend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss. However, an
individual whose realized gain does not exceed $200 will not recognize that
gain, to the extent that there are no expenses associated with the transaction
that meet the requirements for deductibility as a trade or business expense
(other than travel expenses in connection with a business trip) or as an
expense for the production of income.

Dividends paid on the Common Shares of the Company generally will not be
eligible for the dividends received deduction allowed to corporations receiving
dividends from certain United States corporations. A U.S. Holder that is a
corporation and that owns shares representing at least 10% of the voting power
and value of the Company may, under certain circumstances, be entitled to a 70%
(or 80% if the U.S. Holder owns shares representing at least 20% of the voting
power and value of the Company) deduction of the United States source portion
of dividends received from the Company (unless the Company qualifies as a
foreign personal holding company or a passive foreign investment company,
as defined below). The availability of this deduction is subject to several
complex limitations which are beyond the scope of this discussion.

Foreign Tax Credit

A U.S. Holder that pays (or has withheld from distributions) Canadian
income tax with respect to the ownership of Common Shares of the Company may be
entitled, at the option of the U.S. Holder, to either receive a deduction or a
tax credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayers income subject to tax. This election is made on a year-by-year
basis and applies to all foreign taxes paid by (or withheld from) the U.S.
Holder during that year. In addition, U.S. Holders which are corporations that
own 10% or more of the voting stock of the Company may be entitled to a deemed
paid foreign tax credit with respect to the payment of dividends by the
Company under certain circumstances. There are significant and complex rules
and limitations that apply to the foreign tax credit (including the deemed paid
foreign tax credit) that are beyond the scope of this discussion. Because the
availability of the foreign tax credit and the application of the limitations
on the credit are fact specific, U.S. Holders of Common Shares of the Company
should consult their own tax advisors regarding their particular circumstances.

Disposition of Common Shares of the Company

Subject to the discussion under Passive Foreign Investment Company, set
forth below, a U.S. Holder generally will recognize capital gain or loss upon
the sale or other disposition of Common Shares of the Company equal to the
difference, if any, between (i) the amount of cash plus the fair market value
of any property received, and (ii) the shareholders tax basis in the Common
Shares of the Company. This gain or loss will be long-term capital gain or
loss if the Common Shares of the Company are held for more than one year.
Preferential tax rates apply to long-term capital gains of U.S. Holders which
are individuals, estates or trusts. Certain significant limitations exist on
the deductibility of capital losses by both corporations and individuals.

Information Reporting and Backup Withholding

Certain information reporting rules may apply with respect to
distributions made by the Company or to the proceeds of the sale or other
disposition of Common Shares of the Company, and backup withholding (currently
at the rate of 28%) may apply unless the U.S. Holder provides the appropriate
intermediary with a taxpayer identification number, certified under penalties
of perjury, as well as certain other information or otherwise establishes an
exemption from backup withholding. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or a credit against the U.S.
Holders United States federal income tax liability, provided the required
information is furnished to the IRS.

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Other Considerations

In the following circumstances, the above sections of this discussion may
not describe the United States federal income tax consequences resulting from
the holding and disposition of Common Shares.

Foreign Personal Holding Company

If at any time during a taxable year (i) more than 50% of the total
combined voting power or the total value of the Companys outstanding shares is
owned, directly or indirectly (pursuant to constructive ownership rules), by
five or fewer individuals who are citizens or residents of the United States
and (ii) 60% (50% in some circumstances) or more of the Companys gross income
for such year consists of certain types of passive income (e.g. dividends,
interest, royalties, certain gains from the sale of stock and securities, and
certain gains from commodities transactions), the Company may be treated as a
foreign personal holding company. In that event, U.S. Holders that hold
Common Shares would be required to include in gross income for such year their
allocable portions of such passive income to the extent the Company does not
actually distribute such income. The Company does not believe that it
currently qualifies as a foreign personal holding company. However, there can
be no assurance that the Company will not be considered a foreign personal
holding company for the current or any future taxable year.

Foreign Investment Company

If 50% or more of the total combined voting power or total value of the
Companys outstanding shares is held, directly or indirectly (pursuant to
constructive ownership rules), by citizens or residents of the United States,
U.S. partnerships or corporations or U.S. estates or trusts (as defined for
United States federal income tax purposes), and the Company is found to be
engaged primarily in the business of investing, reinvesting, or trading in
securities, commodities, or any interest therein, it is possible that the
Company may be treated as a foreign investment company, causing all or part
of any gain realized by a U.S. Holder selling or exchanging Common Shares to be
treated as ordinary income rather than capital gain. The Company does not
believe that it currently constitutes a foreign investment company. However,
there can be no assurance that the Company will not be considered a foreign
investment company for the current or any future taxable year.

Controlled Foreign Corporation

If more than 50% of the total combined voting power of all classes of
shares entitled to vote or the total value of the shares of the Company is
owned, actually or constructively, by citizens or residents of the United
States, U.S. partnerships or corporations, or U.S. estates or trusts (as
defined for U.S. federal income tax purposes), each of which owns, actually or
constructively, 10% or more of the total combined voting power of all classes
of shares entitled to vote of the Company (a United States Shareholder), the
Company could be treated as a controlled foreign corporation (CFC). The
classification of the Company as a CFC would effect many complex results,
including that United States Shareholders would generally (i) be treated as
receiving a current distribution of the Companys Subpart F income and (ii)
also would be subject to current United States federal income tax on their pro
rata shares of the Companys earnings invested in United States property. If
the Company is classified as both a passive foreign investment company, as
described below, and a CFC, the Company generally will not be treated as a
passive foreign investment company with respect to United States Shareholders.
The Company does not believe that it currently constitutes as a CFC. However,
there can be no assurance that the Company will not be considered a CFC for the
current or any future taxable year.

Passive Foreign Investment Company

Special United States federal income tax rules apply to U.S. Holders of
shares in a passive foreign investment company (PFIC). A PFIC is any
non-U.S. corporation if, for any taxable year, either (i) 75% or more of its
gross income is passive income, which includes interest, dividends and
certain rents and royalties or (ii) the average percentage, by fair market
value (or, if the corporation is not publicly traded and either is a CFC or
makes an election, by adjusted tax basis), of its assets that produce or are
held for the production of passive income is 50% or more. If a foreign
corporation owns, directly or indirectly, at least 25% by value of the stock of
a second corporation, then for purposes of the tests described above, the first
corporation will be treated as owning a
- 46 -Table of Contents

proportionate share of the assets of, and as receiving a proportionate
share of the income of, the second corporation. The Company believes that it
qualified as a PFIC for the fiscal year ended December 2000, may have qualified
as a PFIC in prior years and may qualify as a PFIC in subsequent years. There
can be no assurance that the Companys determination concerning its PFIC status
will not be challenged or that it will be able to satisfy record keeping
requirements that will be imposed on a qualified electing fund (QEF). U.S.
Holders of Common Shares of the Company are urged to consult their tax advisors
with respect to how the PFIC rules affect their tax situation.

A U.S. Holder who holds stock in a foreign corporation during any year in
which such corporation is a PFIC is subject to United States federal income
taxation under one of two alternative tax regimes at the election of such U.S.
Holder. The following is a discussion of the two alternative tax regimes.

A U.S. Holder that elects in a timely manner to treat the Company as a QEF
(an Electing U.S. Holder) will be currently taxable, in each taxable year in
which the Company qualifies as a PFIC, on his pro rata share of the Companys
ordinary earnings and net capital gain (which will be taxed to the Electing
U.S. Holder at ordinary income and capital gains rates, respectively) for the
shareholders taxable year in which (or with which) the Companys taxable year
ends, regardless of whether such amounts are actually distributed.

The QEF election also allows the Electing U.S. Holder to (i) generally
treat any gain realized on the disposition of his Company Common Shares (or
deemed to be realized on the pledge of his shares) as capital gain; (ii) treat
his share of the Companys net capital gain, if any, as long-term capital gain
instead of ordinary income; and (iii) either avoid interest charges resulting
from PFIC status altogether, or make an annual election, subject to certain
limitations, to defer payment of current taxes on his share of the Companys
annual realized net capital gain and ordinary earnings subject, however, to an
interest charge. If the Electing U.S. Holder is not a corporation, such an
interest charge would be treated as personal interest that is not deductible.

The procedure a U.S. Holder must comply with in making an effective QEF
election will depend on whether the year of the election is the first year in
the U.S. Holders holding period in which the Company is a PFIC. If the U.S.
Holder makes a QEF election in such first year, i.e., a timely QEF election,
then the U.S. Holder may make the QEF election by simply filing the appropriate
documents at the time the U.S. Holder files his tax return for such first year.
If, however, the Company qualified as a PFIC in a prior year, then in addition
to filing documents and in order to avoid taxation under both the QEF regime
and the excess distribution regime of Section 1291, discussed below, the U.S.
Holder must elect to recognize (i) under the rules of Section 1291 of the Code
(discussed herein), any gain that he would otherwise recognize if the U.S.
Holder sold his stock on the qualification date or (ii) if the Company is a
controlled foreign corporation, the U.S. Holders pro rata share of the
Companys post-1986 earnings and profits as of the qualification date. The
qualification date is the first day of the Companys first tax year in which
the Company qualified as a QEF with respect to such U.S. Holder. The elections
to recognize such gain or earnings and profits can only be made if such U.S.
Holders holding period for the Common Shares of the Company includes the
qualification date. By electing to recognize such gain or earnings and
profits, the U.S. Holder will be deemed to have made a timely QEF election.
U.S. Holders are urged to consult a tax advisor regarding the availability of
and procedure for electing to recognize gain or earnings and profits under the
foregoing rules.

A QEF election, once made with respect to the Company, applies to the tax
year for which it was made and to all subsequent tax years, unless the election
is invalidated or terminated, or the IRS consents to revocation of the
election. If a QEF election is made by a U.S. Holder and the Company ceases to
qualify as a PFIC in a subsequent tax year, the QEF election will remain in
effect, although not applicable, during those tax years in which the Company
does not qualify as a PFIC. Therefore, if the Company again qualifies as a
PFIC in a subsequent tax year, the QEF election will be effective and the U.S.
Holder will be subject to the rules described above for Electing U.S. Holders
in such tax year and any subsequent tax years in which the Company qualifies as
a PFIC. In addition, the QEF election remains in effect, although not
applicable, with respect to an Electing U.S. Holder even after such U.S. Holder
disposes of all of his or its direct and indirect interest in the shares of the
Company. Therefore, if such U.S. Holder reacquires an interest in the Company,
that U.S. Holder will be subject to the rules described above for Electing U.S.
Holders for each tax year in which the Company qualifies as a PFIC.

If a U.S. Holder does not make a timely QEF election during a year in
which it holds (or is deemed to have held) the Common Shares in question and
the Company is a PFIC (a Non-Electing U.S. Holder), then special taxation
rules under Section 1291 of the Code will apply to (i) gains realized on the
disposition (or deemed to be

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realized by reasons of a pledge) of his Company Common Shares and (ii)
certain excess distributions (generally, distributions received in the
current taxable year that are in excess of 125% of the average distributions
received during the three preceding years or, if shorter, the U.S. Holders
holding period) by the Company.

A Non-Electing U.S. Holder generally would be required to prorate all
gains realized on the disposition of his Company Common Shares and all excess
distributions on his Company Common Shares over the entire holding period for
the Common Shares. All gains or excess distributions allocated to prior years
of the U.S. Holder (other than years prior to the first taxable year of the
Company during such U.S. Holders holding period and beginning after January 1,
1987 for which it was a PFIC) would be taxed at the highest tax rate for each
such prior year applicable to ordinary income. The Non-Electing U.S. Holder
also would be liable for interest on the foregoing tax liability for each such
prior year calculated as if such liability had been due with respect to each
such prior year. A Non-Electing U.S. Holder that is not a corporation must
treat this interest charge as personal interest which, as discussed above, is
wholly nondeductible. The balance of the gain or the excess distribution will
be treated as ordinary income in the year of the disposition or distribution,
and no interest charge will be incurred with respect to such balance.

If the Company is a PFIC for any taxable year during which a Non-Electing
U.S. Holder holds Company Common Shares, then the Company will continue to be
treated as a PFIC with respect to such Company Common Shares, even if it is no
longer definitionally a PFIC. A Non-Electing U.S. Holder may terminate this
deemed PFIC status by electing to recognize gain (which will be taxed under the
rules discussed above for Non-Electing U.S. Holders) as if such Company Common
Shares had been sold on the last day of the last taxable year for which it was
a PFIC.

U.S. Holders that hold, actually or constructively, marketable stock (as
specifically defined in the Treasury Regulations) of a foreign corporation that
qualifies as a PFIC may annually elect to mark such stock to the market (a
mark-to-market election). If such an election is made, such U.S. Holder will
generally not be subject to the special taxation rules of Section 1291
discussed above. However, if the mark-to-market election is made by a
Non-Electing U.S. Holder after the beginning of the holding period for the PFIC
stock, then the Section 1291 rules will apply to certain dispositions of,
distributions on and other amounts taxable with respect to the Company Common
Shares. A U.S. Holder who makes the mark-to-market election will include in
income for the taxable year for which the election was made an amount equal to
the excess, if any, of the fair market value of the Common Shares of the
Company as of the close of such tax year over such U.S. Holders adjusted basis
in such Common Shares. In addition, the U.S. Holder is allowed a deduction for
the lesser of (i) the excess, if any, of such U.S. Holders adjusted tax basis
in the Common Shares over the fair market value of such shares as of the close
of the tax year, or (ii) the excess, if any, of (A) the mark-to-market gains
for the Common Shares in the Company included by such U.S. Holder for prior tax
years, including any amount which would have been included for any prior tax
year but for the Section 1291 interest on tax deferral rules discussed above
with respect to Non-Electing U.S. Holders, over (B) the mark-to-market losses
for shares that were allowed as deductions for prior tax years. A U.S.
Holders adjusted tax basis in the Common Shares of the Company will be
adjusted to reflect the amount included in or deducted from income as a result
of a mark-to-market election. A mark-to-market election applies to the taxable
year in which the election is made and to each subsequent taxable year, unless
the Company Common Shares cease to be marketable, as specifically defined, or
the IRS consents to revocation of the election. Because the IRS has not
established procedures for making a mark-to-market election, U.S. Holders
should consult their tax advisor regarding the manner of making such an
election.

Under Section 1291(f) of the Code, the IRS has issued Proposed Treasury
Regulations that, subject to certain exceptions, would treat as taxable certain
transfers of PFIC stock by Non-Electing U.S. Holders that are generally not
otherwise taxed, such as gifts, exchanges pursuant to corporate
reorganizations, and transfers at death. Generally, in such cases the basis of
the Company Common Shares in the hands of the transferee and the basis of any
property received in the exchange for those Common Shares would be increased by
the amount of gain recognized. Under the Proposed Treasury Regulations, an
Electing U.S. Holder would not be taxed on certain transfers of PFIC stock,
such as gifts, exchanges pursuant to corporate reorganizations, and transfers
at death. The transferees basis in this case will depend on the manner of the
transfer. The specific tax effect to the U.S. Holder and the transferee may
vary based on the manner in which the Common Shares are transferred. U.S.
Holders of the Company are urged to consult a tax advisor with respect to how
the PFIC rules affect their tax situation.

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Certain special, generally adverse, rules will apply with respect to
Company Common Shares while the Company is a PFIC whether or not it is treated
as a QEF. For example under Section 1298(b)(6) of the Code, a U.S. Holder who
uses PFIC stock as security for a loan (including a margin loan) will, except
as may be provided in regulations, be treated as having made a taxable
disposition of such shares.

Canadian Federal Income Tax Considerations

The following is a summary of the principal Canadian federal income tax
consequences generally applicable to a holder (a Holder) of one or more
Common Shares who, for the purposes of the Income Tax Act(Canada) (the Tax
Act) at all relevant times, is a non-resident of Canada, holds the Common
Shares as capital property (other than capital property used in or held in
connection with a business being carried on in Canada) and deals at arms
length with the Company. This summary does not address the special tax
consequences which may apply to a holder of Common Shares who is an insurer
carrying on an insurance business in Canada and elsewhere for the purposes of
the Tax Act.

This summary is based on the current provisions of the Tax Act and the
regulations thereunder and the provisions of the Canada-U.S. Income Tax
Convention, 1980(the Treaty), an understanding of the current administrative
practices of the Canada Customs and Revenue Agency, and all specific proposals
to amend the Tax Act and the regulations thereunder announced by the Canadian
Minister of Finance prior to the date hereof. This summary does not otherwise
take into account or anticipate any changes in law, whether by judicial,
governmental or legislative decision or action, nor does it take into account
tax legislation or considerations of any province or territory of Canada or any
jurisdiction outside Canada.

This summary is of a general nature only, and does not constitute legal or
tax advice to any particular holder of Common Shares and no representation is
made with respect to the tax consequences to any particular holder.
Consequently, holders of Common Share should consult with their own tax
advisors with respect to their particular circumstances.

Dividends

A Holder will be subject to Canadian withholding tax at the rate of 25%,
or such lower rate as may be available under an applicable tax treaty, on the
gross amount of any dividends paid or credited (or deemed to be paid or
credited) on the Common Shares. By virtue of the Treaty, the rate of any such
Canadian withholding tax on dividends paid or credited (or deemed to be paid or
credited) to a resident of the United States which is the beneficial holder
thereof will generally be reduced to 15%, subject to a further reduction to 5%
in the case of a U.S. corporate shareholder which owns 10% or more of the
outstanding Common Shares of the Corporation.

Disposition of Common Shares

A Holder who disposes of Common Shares, including by deemed disposition on
death or otherwise, will not be subject to Canadian tax under the Tax Act on
any resulting capital gain unless the Common Shares constitute taxable
Canadian property to the Holder. In general, Common Shares will only
constitute taxable Canadian property to a Holder if the Common Shares are not
listed on a prescribed stock exchange (which includes The Toronto Stock
Exchange) or, at any time within the five-year period immediately preceding the
disposition, the Holder, persons with whom the Holder did not deal at arms
length, or the Holder together with such persons owned or had an interest in or
the right to acquire more than 25% of the shares of any class or series of the
capital stock of the Company.

A Holder who is a resident of the United States for the purposes of the
Treaty and realizes a capital gain on a disposition or deemed disposition of
Common Shares that constitute taxable Canadian property to the Holder will only
be subject to Canadian tax if the Common Shares derive their value principally
from real property situated in Canada. For this purpose, the definition of
real property generally includes rights to explore for natural resources and
rights to amounts computed by reference to the amount or value of production
from such natural resources. The Company is of the view that the value of its
shares is currently derived principally from real property situated in

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Canada however, the determination as to whether Canadian tax would be
applicable must be made at the time of the disposition or deemed disposition.



|F. |  | Dividends and paying agents.
|-- |  | ----------------------------
|  
|   |  | Not applicable.             
|  
|G. |  | Statement by experts.       
|  
|   |  | Not applicable.             
|  
|H. |  | Documents on display.       

We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we file reports and other information
with the SEC. You may read and copy any of our reports and other information
at, and obtain copies upon payment of prescribed fees from, the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. In addition, the SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC at http://www.sec.gov. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.

We are required to file reports and other information with the securities
commission in all provinces of Canada. You are invited to read and copy any
reports, statements or other information, other than confidential filings, that
we file with the provincial securities commissions. These filings are also
electronically available from the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent
of the SECs electronic document gathering and retrieval system.

We will provide without charge to each person, including any beneficial
owner, on the written or oral request of such person, a copy of any or all
documents referred to above which have been or may be incorporated by reference
in this report (not including exhibits to such incorporated information that
are not specifically incorporated by reference into such information). Requests
for such copies should be directed to the Companys principal executive offices
at 3200, 350  7th Avenue S.W., Calgary, Alberta, T2P 3N9.




Item 11.          Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to cash flow and translation risk due to changes in
the Canadian/United States dollar exchange rate and interest rate fluctuations.

The information below about the foreign exchange and interest rate
sensitivity constitutes a forward looking statement. The Companys foreign
exchange rate and interest exposure is due to the changing exchange rate
between the Canadian and United States dollar and fluctuations in interest
rates in Canada.

Exposure to exchange rate fluctuations are due to the translation of a
portion of the Companys cash balances, revenues and payables and direct costs.

As at December 31, 2002, the Company estimates that a $0.01 decrease in
the value of the Canadian dollar relative to the United States dollar would
have an annualized impact of reducing earnings from operations before taxes by
$20,000.

The Company is exposed to interest rate risk relating to any debt pursuant
to a revolving credit facility. The Company does not currently draw on this
facility but does expect to draw on this facility to fund the exercise of the
Purchase Option. The Company is also exposed to interest rate risk relating to
cash balances. The Companys policy is to deposit surplus cash in treasury
accounts at a major Canadian chartered bank. These accounts earn interest at
bank or money market rates in effect at such time.

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Item 12.          Description of Securities Other than Equity Securities

Not applicable.




PART II




Item 13.          Defaults, Dividend Arrearages and Delinquencies

Not applicable.




Item 14.          Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.




Item 15.          Controls and Procedures

Within 90 days prior to the date of this annual report, the Company
carried out an evaluation under the supervision and with the participation of
its management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon and as of the date of our evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in all material respects to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.

There were no significant changes in the Companys internal controls or in
other factors which could significantly affect the Companys internal controls
subsequent to the date the Company carried out its evaluation.

Southward
was acquired by the Company on April 30, 2003. Due to the
significance of this acquisition, the financial statements of
Southward as of and for the years ended December 31, 2000, 2001
and 2002 are included in this annual report. The
financial statements of Southward for these periods were audited in accordance with Canadian generally accepted
auditing standards; however, such financial statements were not
audited in accordance with United States
generally accepted auditing standards because Southward has never
been a registrant under the Securities Exchange Act of 1934.




Item 16A.        Audit Committee Financial Expert

Not applicable until the annual report for the first fiscal year ending after July 15, 2003.




Item 16B.        Code of Ethics

Not applicable until the annual report for the first fiscal year ending after July 15, 2003.




Item 16C.        Principal Accountant Fees and Services

Not applicable until the annual report for the first fiscal year ending
after December 15, 2003.




PART III




Item 17.          Financial Statements

The financial statements attached to this document were prepared in
accordance with Canadian GAAP and are presented in Canadian dollars. There are
differences between U.S. GAAP and Canadian GAAP. The reconciliation of the
financial statements to the United States GAAP is set forth in the notes to the
financial statements.

The following financial statements are filed as part of this annual
report, together with the report of the auditors:

|   |  |                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|F1 |  | Compilation Report and Comments for United States Readers on Differences Between Canadian and
United States Reporting Standards of Ernst & Young LLP both dated May 29, 2003

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|    |  |                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|F2  |  | Unaudited Pro Forma Consolidated Balance Sheet of Hawker as at December 31, 2002                                                                                                                              
|    |  |                                                                                                                                                                                                               
|F3  |  | Unaudited Pro Forma Consolidated Statement of Earnings of Hawker for the year ended December
31, 2002                                                                                                         
|    |  |                                                                                                                                                                                                               
|F4  |  | Notes to the December 31, 2002 unaudited Pro Forma Consolidated Financial Statements of Hawker                                                                                                                
|    |  |                                                                                                                                                                                                               
|F5  |  | Audit Report of Ernst & Young LLP dated February 5, 2003 (except for note 13(b), which is as
of March 31, 2003, notes 13(c) and (d) which are as of April 3, 2003 and note 13(e), which is
as of May 29, 2003)
|    |  |                                                                                                                                                                                                               
|F6  |  | Audited Balance Sheets of Hawker as at December 31, 2002 and December 31, 2001                                                                                                                                
|    |  |                                                                                                                                                                                                               
|F7  |  | Audited Statements of Earnings and Deficit of Hawker for the years ended December 31, 2002,
2001 and 2000                                                                                                     
|    |  |                                                                                                                                                                                                               
|F8  |  | Audited Statements of Cash Flows of Hawker for the years ended December 31, 2002, 2001 and 2000                                                                                                               
|    |  |                                                                                                                                                                                                               
|F9  |  | Notes to the December 31, 2002, 2001 and 2000 audited Financial Statements of Hawker                                                                                                                          
|    |  |                                                                                                                                                                                                               
|F10 |  | Audit Report of Deloitte & Touche LLP dated April 21, 2003                                                                                                                                                    
|    |  |                                                                                                                                                                                                               
|F11 |  | Audited Statements of Revenues and Operating Expenses relating to the proposed acquisition by
Hawker of the Optioned Properties for each of the years ended December 31, 2002, 2001 and 2000                  
|    |  |                                                                                                                                                                                                               
|F12 |  | Notes to the December 31, 2002, 2001 and 2000 audited Statements of Revenues and Operating
Expenses                                                                                                           
|    |  |                                                                                                                                                                                                               
|F13 |  | Audit Report of Deloitte & Touche LLP dated March 17, 2003                                                                                                                                                    
|    |  |                                                                                                                                                                                                               
|F14 |  | Audited Consolidated Balance Sheets of Southward as at December 31, 2002 and December 31, 2001                                                                                                                
|    |  |                                                                                                                                                                                                               
|F15 |  | Audited Consolidated Statements of Operations and Retained Earnings of Southward for the years
ended December 31, 2002, 2001 and 2000                                                                         
|    |  |                                                                                                                                                                                                               
|F16 |  | Audited Consolidated Statements of Cash Flows of Southward for the years ended December 31,
2002, 2001 and 2000                                                                                               
|    |  |                                                                                                                                                                                                               
|F17 |  | Notes to the December 31, 2002, 2001 and 2000 audited Consolidated Financial Statements of
Southward                                                                                                          




Item 18.          Financial Statements

Not applicable.




Item 19.          Exhibits

The following exhibits are filed as part of this annual report:

|        |  |                                                                   |  |  |  | 
|------- |  | ----------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                   |  |  |  | 
|Number  |  | Description                                                       |  |  |  | 
|        |  |                                                                   |  |  |  | 
|1.1(1)  |  | Articles of Incorporation of the Company dated February 14, 1994.
|        |  |                                                                  
|1.2(1)  |  | Articles of Amendment of the Company dated March 31, 1994.       

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|        |  |                                                                                 |  |  |  | 
|------- |  | ------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                 |  |  |  | 
|Number  |  | Description                                                                     |  |  |  | 
|        |  |                                                                                 |  |  |  | 
|1.3(1)  |  | Articles of Amendment of the Company dated July 12, 1994.                      
|        |  |                                                                                
|1.4     |  | Articles of Arrangement of the Company dated May 8, 2002.                      
|        |  |                                                                                
|1.5     |  | Restated Articles of Incorporation of the Company dated May 8, 2002.           
|        |  |                                                                                
|1.6     |  | Articles of Amendment and Restated Articles of the Company dated April 3, 2003.
|        |  |                                                                                
|1.7     |  | Articles of Amendment and Restated Articles of the Company dated April 3, 2003.
|        |  |                                                                                
|1.8(1)  |  | By-Law Number 1 of the Company dated March 31, 1994.                           
|        |  |                                                                                
|4.1(1)  |  | Stock Option Plan of the Company                                               
|        |  |                                                                                
|10.1    |  | Certification under Section 906 of the Sarbanes-Oxley Act                      



|Note:                                |  | 
|------------------------------------ |  | 
|(1) Previously filed by the Company. |  | 

- 53 -



---



##### Table of Contents



SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this registration statement on its behalf.

| |  |                       |  |                                               
| |  | --------------------- |  | ----------------------------------------------
| |  | HAWKER RESOURCES INC.
| |  |                       |  |                                               
| |  | By:                   |  | (signed) David A. Tuer
Chief Executive Officer

Dated: June 25, 2003

- 54 -



---



##### Table of Contents






CERTIFICATION

I, David A. Tuer, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of Hawker Resources Inc.;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: June 25, 2003

| |                                               
| | ----------------------------------------------
| | (signed) David A. Tuer
Chief Executive Officer

- 55 -



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##### Table of Contents



CERTIFICATION

I, Barry R. Herring, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of Hawker Resources Inc.;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: June 25, 2003

| |                                                  
| | -------------------------------------------------
| | (signed) Barry R. Herring
Chief Financial Officer

- 56 -



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##### Table of Contents






COMPILATION REPORT

To the Directors ofHawker Resources Inc. (formerly Synsorb Biotech Inc.)

We have reviewed, as to compilation only, the accompanying pro forma
consolidated balance sheet of Hawker Resources Inc. (formerly Synsorb Biotech
Inc.)as at December 31, 2002 and the pro forma consolidated statement of
earnings for the year then ended, which have been prepared for inclusion in
this prospectus relating to the sale and issue of 14,286,000 common shares.
In our opinion, the pro forma consolidated balance sheet and pro forma
consolidated statement of earnings have been properly compiled to give effect
to the proposed transactions and assumptions described in the notes thereto.

|                |  |                           
|--------------- |  | --------------------------
|Calgary, Canada |  | (Signed) Ernst & Young LLP
|May 29, 2003    |  | Chartered Accountants     

Comments for United States Readers on Differences Between
Canadian and United States Reporting Standards

The above opinion, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect
to compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the
pro forma financial statements would require an examination or review which
would be substantially greater in scope than the review as to compilation only
that we have conducted. Consequently, under United States standards, we would
be unable to express any opinion with respect to the compilation of the
accompanying unaudited pro forma consolidated balance sheet and the unaudited
pro forma consolidated statement of earnings.

|                |  |                           
|--------------- |  | --------------------------
|Calgary, Canada |  | (Signed) Ernst & Young LLP
|May 29, 2003    |  | Chartered Accountants     

F-1



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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

PRO FORMA CONSOLIDATED BALANCE SHEET

As at December 31, 2002
(Unaudited)


|                                |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 
|------------------------------- |  | --------- | ----- | --------- |  | ----------- | ------- | ----- |  | - | ------- | --------- |  |  | - | --- |  | ----------- | ------- | 
|                                |  | Hawker    |       | Southward |  |             |         |       |  |   |         |           |  |  |   |    
|                                |  | Resources |       | Energy    |  | Pro forma   |         |       |  |   |         |           |  | 
|                                |  | Inc.      |       | Ltd.      |  | adjustments |         |       |  |   |         | Pro forma
|[thousands of Canadian dollars] |  | $         |       | $         |  | $           |         | Notes |  | $ |        
|                                |  |           |       |           |  |             |         |       |  |   |        
|                                |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  | (unaudited)
|ASSETS                          |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 
|Current                         |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 
|Cash                            |  |           | 289   |           |  |             |        |       |  |   | 28,000  |           |  |  | 2 | (h) |  |             | 11,872  | 
|                                |  |           |       |           |  |             |         |       |  |   | 192     |           |  |  | 2 | (k) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | (37,550 | )         |  |  | 2 | (c) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | (60,000 | )         |  |  | 2 | (c) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | 120,000 |           |  |  | 2 | (a) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | (24,650 | )         |  |  | 2 | (b) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | 75      |           |  |  | 2 | (f) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | 3,616   |           |  |  | 2 | (f) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | 41,900  |           |  |  | 2 | (g) |  |             |         | 
|                                |  |           |       |           |  |             |         |       |  |   | (60,000 | )         |  |  | 2 | (i) |  |             |         | 
|Accounts receivable             |  |           | 27    |           |  |             | 11,663  |       |  |   |         |           |  |  |   |     |  |             | 11,690  | 
|Note receivable                 |  |           |      |           |  |             | 500     |       |  |   |         |           |  |  |   |     |  |             | 500     | 
|Deposits and prepaids           |  |           | 176   |           |  |             | 997     |       |  |   |         |           |  |  |   |     |  |             | 1,173   | 
|Marketable securities           |  |           |      |           |  |             | 750     |       |  |   |         |           |  |  |   |     |  |             | 750     | 
|                                |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 
|                                |  |           | 492   |           |  |             | 13,910  |       |  |   | 11,583  |           |  |  |   |     |  |             | 25,985  | 
|Property and equipment          |  |           | 3,523 |           |  |             | 160,271 |       |  |   | (89,821 | )         |  |  | 2 | (b) |  |             | 73,973  | 
|Goodwill                        |  |           |      |           |  |             |        |       |  |   | 25,649  |           |  |  | 2 | (b) |  |             | 25,649  | 
|                                |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 
|                                |  |           | 4,015 |           |  |             | 174,181 |       |  |   | (52,589 | )         |  |  |   |     |  |             | 125,607 | 
|                                |  |           |       |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         | 



|See accompanying notes to unaudited pro forma financial statements |  | 
|------------------------------------------------------------------ |  | 

F-2



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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

PRO FORMA CONSOLIDATED BALANCE SHEET

As at December 31, 2002
(Unaudited)


|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|--------------------------------------------- |  | --------- | ------ | --------- |  | ----------- | ------- | ----- |  | - | ------- | --------- |  |  | - | --- |  | ----------- | ------- | -
|                                              |  | Hawker    |        | Southward |  |             |         |       |  |   |         |           |  |  |   |    
|                                              |  | Resources |        | Energy    |  | Pro forma   |         |       |  |   |         |           |  | 
|                                              |  | Inc.      |        | Ltd.      |  | adjustments |         |       |  |   |         | Pro forma
|[thousands of Canadian dollars]               |  | $         |        | $         |  | $           |         | Notes |  | $ |        
|                                              |  |           |        |           |  |             |         |       |  |   |        
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  | (unaudited)
|LIABILITIES AND SHAREHOLDERS EQUITY          |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|Current                                       |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|Accounts payable and accrued liabilities      |  |           | 80     |           |  |             | 14,065  |       |  |   |         |           |  |  |   |     |  |             | 14,145  |  
|Income taxes payable                          |  |           |       |           |  |             | 17      |       |  |   |         |           |  |  |   |     |  |             | 17      |  
|Bank loan                                     |  |           |        |           |  |             | 47,892  |       |  |   | 28,000  |           |  |  | 2 | (h) |  |             | 38,342  |  
|                                              |  |           |        |           |  |             |         |       |  |   | 120,000 |           |  |  | 2 | (a) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | (37,550 | )         |  |  | 2 | (c) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | (60,000 | )         |  |  | 2 | (c) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | (60,000 | )         |  |  | 2 | (i) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|                                              |  |           | 80     |           |  |             | 61,974  |       |  |   | (9,550  | )         |  |  |   |     |  |             | 52,504  |  
|Debentures payable                            |  |           |       |           |  |             |        |       |  |   | 3,616   |           |  |  | 2 | (f) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | (3,616  | )         |  |  | 2 | (j) |  |             |         |  
|Alberta Heritage Foundation grant             |  |           | 387    |           |  |             |        |       |  |   |         |           |  |  |   |     |  |             | 387     |  
|Future income taxes                           |  |           |       |           |  |             | 57,607  |       |  |   | (35,310 | )         |  |  | 2 | (b) |  |             | 22,297  |  
|Future site restoration and abandonment costs |  |           |       |           |  |             | 2,642   |       |  |   | (1,554  | )         |  |  | 2 | (b) |  |             | 1,088   |  
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|                                              |  |           | 467    |           |  |             | 122,223 |       |  |   | (46,414 | )         |  |  |   |     |  |             | 76,276  |  
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|Shareholders equity                          |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|Share capital                                 |  |           | 12,741 |           |  |             | 22,897  |       |  |   | (22,897 | )         |  |  | 2 | (b) |  |             | 58,524  |  
|                                              |  |           |        |           |  |             |         |       |  |   | 192     |           |  |  | 2 | (k) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | 3,616   |           |  |  | 2 | (j) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | 41,900  |           |  |  | 2 | (g) |  |             |         |  
|                                              |  |           |        |           |  |             |         |       |  |   | 75      |           |  |  | 2 | (f) |  |             |         |  
|Retained earnings (deficit)                   |  |           | (9,193 | )         |  |             | 29,061  |       |  |   | (29,061 | )         |  |  | 2 | (b) |  |             | (9,193  | )
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|                                              |  |           | 3,548  |           |  |             | 51,958  |       |  |   | (6,175  | )         |  |  |   |     |  |             | 49,331  |  
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  
|                                              |  |           | 4,015  |           |  |             | 174,181 |       |  |   | (52,589 | )         |  |  |   |     |  |             | 125,607 |  
|                                              |  |           |        |           |  |             |         |       |  |   |         |           |  |  |   |     |  |             |         |  



|See accompanying notes to unaudited pro forma financial statements |  | 
|------------------------------------------------------------------ |  | 

|                       |  |                            
|---------------------- |  | ---------------------------
|(Signed) David A. Tuer |  | (Signed) Ronald P. Mathison
|Director               |  | Director                   

F-3



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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

For the year ended December 31, 2002
(Unaudited)


|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |        |  
|-------------------------------------------------------- | -------------------------------------------------- | - | --------- | ------ | --------- | - | ----------- | ----- |  | - | ------- | - | --------- |  | --------- | --- |  |  | ----------- | ------ | -
|                                                         |                                                    |   | Hawker    |        | Southward |   |             |       |  |   |         |   |           |  |           |     | 
|                                                         |                                                    |   | Resources |        | Energy    |   | Pro forma   |       |  |   |         |   |           |  |          
|                                                         |                                                    |   | Inc.      |        | Ltd.      |   | adjustments |       |  |   |         |   | Pro forma
|[thousands of Canadian dollars except per share amounts] |                                                    | $ |           | $      |           | $ |             | Notes |  | $ |        
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |        
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  | (unaudited)
|Revenue                                                  |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Oil and natural gas sales                                |                                                    |   |          |        |           |   | 61,378      |       |  |   | (36,983 | ) |           |  | 2         | (e) |  |  | 24,395      |       
|Royalties, net                                           |                                                    |   |          |        |           |   | (14,784     | )     |  |   | 8,696   |   |           |  | 2         | (e) |  |  | (6,088      | )     
|Interest income                                          |                                                    |   | 32        |        |           |   |            |       |  |   |         |   |           |  |           |     |  |  | 32          |       
|Other                                                    |                                                    |   | 107       |        |           |   |            |       |  |   |         |   |           |  |           |     |  |  | 107         |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|                                                         |                                                    |   | 139       |        |           |   | 46,594      |       |  |   | (28,287 | ) |           |  |           |     |  |  | 18,446      |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Expenses                                                 |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Production                                               |                                                    |   |          |        |           |   | 10,050      |       |  |   | (6,342  | ) |           |  | 2         | (e) |  |  | 3,708       |       
|General and administrative                               |                                                    |   | 1,596     |        |           |   | 3,335       |       |  |   |         |   |           |  |           |     |  |  | 4,931       |       
|Interest                                                 |                                                    |   | 71        |        |           |   | 2,628       |       |  |   | 1,680   |   |           |  | 2         | (h) |  |  | 2,126       |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   | (2,253  | ) |           |  | 2         | (c) |  |  |             |       
|Maintenance of patents                                   |                                                    |   | 243       |        |           |   |            |       |  |   |         |   |           |  |           |     |  |  | 243         |       
|Depletion, depreciation and asset write-downs            |                                                    |   | 7,216     |        |           |   | 30,480      |       |  |   | (18,274 | ) |           |  | 2         | (d) |  |  | 19,422      |       
|Site restoration                                         |                                                    |   |          |        |           |   | 411         |       |  |   |         |   |           |  |           |     |  |  | 411         |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|                                                         |                                                    |   | 9,126     |        |           |   | 46,904      |       |  |   | (25,189 | ) |           |  |           |     |  |  | 30,841      |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Loss before the following:                               |                                                    |   | (8,987    | )      |           |   | (310        | )     |  |   | (3,098  | ) |           |  |           |     |  |  | (12,395     | )     
|                                                         | Gain on sale and distribution of Oncolytics shares |   |           | 13,224 |           |   |             |      |  |   |         |   |           |  |           |     |  |  |             | 13,224 |  
|                                                         | Share of loss from equity investment in Oncolytics |   |           | (471   | )         |   |             |      |  |   |         |   |           |  |           |     |  |  |             | (471   | )
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Earnings (loss) before tax                               |                                                    |   | 3,766     |        |           |   | (310        | )     |  |   | (3,098  | ) |           |  |           |     |  |  | 358         |       
|Income tax expense (recovery)                            |                                                    |   |          |        |           |   | (1,197      | )     |  |   | (2,431  | ) |           |  | 2(c,d,e,h | )   |  |  | (3,628      | )     
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Net earnings (loss)                                      |                                                    |   | 3,766     |        |           |   | 887         |       |  |   | (667    | ) |           |  |           |     |  |  | 3,986       |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       
|Earnings per share[note 3]                               |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  | 0.15        |       
|                                                         |                                                    |   |           |        |           |   |             |       |  |   |         |   |           |  |           |     |  |  |             |       



|See accompanying notes to unaudited pro forma financial statements |  | 
|------------------------------------------------------------------ |  | 

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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
(thousands of Cdn. Dollars, except share and per share amounts)

1. BASIS OF PRESENTATION

These unaudited pro forma consolidated financial statements have been prepared
by management in accordance with Canadian generally accepted accounting
principles for inclusion in the prospectus of Hawker Resources Inc. (Hawker)
dated May 29, 2003 relating to the sale and issue of 14,286,000 common shares.
These unaudited pro forma financial statements are based on the historical
financial statements of Hawker and Southward Energy Ltd. (Southward),
together with other information available to Hawker management.

The unaudited pro forma financial statements have been prepared to give effect
to the acquisition of Southward through Hawkers wholly-owned subsidiary,
1022971 Alberta Ltd. (1022971), for cash consideration of $120,000 and the
immediate disposition by Southward to a third party of certain oil and gas
properties that will not be retained by Hawker, financing agreements entered
into by Hawker, the sale and issue of shares and bank financing, conversion of
warrants and exercise of options. The actual form of the transaction with
Southward as described in the prospectus will result in Southward selling its
oil and gas properties to the third party and Hawker subsequently purchasing
back from the third party the assets to be retained by Hawker, pursuant to an
option to purchase. Accordingly, these pro formas reflect adjustments to the
Southward financial statements to eliminate the properties and results thereof
that are not retained.

The acquisition of Southward has been accounted for under the purchase method
of accounting. These pro forma financial statements also reflect certain
financing agreements entered into by Hawker subsequent to December 31, 2002,
the sale and issue of common shares under this prospectus and the exercise of
warrants issued pursuant to the financing agreements.

These pro forma financial statements are not necessarily indicative of the
results that actually would have occurred if the events reflected herein had
been in effect on the dates indicated or of the results which may be obtained
in the future.

The pro forma financial statements should be read in conjunction with the
December 31, 2002 audited financial statements of Hawker, the December 31, 2002
publicly filed audited financial statements of Southward and the December 31,
2002 audited statement of revenues and operating expenses of the Southward
properties acquired.

2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS

The pro forma balance sheet gives effect to the proposed transactions as if
they occurred as at December 31, 2002 and the pro forma statement of operations
gives effect to the proposed transactions as if they occurred on January 1,
2002.

The accounting policies used in the preparation of the pro forma financial
statements are in accordance with those disclosed in Hawkers and Southwards
audited financial statements for the year ended December 31, 2002.

F-5



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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
(thousands of Cdn. Dollars, except share and per share amounts)

These pro forma financial statements give effect to the following transactions,
assumptions and adjustments:

Acquisition of Southward and immediate disposition of certain oil and gas
properties to a third party



|(a) |  | bank indebtedness of $120,000 was used to acquire the shares and options
of Southward;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | adjustments to the Southward financial statements to reflect the
elimination of properties not retained and an allocation of the net cost
of the property acquired in the transaction. These adjustments are based
on the oil and gas properties having an assigned fair value of $166,000 in
total and an assigned value of $68,450 with respect to the property to be
repurchased by Hawker in this transaction.                                                                                                                                                                                                                                                                  
|   
|    |  | The total cost of acquiring Southward was $120,000 plus estimated costs of
the transaction of $2,200 for a total price of $122,200. The sale of the
properties to a third party, net of the assumed repurchase by Hawker, is for
proceeds of $97,550 resulting in a net cost of the shares of Southward after
the disposition of the non-retained properties of $24,650. The acquisition
of Southward reflecting the properties retained using the purchase method of
accounting and a preliminary allocation of the purchase price to the fair
value of the assets and liabilities acquired for purposes of preparing these
unaudited pro forma financial statements is as follows:

|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|                                              |  | $
|                                              |  |  
|Accounts receivable                           |  |   | 11,663  |  
|Note receivable                               |  |   | 500     |  
|Deposits and prepaids                         |  |   | 997     |  
|Marketable securities                         |  |   | 750     |  
|Oil and gas properties                        |  |   | 70,450  |  
|Goodwill                                      |  |   | 25,649  |  
|                                              |  |   |         |  
|Total assets                                  |  |   | 110,009 |  
|Accounts payable and accrued liabilities      |  |   | (14,065 | )
|Income taxes payable                          |  |   | (17     | )
|Bank loan                                     |  |   | (47,892 | )
|Future income taxes                           |  |   | (22,297 | )
|Future site restoration and abandonment costs |  |   | (1,088  | )
|                                              |  |   |         |  
|Net cash cost                                 |  |   | 24,650  |  
|                                              |  |   |         |  



| |  | The adjustments to the Southward financial statements to reflect the above
purchase allocation are as follows:
| |  | --------------------------------------------------------------------------------------------------------------

|                                                                 |  |   |         |  
|---------------------------------------------------------------- |  | - | ------- | -
|                                                                 |  | $
|                                                                 |  |  
|Property and equipment sold                                      |  |   | (89,821 | )
|Goodwill on acquisition                                          |  |   | 25,649  |  
|Future income taxes  net reduction related to acquisition       |  |   | 35,310  |  
|Future site restoration and abandonment costs on properties sold |  |   | 1,554   |  
|Elimination of share capital                                     |  |   | 22,897  |  
|Elimination of retained earnings                                 |  |   | 29,061  |  
|                                                                 |  |   |         |  
|Net cash cost                                                    |  |   | (24,650 | )
|                                                                 |  |   |         |  

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##### Table of Contents



Hawker Resources Inc.
(formerly Synsorb Biotech Inc.)

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
(thousands of Cdn. Dollars, except share and per share amounts)



|(c) |  | the proceeds from the sale of the properties noted in note 2(b) of
$97,550 being used to repay $60,000 of the bank loan noted in note 2(a)
and $37,550 of the bank loan of Southward with interest at 6% on the
Southward bank loan amounting to $2,253 and related income tax expense
increase;                                                                                                                                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(d) |  | the provision for depletion, depreciation and asset write-downs reflects
a decrease of $18,274 resulting from the reduction in oil and gas
properties on the sale of properties to the independent third party and an
increase in such properties resulting from the adjustment in note 2(b) and
related income tax expense increase;                                                                                                                                        
|   
|(e) |  | oil and natural gas sales of $61,378, net of royalties of $14,784 and
production expenses of $10,050 and related income tax expense reduction
relating to the properties sold have been deducted from the Southward
statement of earnings; oil and natural gas sales of $24,395, net of
royalties of $6,088 and production costs of $3,708 and related income tax
expense relating to the properties to be reacquired by Hawker have been
added to the statement of earnings;

Financing agreements entered into by Hawker on April 3, 2003



|(f) |  | the proceeds of private placements by Hawker to raise $3,691 resulting in
the issue of debentures for $3,616, preferred shares of $30 and common
shares of $45;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Sale and issue of shares, obtaining of a bank loan and application of the
proceeds of the offering



|(g) |  | the net proceeds of this offering of 14,286,000 common shares by Hawker
amounting to $41,900;                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(h) |  | the proceeds of a bank loan facility for $28,000 with interest at 6%
amounting to $1,680 and related income tax expense reduction;                                                                            
|   
|(i) |  | a portion of the proceeds raised through the offering of common shares
and loan facility noted in 2(g) and 2(h) reflected as a repayment of the
remaining $60,000 due on the bank loan mentioned in note 2(a);

Conversion of warrants



|(j) |  | the deemed exercise of all the warrants issued in private placements in
(f) above by the issue of $3,616 in share capital upon the surrender of
$30 in preferred shares and $3,616 in debentures; and
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exercise of options



|(k) |  | the exercise of all in-the-money options and issue of 275,000 common
shares for $192.
|--- |  | -------------------------------------------------------------------------------------

3. EARNINGS PER SHARE

The pro forma earnings per share is based on the weighted average number of
Hawker common and Class A shares outstanding taking into account the issue of
2,152,465 common shares and 3,874,437 Class A shares on the conversion of the
private placements in (f) and (j) and the issue of 14,286,000 common shares
under this offering in (g) and the issue of 275,000 common shares in (k) above.

F-7



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##### Table of Contents



AUDITORS REPORT

To the Directors of
Hawker Resources Inc. (formerly SYNSORB Biotech Inc.)

We have audited the balance sheets of Hawker Resources Inc. (formerly SYNSORB
Biotech Inc.) as at December 31, 2002 and 2001 and the statements of earnings
and deficit and cash flows for each of the years in the three year period ended
December 31, 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in Canada and the United States. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2002 and
2001 and the results of its operations and its cash flows for each of the years
in the three year period ended December 31, 2002 in accordance with Canadian
generally accepted accounting principles.

|                                                   |  |                            | 
|-------------------------------------------------- |  | -------------------------- | 
|Calgary, Canada                                    |  | (signed) Ernst & Young LLP | 
|February 5, 2003 (except for note 13(b)            |  | Chartered Accountants      | 
|which is as of March 31, 2003, notes 13(c) and (d) |  |                           
|which are as of April 3, 2003, and note 13(e),     |  |                            | 
|which is as of May 29, 2003)                       |  |                            | 

F-8



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##### Table of Contents



Hawker Resources Inc.(Incorporated under the Alberta Business Corporations Act)(formerly SYNSORB Biotech Inc.)
(see Note 1)
Balance Sheets
As at December 31

|                                          |                                                   |      |       |        |   |   |        |         |   | 
|----------------------------------------- | ------------------------------------------------- | ---- | ----- | ------ | - | - | ------ | ------- | - | 
|(in thousands of Canadian dollars)        |                                                   | 2002 |       | 2001  
|                                          |                                                   |      |       |       
|ASSETS                                    |                                                   |      |       |        |   |   |        |        
|Current                                   |                                                   |      |       |        |   |   |        |        
|                                          | Cash and cash equivalents                         |      | $     | 289    |   |   | $      | 5,841   |  
|                                          | Accounts receivable                               |      |       | 27     |   |   |        | 62      |  
|                                          | Prepaids                                          |      |       | 176    |   |   |        | 153     |  
|                                          |                                                   |      |       |        |   |   |        |         |  
|                                          |                                                   |      | 492   |        |   |   | 6,056  |        
|Capital assets(Notes 1 and 4)             |                                                   |      | 3,523 |        |   |   | 10,783 |        
|Investments(Note 3)                       |                                                   |      |      |        |   |   | 5,745  |        
|                                          |                                                   |      |       |        |   |   |        |         |  
|                                          |                                                   | $    | 4,015 |        |   | $ | 22,584 |        
|                                          |                                                   |      |       |        |   |   |        |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                                   |      |       |        |   |   |        |        
|Current                                   |                                                   |      |       |        |   |   |        |        
|                                          | Accounts payable and accrued liabilities (Note 1) |      | $     | 80     |   |   | $      | 4,871   |  
|                                          | Current portion of long-term debt (Note 5)        |      |       |       |   |   |        | 5,910   |  
|                                          |                                                   |      |       |        |   |   |        |         |  
|                                          |                                                   |      | 80    |        |   |   | 10,781 |        
|Alberta Heritage Foundation grant(Note 6) |                                                   |      | 387   |        |   |   | 387    |        
|Shareholders equity(Note 7)              |                                                   |      |       |        |   |   |        |        
|                                          | Share capital                                     |      |       | 12,741 |   |   |        | 84,271  |  
|                                          | Deficit                                           |      |       | (9,193 | ) |   |        | (72,855 | )
|                                          |                                                   |      |       |        |   |   |        |         |  
|                                          |                                                   |      | 3,548 |        |   |   | 11,416 |        
|                                          |                                                   |      |       |        |   |   |        |         |  
|                                          |                                                   | $    | 4,015 |        |   | $ | 22,584 |        
|                                          |                                                   |      |       |        |   |   |        |         |  

See accompanying notes

On behalf of the Board:

|                       |  |                            
|---------------------- |  | ---------------------------
|(signed) David A. Tuer |  | (signed) Ronald P. Mathison
|Director               |  | Director                   

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##### Table of Contents



Hawker Resources Inc.
(formerly SYNSORB Biotech Inc.)
Statements of Earnings and Deficit
For the years ended December 31

|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|-------------------------------------------------------------- | ------------------------------------------- | ---- | ------- | ---- |  | ---- | ------- | --- |  | - | ------- | ----- | 
|(in thousands of Canadian dollars, except per share amounts)   |                                             | 2002 |         | 2001 |  | 2000
|                                                               |                                             |      |         |      |  |     
|Revenue                                                        |                                             |      |         |      |  |      |         |     |  |   |         |      
|                                                               | Interest income                             |      | $       | 32   |  |      | $       | 515 |  |   | $       | 1,313 | 
|                                                               | Other                                       |      |         | 107  |  |      |         | 214 |  |   |         | 200   | 
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|                                                               |                                             |      | 139     |      |  |      | 729     |     |  |   | 1,513   |      
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Expenses                                                       |                                             |      |         |      |  |      |         |     |  |   |         |      
|                                                               | Amortization and asset write-downs (Note 1) |      | 7,216   |      |  |      | 9,655   |     |  |   | 1,404   |      
|                                                               | Research and development (Note 1)           |      |        |      |  |      | 9,255   |     |  |   | 7,889   |      
|                                                               | Operating (Note 1)                          |      | 1,596   |      |  |      | 7,106   |     |  |   | 3,648   |      
|                                                               | Interest on long-term debt                  |      | 71      |      |  |      | 787     |     |  |   | 1,176   |      
|                                                               | Maintenance of patents                      |      | 243     |      |  |      |        |     |  |   |        |      
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|                                                               |                                             |      | 9,126   |      |  |      | 26,803  |     |  |   | 14,117  |      
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Loss before the following                                      |                                             |      | (8,987  | )    |  |      | (26,074 | )   |  |   | (12,604 | )    
|Gain on sale and distribution of Oncolytics shares(Note 3)     |                                             |      | 13,224  |      |  |      | 3,004   |     |  |   |        |      
|Gain on dilution of investment in Oncolytics(Note 3)           |                                             |      |        |      |  |      | 357     |     |  |   | 4,933   |      
|Share of loss from equity investment in Oncolytics             |                                             |      | (471    | )    |  |      | (1,831  | )   |  |   | (691    | )    
|Gain on sale of INH(Note 3)                                    |                                             |      |        |      |  |      |        |     |  |   | 568     |      
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Earnings (loss) before tax                                     |                                             |      | 3,766   |      |  |      | (24,544 | )   |  |   | (7,794  | )    
|Recovery of (provision for) future income taxes(Note 11)       |                                             |      |        |      |  |      | 1,556   |     |  |   | (95     | )    
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Net earnings (loss) for the year                               |                                             |      | 3,766   |      |  |      | (22,988 | )   |  |   | (7,889  | )    
|Deficit, beginning of year                                     |                                             |      | (72,855 | )    |  |      | (49,867 | )   |  |   | (41,978 | )    
|Reduction of stated capital(Note 7)                            |                                             |      | 59,896  |      |  |      |        |     |  |   |        |      
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Deficit, end of year                                           |                                             | $    | (9,193  | )    |  | $    | (72,855 | )   |  | $ | (49,867 | )    
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 
|Basic and diluted net earnings (loss) per common share(Note 7) |                                             | $    | 0.76    |      |  | $    | (4.64   | )   |  | $ | (1.63   | )    
|                                                               |                                             |      |         |      |  |      |         |     |  |   |         |       | 

See accompanying notes

F-10



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##### Table of Contents



Hawker Resources Inc.

(formerly SYNSORB Biotech Inc.)
Statements of Cash Flows
For the years ended December 31


|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |   |        |  
|--------------------------------------------------------------- | ------------------ | ----------------------------------------------------------- | ------ | ---- | ------- | ---- | ------- | - | ------ | - | ------- | - | ------ | -
|(in thousands of Canadian dollars)                              |                    | 2002                                                        |        | 2001 |         | 2000
|                                                                |                    |                                                             |        |      |         |     
|Operating activities                                            |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Net earnings (loss) for the year                                |                    | $                                                           | 3,766  |      |         | $    | (22,988 | ) |        | $ | (7,889  | )
|                                                                | Add non-cash items |                                                             |        |      |         |      |         |   |        |   |         |   |       
|                                                                |                    | Gain on sale and distribution of Oncolytics shares (Note 3) |        |      | (13,224 | )    |         |   | (3,004 | ) |         |   |       |  
|                                                                |                    | Amortization and asset write-downs                          |        |      | 7,216   |      |         |   | 9,655  |   |         |   | 1,404  |  
|                                                                |                    | Share of loss from equity investment in Oncolytics          |        |      | 471     |      |         |   | 1,831  |   |         |   | 691    |  
|                                                                |                    | Issuance of stock options for services                      |        |      | 12      |      |         |   |       |   |         |   |       |  
|                                                                |                    | Provision for (recovery of) future income taxes             |        |      |        |      |         |   | (1,556 | ) |         |   | 95     |  
|                                                                |                    | Gain on dilution of investment in Oncolytics (Note 3)       |        |      |        |      |         |   | (357   | ) |         |   | (4,933 | )
|                                                                |                    | Gain on sale of INH                                         |        |      |        |      |         |   |       |   |         |   | (568   | )
|Decrease in accounts receivable                                 |                    |                                                             | 35     |      |         |      | 135     |   |        |   | (226    | )
|Increase (decrease) in prepaid expenses                         |                    |                                                             | (23    | )    |         |      | (34     | ) |        |   | (32     | )
|(Decrease) increase in accounts payable and accrued liabilities |                    |                                                             | (4,791 | )    |         |      | 3,541   |   |        |   | (27     | )
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|                                                                |                    |                                                             | (6,538 | )    |         |      | (12,777 | ) |        |   | (11,485 | )
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Investing activities                                            |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|                                                                |                    | Proceeds from sale of Oncolytics shares (Note 3)            |        |      | 6,898   |      |         |   | 3,481  |   |         |   |       |  
|                                                                |                    | Proceeds from sale of capital assets                        |        |      | 44      |      |         |   |       |   |         |   |       |  
|                                                                |                    | Purchase of capital assets                                  |        |      |        |      |         |   | (944   | ) |         |   | (980   | )
|                                                                |                    | Proceeds from dilution of investment (Note 3)               |        |      |        |      |         |   |       |   |         |   | (4,549 | )
|                                                                |                    | Proceeds from sale of INH (Note 3)                          |        |      |        |      |         |   |       |   |         |   | 1,261  |  
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|                                                                |                    |                                                             | 6,942  |      |         |      | 2,537   |   |        |   | (4,268  | )
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Financing activities                                            |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|                                                                |                    | Repayment of long-term debt                                 |        |      | (5,910  | )    |         |   | (2,866 | ) |         |   | (2,287 | )
|                                                                |                    | Costs of distribution of shares in Oncolytics               |        |      | (46     | )    |         |   |       |   |         |   |       |  
|                                                                |                    | Common shares issued on exercise of options and warrants    |        |      |        |      |         |   | 126    |   |         |   | 2,996  |  
|                                                                |                    | Proceeds from share offering                                |        |      |        |      |         |   |       |   |         |   | 22,315 |  
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|                                                                |                    |                                                             | (5,956 | )    |         |      | (2,740  | ) |        |   | 23,024  |  
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Increase (decrease) in cash and cash equivalents                |                    |                                                             | (5,552 | )    |         |      | (12,980 | ) |        |   | 7,271   |  
|Cash and cash equivalents, beginning of year                    |                    |                                                             | 5,841  |      |         |      | 18,821  |   |        |   | 11,550  |  
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Cash and cash equivalents, end of year                          |                    | $                                                           | 289    |      |         | $    | 5,841   |   |        | $ | 18,821  |  
|                                                                |                    |                                                             |        |      |         |      |         |   |        |   |         |  
|Cash interest paid                                              |                    |                                                             | 71     |      |         |      | 787     |   |        |   | 1,176   |  
|Cash interest received                                          |                    |                                                             | 56     |      |         |      | 580     |   |        |   | 1,160   |  
|Cash taxes paid                                                 |                    |                                                             | 10     |      |         |      | 86      |   |        |   | 41      |  

See accompanying notes

F-11



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##### Table of Contents



Hawker Resources Inc.
(formerly SYNSORB Biotech Inc.)
Notes to Financial Statements (expressed in Canadian dollars)
December 31, 2002, 2001 and 2000

1. NATURE OF OPERATIONS



| |  | During 2000 and 2001 the Company conducted pharmaceutical drug development
with respect to SYNSORB Cd® for the prevention of recurrent C.difficile
associated diarrhea. On December 10, 2001 the Company terminated development
of SYNSORB Cd® including its phase III clinical trials. Subsequent to
December 10, 2001 the Company had no drug in active development. On March 7,
2003 the Company entered into an agreement with an unrelated company to
transform the Company into an oil and gas enterprise and subsequently
changed its name to Hawker Resources Inc. (see Note 13).                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Measurement Uncertainty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | As a result of the decision to halt development of SYNSORB Cd®, the Company
made provision for future wind-down costs and wrote down the carrying value
of its capital assets in its financial statements for the year ended
December 31, 2001. These cost provisions and write-downs incorporated
estimates of potential costs, market realizations and timing which are
uncertain and dependent on factors over which management may have no
control. These cost provisions and write-downs have been reviewed as at
December 31, 2002. However, future adjustments could be required and such
adjustments could have a material impact on income.                                                                       
|
| |  | Provision for SYNSORB Cd® Trial Wind-Down Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | A provision for the future wind-down costs of the clinical trials, reduction
in staff and elimination of other costs associated with the development of
SYNSORB Cd® totaling $3,830,000 was included in research and development and
operating expenses for the year ended December 31, 2001. An additional
provision amount of $50,000 was included in the results for the period ended
June 30, 2002. As at December 31, 2002 the entire provision amount had been
utilized. No further wind-down costs are anticipated.                                                                                                                                                                                                 
|
| |  | Impairment of Capital Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The decision to halt development of SYNSORB Cd® has led to the write-down of
certain capital assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | SYNSORB built a cGMP-compliant manufacturing facility in 1998 as part of its
drug development activity. As a result of the decision to halt development
of SYNSORB Cd®, the Company determined that continued ownership of its
manufacturing facility was unnecessary and the facility was advertised for
sale as a cGMP-compliant manufacturing facility. Sale of the facility as a
cGMP-compliant manufacturing facility would have achieved the highest net
realizable value for the facility. The Company wrote down the value of the
manufacturing facility and associated equipment at December 31, 2001 to
their estimated net realizable values based on potential sale as a
cGMP-compliant manufacturing facility.
|
| |  | Efforts to market the facility as a cGMP-compliant manufacturing facility to
pharmaceutical companies were unsuccessful. The Company now expects to
realize commercial value for the land and building. Accordingly, the Company
wrote down the carrying value of the building and land to $2,500,000
(December 31, 2001: $8,600,000).                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Most of the manufacturing equipment was auctioned subsequent to December 31,
2002 for proceeds approximating their carrying value. The carrying value of
the manufacturing equipment as at December 31, 2002 was written down to
$1,000,000 (December 31, 2001: $2,000,000).                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | For the year ended December 31, 2001, SYNSORB wrote off its patents
associated with SYNSORB-related technology and its leasehold improvements.
The Company also wrote down its computer equipment and its office furniture
and equipment. In 2002, costs associated with maintenance of patents are
expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The asset write-downs are included in amortization expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|

F-12



---



##### Table of Contents



|                                        |  |                   |       |            |  |                  |       |  |  |   |       | 
|--------------------------------------- |  | ----------------- | ----- | ---------- |  | ---------------- | ----- |  |  | - | ----- | 
|December 31, 2002                       |  |                   |       |            |  |                  |       |  |  |   |       | 
|                                        |  |                   |       |            |  |                  |       |  |  |   |       | 
|                                        |  | Carrying value    |       | Asset      |  | Carrying value  
|(in thousands of dollars)               |  | before write-down |       | write-down |  | after write-down
|                                        |  |                   |       |            |  |                 
|Building and land                       |  | $                 | 8,600 |            |  | $                | 6,100 |  |  | $ | 2,500 | 
|Manufacturing equipment                 |  |                   | 1,997 |            |  |                  | 997   |  |  |   | 1,000 | 
|Computer & office
furniture & equipment |  |                   | 23    |            |  |                  |      |  |  |   | 23    | 
|                                        |  |                   |       |            |  |                  |       |  |  |   |       | 
|                                        |  |                   |       |            |  | $                | 7,097 |  |  |   |       | 
|                                        |  |                   |       |            |  |                  |       |  |  |   |       | 

|                                                   |  |                       |        |            |  |                  |       |  |  |   |       | 
|-------------------------------------------------- |  | --------------------- | ------ | ---------- |  | ---------------- | ----- |  |  | - | ----- | 
|December 31, 2001                                  |  |                       |        |            |  |                  |       |  |  |   |       | 
|                                                   |  |                       |        |            |  |                  |       |  |  |   |       | 
|                                                   |  | Carrying value before |        | Asset      |  | Carrying value  
|(in thousands of dollars)                          |  | write-down            |        | write-down |  | after write-down
|                                                   |  |                       |        |            |  |                 
|Patents                                            |  | $                     | 2,060  |            |  | $                | 2,060 |  |  |   |      | 
|Building and land                                  |  |                       | 13,367 |            |  |                  | 4,767 |  |  | $ | 8,600 | 
|Manufacturing equipment                            |  |                       | 3,109  |            |  |                  | 1,109 |  |  |   | 2,000 | 
|Leasehold, computer & office furniture & equipment |  |                       | 450    |            |  |                  | 267   |  |  |   | 183   | 
|                                                   |  |                       |        |            |  |                  |       |  |  |   |       | 
|                                                   |  |                       |        |            |  | $                | 8,203 |  |  |   |       | 
|                                                   |  |                       |        |            |  |                  |       |  |  |   |       | 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |  | The financial statements of the Company have been prepared in accordance
with Canadian generally accepted accounting principles. These are different
in some respects from those generally accepted in the United States. The
significant differences are described in note 14 Reconciliation of Canadian
and United States Generally Accepted Accounting Principles. Because a
precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements necessarily involves
the use of estimates and approximations that have been made using careful
judgment. The financial statements have, in managements opinion, been
properly prepared within reasonable limits of materiality and within the
framework of the accounting policies summarized below.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Revenue from product sales is recognized when the product is delivered.
Revenue from the granting of licenses to develop, import, package, market,
distribute and sell the SYNSORB products is recognized in full in the period
in which the agreement is completed. Revenue from milestone payments and
royalties is recognized when received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company used the equity method of accounting for its investment in
Oncolytics Biotech Inc. (Oncolytics) up until the distribution of the
majority of its holding in Oncolytics on May 15, 2002. Under this method of
accounting, the Company included in its net earnings its share of the net
earnings or losses of Oncolytics. Subsequent to this date, the investment
has been accounted for on a cost basis and accordingly, no net earnings or
losses of Oncolytics have been included in net earnings subsequent to May
15, 2002.                                                                                                                                                                                                                                                                        
|
| |  | Capital Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Capital assets are recorded at cost. Amortization is provided to amortize
the cost of assets over their estimated useful lives. An impairment in the
carrying value of these capital assets is recorded in the statement of
earnings and deficit in the year that the impairment becomes evident.
Amortization is recorded using the declining balance and straight-line
methods at the following annual rates:                                                                                                                                                                                                                                                                                                                                                                                                      

|                               |  |                             
|------------------------------ |  | ----------------------------
|Building                       |  | 5% declining balance        
|Patents                        |  | 10% straight line           
|Manufacturing equipment        |  | 20% straight-line           
|Computer equipment             |  | 30% declining balance       
|Office furniture and equipment |  | 20% declining balance       
|Leasehold improvements         |  | Term of lease, straight-line

F-13



---



##### Table of Contents





| |  | Research and Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Research costs are expensed as incurred. Development costs that meet
specific criteria related to technical, market and financial feasibility are
capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | On January 1, 2002 the Company adopted the new CICA standard for stock-based
compensation. As permitted by CICA the Company has applied this change
prospectively for new awards granted on or after January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | For stock options granted to employees and directors on or after January 1,
2002 under stock option plans with no cash settlement features, the Company
has chosen to recognize no compensation. However, direct awards of stock to
employees and stock and stock option awards granted to non-employees are
accounted for in accordance with the fair value method of accounting for
stock-based compensation. The fair value of direct awards of stock are
determined by the quoted market price of the Companys stock and the fair
value of stock options are determined using the Black-Scholes option pricing
model. In periods prior to January 1, 2002, the Company recognized no
compensation when stock or stock options were issued to employees.
|
| |  | During the year ended December 31, 2002, the Company granted stock options
to a non-employee and recorded $12,000 in compensation included in operating
expenses based on the fair value of the options granted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Future Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Company follows the liability method of accounting for income taxes.
Under this method, future tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using substantially enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Income
tax expense for the period is the tax payable for the period and any change
during the period in future income tax assets and liabilities. A valuation
allowance is recorded to the extent that there is uncertainty regarding
utilization of future tax assets.                                                                                                          
|
| |  | In accordance with the recommendations of the Canadian Institute of
Chartered Accountants, the Corporation adopted the liability method of tax
allocation in accounting for income taxes on a retroactive basis without
restatement of individual prior periods from January 1, 2000. The effect of
adopting the new recommendations was to increase future income tax liability
and deficit by $1,461,000 at January 1, 2000 and to increase future income
tax expense and loss by $95,000 for the year ended December 31, 2000.                                                                                                                                                                                                                           
|
| |  | Prior to January 1, 2000, the Company followed the deferral method of tax
allocation under which the provision for income taxes was based on the
losses reported in the accounts. This method made full provision for income
taxes deferred as a result of timing differences between loss per the
financial statements and taxable loss.                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Treasury method is used to calculate diluted earnings per share. This
method assumes that any proceeds from the exercise of stock options and
warrants would be used to purchase common shares at the average market price
during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

3. BUSINESS ACQUISITIONS AND DISPOSITIONS



| |  | The Company acquired all of the issued and outstanding common shares of
Oncolytics Biotech Inc. (Oncolytics) on April 12, 1999. Oncolytics
subsequently issued common shares which reduced the Companys ownership
interest to 38.6% at December 31, 2000, and resulted in a gain on dilution
of $4,933,000 for the year ended December 31, 2000. During 2001, Oncolytics
issued further common shares which resulted in a gain on dilution of
$357,000. As at December 31, 2001, the Company held 6,255,800 common shares
of Oncolytics.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



---



##### Table of Contents





| |  | On May 7, 2002 approval was received from both the shareholders of the
Company and the shareholders of Oncolytics for the distribution of not less
then 4,000,000 Oncolytics shares to the shareholders of the Company on a pro
rata basis. On May 8, 2002 the Company received approval from the Court of
the Queens Bench of Alberta to distribute these Oncolytics shares and the
distribution of 4,000,235 Oncolytics shares was made effective May 15, 2002.
The deemed value of these shares on the date of distribution, net of legal
fees with respect to the transaction, was $11,600,000 resulting in a gain on
distribution of $8,325,000. The transaction was marked to market and
accounted for as a return of capital (see Note 7). As part of this
transaction the Companys holding of 1,500,000 million shares in BCY Life
Sciences Inc. (BCY) was transferred to Oncolytics. No value had been
assigned to these shares in the accounts of the Company and no gain or loss
was recorded as a result of the transaction. The market value of the BCY
shares on May 15, 2002 was $300,000.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended December 31, 2002, the Company sold 2,255,565
(December 31, 2001: 494,200) common shares in Oncolytics for net proceeds of
$6,898,000 (December 31, 2001: $3,481,000) resulting in a gain on sale of
$4,899,000 (December 31, 2001: $3,004,000). As at December 31, 2002 the
Company did not hold any common shares of Oncolytics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | On March 6, 2000 the Company sold its wholly-owned subsidiary, INH
Technologies Inc. (INH), for proceeds of $1,260,669 and the rights to
receive milestone payments and royalties. The Company recognized a gain of
$568,327 with respect to this transaction for the year ended December 31,
2000. During the year ended December 31, 2002 the Company received payments
of $107,000 in respect of milestones achieved by INH during the year
(December 31, 2001: $214,000; December 31, 2000: $106,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

4. CAPITAL ASSETS

|                               |  |      |        |             |  |                  |        |  |  |   |       | 
|------------------------------ |  | ---- | ------ | ----------- |  | ---------------- | ------ |  |  | - | ----- | 
|                               |  | 2002
|                               |  |     
|                               |  |      |        |             |  | Accumulated      |        |  |  |  
|                               |  |      |        |             |  | Amortization and |        |  |  |  
|(in thousands of dollars)      |  | Cost |        | Write-Downs |  | Carrying Value  
|                               |  |      |        |             |  |                 
|Land                           |  | $    | 600    |             |  |                  |       |  |  | $ | 600   | 
|Building                       |  |      | 13,423 |             |  | $                | 11,523 |  |  |   | 1,900 | 
|Patents                        |  |      | 3,708  |             |  |                  | 3,708  |  |  |   |      | 
|Manufacturing equipment        |  |      | 4,303  |             |  |                  | 3,303  |  |  |   | 1,000 | 
|Computer equipment             |  |      | 422    |             |  |                  | 402    |  |  |   | 20    | 
|Office furniture and equipment |  |      | 104    |             |  |                  | 101    |  |  |   | 3     | 
|Leasehold improvements         |  |      | 350    |             |  |                  | 350    |  |  |   |      | 
|                               |  |      |        |             |  |                  |        |  |  |   |       | 
|                               |  | $    | 22,910 |             |  | $                | 19,387 |  |  | $ | 3,523 | 
|                               |  |      |        |             |  |                  |        |  |  |   |       | 

|                               |  |      |        |             |  |                  |        |  |  |   |        | 
|------------------------------ |  | ---- | ------ | ----------- |  | ---------------- | ------ |  |  | - | ------ | 
|                               |  | 2001
|                               |  |     
|                               |  |      |        |             |  | Accumulated      |        |  |  |  
|                               |  |      |        |             |  | Amortization and |        |  |  |  
|(in thousands of dollars)      |  | Cost |        | Write-Downs |  | Carrying Value  
|                               |  |      |        |             |  |                 
|Land                           |  | $    | 600    |             |  |                  |       |  |  | $ | 600    | 
|Building                       |  |      | 13,423 |             |  | $                | 5,423  |  |  |   | 8,000  | 
|Patents                        |  |      | 3,708  |             |  |                  | 3,708  |  |  |   |       | 
|Manufacturing equipment        |  |      | 4,309  |             |  |                  | 2,309  |  |  |   | 2,000  | 
|Computer equipment             |  |      | 521    |             |  |                  | 404    |  |  |   | 117    | 
|Office furniture and equipment |  |      | 248    |             |  |                  | 182    |  |  |   | 66     | 
|Leasehold improvements         |  |      | 350    |             |  |                  | 350    |  |  |   |       | 
|                               |  |      |        |             |  |                  |        |  |  |   |        | 
|                               |  | $    | 23,159 |             |  | $                | 12,376 |  |  | $ | 10,783 | 
|                               |  |      |        |             |  |                  |        |  |  |   |        | 

F-15



---



##### Table of Contents



5. LONG-TERM DEBT

|                                                                                                                                                                                 |  |      |   |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | ---- |  | - | ------ | -
|(in thousands of dollars)                                                                                                                                                        |  | 2002 |   | 2001
|                                                                                                                                                                                 |  |      |   |     
|Loan payable with interest at 13.73% per annum with
certain intellectual property pledged as collateral                                                                          |  |      |  |      |  | $ | 910    |  
|Loan payable, with monthly interest payments at the
lenders floating basic rate plus 3% per annum
(December 31, 2001: 8.86%). Land and building have
been pledged as collateral |  |      |  |      |  |   | 5,000  |  
|                                                                                                                                                                                 |  |      |   |      |  |   |        |  
|                                                                                                                                                                                 |  |      |  |      |  |   | 5,910  |  
|Current portion                                                                                                                                                                  |  |      |  |      |  |   | (5,910 | )
|                                                                                                                                                                                 |  |      |   |      |  |   |        |  
|                                                                                                                                                                                 |  |      |  |      |  |   |       |  
|                                                                                                                                                                                 |  |      |   |      |  |   |        |  

6. ALBERTA HERITAGE FOUNDATION GRANT



| |  | Pursuant to the terms of a technology commercialization agreement the
Company received a grant from the Alberta Heritage Foundation. The Company
is required to repay the amount advanced of $387,000 plus a royalty
equivalent to the amount initially received. Any required repayment and
royalty is based on gross sales of SYNSORB related products commencing
January 1, 2000 with payments equal to the lesser of 5% of gross sales or
$100,000 per annum commencing 90 days after January 1, 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7. SHARE CAPITAL



| | (a) |  | Authorized:
| | --- |  | -----------



| |  | Unlimited number of voting common shares without par value. 
| |  | ------------------------------------------------------------
| |  | Unlimited number of preferred shares to be issued in series.



| | (b) |  | Common Shares Issued:
| | --- |  | ---------------------

|                                                                |  |           |           |            |  |           |         |            |  |           |           |            |  |   |        |  |  |  |           |  |  |   |        | 
|--------------------------------------------------------------- |  | --------- | --------- | ---------- |  | --------- | ------- | ---------- |  | --------- | --------- | ---------- |  | - | ------ |  |  |  | --------- |  |  | - | ------ | 
|                                                                |  | 2002      |           | 2001       |  | 2000     
|                                                                |  |           |           |            |  |          
|                                                                |  | Number of |           | Amount     |  | Number of |         | Amount     |  | Number of |           | Amount    
|                                                                |  | Shares    |           | (in
000s) |  | Shares    |         | (in 000s) |  | Shares    |           | (in 000s)
|                                                                |  |           |           |            |  |           |         |            |  |           |           |           
|Balance, beginning of
year                                      |  |           | 4,959,937 |            |  | $         | 84,271  |            |  |           | 4,944,187 |            |  | $ | 84,145 |  |  |  | 3,938,227 |  |  | $ | 58,834 | 
|Reduction of stated
capital                                     |  |           |          |            |  |           | (59,896 | )          |  |           |          |            |  |   |       |  |  |  |          |  |  |   |       | 
|Return of capital on
distribution of
Oncolytics shares (Note
3) |  |           |          |            |  |           | (11,646 | )          |  |           |          |            |  |   |       |  |  |  |          |  |  |   |       | 
|Issuance of stock
options for services                          |  |           |          |            |  |           | 12      |            |  |           |          |            |  |   |       |  |  |  |          |  |  |   |       | 
|Issued for public
offering                                      |  |           |          |            |  |           |        |            |  |           |          |            |  |   |       |  |  |  | 862,500   |  |  |   | 22,315 | 
|Issued for cash on
exercise of options and
warrants             |  |           |          |            |  |           |        |            |  |           | 15,750    |            |  |   | 126    |  |  |  | 143,460   |  |  |   | 2,996  | 
|                                                                |  |           |           |            |  |           |         |            |  |           |           |            |  |   |        |  |  |  |           |  |  |   |        | 
|Balance, end of year                                            |  |           | 4,959,937 |            |  | $         | 12,741  |            |  |           | 4,959,937 |            |  | $ | 84,271 |  |  |  | 4,944,187 |  |  | $ | 84,145 | 
|                                                                |  |           |           |            |  |           |         |            |  |           |           |            |  |   |        |  |  |  |           |  |  |   |        | 



| |  | Options exercised in 2001 relate to shares issued to a licensor pursuant to
a licensing agreement and do not form part of the Companys stock option
plan.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Share consolidation
| | --- |  | -------------------



| |  | On May 7, 2002, the shareholders of the Company approved the consolidation
of the common shares on the basis of one new common share being issued for
every eight previously issued and outstanding common shares. All
outstanding share and option numbers reflect the one for eight
consolidation. The consolidated shares began trading on May 16, 2002.
Simultaneously with the share consolidation was the distribution of the
4,000,235 shares in Oncolytics to the shareholders of the Company. This
distribution was accounted for as a capital transaction and accordingly,
the stated capital of the common shares was reduced by $11,646,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



---



##### Table of Contents





| | (d) |  | Reduction of stated capital
| | --- |  | ---------------------------



| |  | Pursuant to the Plan of Arrangement ratified by shareholders of the Company
at the May 7, 2002 Annual and Special Meeting, the stated capital of
SYNSORB shares was reduced to the net realizable value of the Companys
assets as at May 7, 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Options and warrants
| | --- |  | --------------------



| |  | The Company has a stock option plan that provides for the issuance of
options to its directors, officers, employees and non-employees to acquire
up to 456,513 common shares. The dates on which options vest are set by
the board of directors at the time of grant. The date on which options
expire are also set by the board of directors at the time of grant and
cannot exceed ten years. The Company has issued stock options to acquire
common shares through its stock option plan of which the following are
outstanding at December 31:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |  |  |          |   |      |  |          |  |   |  |         |   |          |  |       |  |  |  |          |   |  |  |       |  | 
|------------------------------------ |  |  | -------- | - | ---- |  | -------- |  | - |  | ------- | - | -------- |  | ----- |  |  |  | -------- | - |  |  | ----- |  | 
|                                     |  |  | 2002     |   | 2001 |  | 2000    
|                                     |  |  |          |   |      |  |         
|                                     |  |  |          |   |      |  | Weighted |  |   |  |         |   | Weighted |  |       |  |  |  | Weighted
|                                     |  |  |          |   |      |  | average  |  |   |  |         |   | average  |  |       |  |  |  | average 
|                                     |  |  |          |   |      |  | exercise |  |   |  |         |   | exercise |  |       |  |  |  | exercise
|                                     |  |  |          |   |      |  | price    |  |   |  |         |   | price    |  |       |  |  |  | price   
|                                     |  |  | Shares   |   | $    |  | Shares   |  | $ |  | Shares  |   | $       
|                                     |  |  |          |   |      |  |          |  |   |  |         |   |         
|Outstanding at beginning of the year |  |  | 244,440  |   |      |  | 40.88    |  |   |  | 275,877 |   |          |  | 49.60 |  |  |  | 280,760  |   |  |  | 48.00 | 
|Granted                              |  |  | 275,000  |   |      |  | 0.70     |  |   |  | 65,625  |   |          |  | 12.88 |  |  |  | 52,500   |   |  |  | 41.60 | 
|Exercised                            |  |  |         |   |      |  |         |  |   |  |        |   |          |  |      |  |  |  | (43,568  | ) |  |  | 32.24 | 
|Expired                              |  |  | (6,250   | ) |      |  | 68.00    |  |   |  |        |   |          |  |      |  |  |  |         |   |  |  |      | 
|Forfeited                            |  |  | (182,625 | ) |      |  | 35.76    |  |   |  | (97,062 | ) |          |  | 46.64 |  |  |  | (13,815  | ) |  |  | 41.68 | 
|                                     |  |  |          |   |      |  |          |  |   |  |         |   |          |  |       |  |  |  |          |   |  |  |       |  | 
|Outstanding at year
end              |  |  | 330,565  |   |      |  | 9.80     |  |   |  | 244,440 |   |          |  | 40.88 |  |  |  | 275,877  |   |  |  | 49.60 | 
|                                     |  |  |          |   |      |  |          |  |   |  |         |   |          |  |       |  |  |  |          |   |  |  |       |  | 
|Options exercisable
at end of year   |  |  | 329,065  |   |      |  | 9.80     |  |   |  | 212,550 |   |          |  | 45.04 |  |  |  | 234,171  |   |  |  | 54.48 | 
|                                     |  |  |          |   |      |  |          |  |   |  |         |   |          |  |       |  |  |  |          |   |  |  |       |  | 



| |  | The following table summarizes information about the stock options
outstanding at December 31, 2002:
| |  | ----------------------------------------------------------------------------------------------------

|                         |                  |  |              |         |                  |  |                |      |              |   |                |       |  |  |         |         |  |   |      |       | 
|------------------------ | ---------------- |  | ------------ | ------- | ---------------- |  | -------------- | ---- | ------------ | - | -------------- | ----- |  |  | ------- | ------- |  | - | ---- | ----- | 
|                         |                  |  | Number       |         | Weighted average |  |                |      |              |   | Number         |       |  |  |        
|                         |                  |  | outstanding  |         | remaining        |  | Weighted       |      | exercisable  |   | Weighted      
|                         |                  |  | December 31, |         | contractual life |  | average        |      | December 31, |   | average       
|                         |                  |  | 2002         |         | (years)          |  | exercise price |      | 2002         |   | exercise price
|                         |                  |  |              |         |                  |  |                |      |              |   |               
|Range of exercise prices |                  |  |              |         |                  |  |                |      |              |   |                |       |  |  |         |         |  |   |      |      
|                         | $0.50 to $1.00   |  |              | 275,000 |                  |  |                | 2.88 |              |   | $              | 0.70  |  |  |         | 275,000 |  |   | $    | 0.70  | 
|                         | $1.01 to $15.00  |  |              | 2,500   |                  |  |                | 7.07 |              |   | $              | 10.78 |  |  |         | 1,000   |  |   | $    | 12.79 | 
|                         | $15.01 to $30.00 |  |              | 11,313  |                  |  |                | 2.58 |              |   | $              | 22.00 |  |  |         | 11,313  |  |   | $    | 22.00 | 
|                         | $30.01 to $50.00 |  |              | 18,314  |                  |  |                | 3.55 |              |   | $              | 42.46 |  |  |         | 18,314  |  |   | $    | 42.46 | 
|                         | $50.01 to $70.00 |  |              | 938     |                  |  |                | 3.89 |              |   | $              | 64.80 |  |  |         | 938     |  |   | $    | 64.80 | 
|                         | $70.01 to $90.00 |  |              | 22,500  |                  |  |                | 2.00 |              |   | $              | 85.87 |  |  |         | 22,500  |  |   | $    | 85.87 | 
|                         |                  |  |              |         |                  |  |                |      |              |   |                |       |  |  |         |         |  |   |      |       | 
|                         |                  |  | 330,565      |         |                  |  | 2.88           |      |              | $ | 9.80           |       |  |  | 329,065 |         |  | $ | 9.80 |      
|                         |                  |  |              |         |                  |  |                |      |              |   |                |       |  |  |         |         |  |   |      |       | 



| |  | In addition to the stock option plan, the Company has granted options and
warrants to underwriters and financial institutions pursuant to public
offerings and a licensing agreement, of which 10,625 warrants were
outstanding at December 31, 2002 (68,750 options and 15,625 warrants at
December 31, 2001; 84,500 options and 15,675 warrants at December 31,
2000), with a weighted average price of $36.00 per share ($33.60 at
December 31, 2001; $29.60 at December 31, 2000).
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | Per share amounts
| | --- |  | -----------------



| |  | Earnings (loss) per common share calculations are based on earnings (loss)
for the year as the numerator in the calculation and the weighted average
number of common shares outstanding during the year (2002: 4,959,937; 2001:
4,955,199; 2000: 4,828,112) as the denominator. For the year ended
December 31, 2002, options to purchase 341,816 common shares at an average
price of $10.72 and warrants for the purchase of 10,625 common shares at a
price of $36.00 were not included in the computation of diluted earnings
per share because the exercise price of the options and warrants was
greater than the average market price of the
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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---



##### Table of Contents





| |  | common shares. For the years ended December 31, 2001 and 2000, option and
warrant conversions were not included in the computation of diluted
earnings per share because the effect on the net loss for the years of the
issue of additional shares on the conversions would be anti-dilutive. Per
share amounts for 2001 and 2000 have been restated to reflect the share
consolidation noted in (c) above that took place in May 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8. STOCK BASED COMPENSATION



| |  | The Company has a stock option plan that provides for the issuance of
options to its officers, directors and employees. The Company applies the
intrinsic value based method of accounting for stock-based compensation
awards granted to officers, directors and employees. Accordingly, no
compensation cost has been recognized under the stock-based compensation
plan. Consideration paid on the exercise of stock options and purchase of
stock is credited to share capital. Had compensation costs for the
Companys stock based compensation plan been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
fair value based method of accounting for stock based compensation, the
Companys net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    |             |      |   |       | 
|--------------------------------------------------- | ----------- | ---- | - | ----- | 
|(in thousands of dollars, except per share amounts) |             | 2002
|                                                    |             |     
|Net earnings                                        |             |      |   |      
|                                                    | As reported |      | $ | 3,766 | 
|                                                    | Pro forma   |      | $ | 3,646 | 
|Basic and diluted net earnings per common share     |             |      |   |      
|                                                    | As reported |      | $ | 0.76  | 
|                                                    | Pro forma   |      | $ | 0.74  | 



| |  | The pro forma amounts shown above do not include the compensation costs
associated with stock options granted prior to January 1, 2002. The fair
value of common share options granted is estimated to be $120,000 as at the
date of grant using the Black-Scholes option pricing model and the
following assumptions:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |  |      |      | 
|--------------------------- |  | ---- | ---- | 
|                            |  | 2002
|                            |  |     
|Risk-free interest rate (%) |  |      | 2.89 | 
|Expected life (years)       |  |      | 1.00 | 
|Expected volatility (%)     |  |      | 1.97 | 
|Expected dividend yield (%) |  |      |     | 

9. RELATED PARTY TRANSACTIONS



| |  | During the year ended December 31, 2002, the Company paid $214,000
(December 31, 2001: Nil; December 31, 2000: Nil) to Scout Capital
Corporation (Scout), a significant shareholder, as reimbursement of
Scouts costs with respect to the Companys annual general meeting. An
additional amount of $34,000 was paid to Scout during 2002 to reimburse
Scout for expenses incurred on behalf of the Company. The Company also
paid $50,000 to Scout pursuant to an agreement under which Scout is to
provide the Company with administrative and executive services until the
end of April 2003. The fees charged were based on estimated time to be
spent on Company matters at standard rates.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10. FINANCIAL INSTRUMENTS



| |  | Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, investments, accounts payable and accrued liabilities,
Alberta Heritage Foundation grant, and long-term debt. As at December 31,
2002 and 2001, there were no significant differences between the carrying
values of these amounts and their estimated market values except as
otherwise disclosed in the financial statements.                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash equivalents consist primarily of highly liquid money market securities
and investment deposits which are readily convertible into cash. Cash
equivalents are carried at cost plus accrued interest. The cash
equivalents earned an effective interest rate of 2.50% (2001: 4.52%). Of
the total cash and cash equivalents at December 31, 2001, $5,104,000 was
held in highly liquid money market securities and investment deposits that
matured within ninety days. At December 31, 2002, there were no cash
equivalents held.

F-18



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##### Table of Contents



11. INCOME TAXES



| |  | The provision for income taxes recorded in the financial statements differs
from the amount which would be obtained by applying the statutory income
tax rate to the net earnings (loss) before tax as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |  |      |        |      |  |      |         |   |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|(in thousands of dollars)                    |  | 2002 |        | 2001 |  | 2000
|                                             |  |      |        |      |  |     
|Earnings (loss) before tax                   |  | $    | 3,766  |      |  | $    | (24,544 | ) |  | $ | (7,794 | )
|Statutory Canadian corporate tax rate        |  |      | 39.24  | %    |  |      | 42.12   | % |  |   | 45.00  | %
|                                             |  |      |        |      |  |      |         |   |  |   |        |  
|Anticipated tax expense (recovery)           |  |      | 1,478  |      |  |      | (10,338 | ) |  |   | (3,507 | )
|Gain on dilution of investment in Oncolytics |  |      |       |      |  |      | (75     | ) |  |   | (1,110 | )
|Taxable income from investment in Oncolytics |  |      |       |      |  |      | 421     |   |  |   | 900    |  
|Non-taxable portion of capital gain          |  |      | (2,536 | )    |  |      | (633    | ) |  |   |       |  
|Change in tax rate                           |  |      |       |      |  |      |        |   |  |   | (952   | )
|Non-deductible portion of equity loss        |  |      | 92     |      |  |      |        |   |  |   |       |  
|Non-deductible expenses                      |  |      | 3      |      |  |      | 26      |   |  |   | 28     |  
|Future tax assets valuation allowance        |  |      | 963    |      |  |      | 9,043   |   |  |   | 4,736  |  
|                                             |  |      |        |      |  |      |         |   |  |   |        |  
|Future income tax expense (recovery)         |  |      |       |      |  | $    | (1,556  | ) |  |   | 95     |  
|                                             |  |      |        |      |  |      |         |   |  |   |        |  



| |  | Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of the Companys future income tax assets and liabilities are as
follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                            |  |      |         |      |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|(in thousands of dollars)                                                                   |  | 2002 |         | 2001
|                                                                                            |  |      |         |     
|Future tax liabilities:                                                                     |  |      |         |      |  |   |         |  
|Book value of investment in excess of tax adjusted cost base                                |  |      |        |      |  | $ | (1,034  | )
|Future tax assets:                                                                          |  |      |         |      |  |   |         |  
|Non-capital loss carryforwards                                                              |  | $    | 13,105  |      |  |   | 15,670  |  
|UCC and scientific research and development pools in excess
of book value of capital assets |  |      | 13,197  |      |  |   | 10,772  |  
|Share issue costs                                                                           |  |      | 400     |      |  |   | 691     |  
|                                                                                            |  |      |         |      |  |   |         |  
|Net future tax assets                                                                       |  |      | 26,702  |      |  |   | 26,099  |  
|Valuation allowance                                                                         |  |      | (26,702 | )    |  |   | (26,099 | )
|                                                                                            |  |      |         |      |  |   |         |  
|Net future taxes                                                                            |  |      |        |      |  |   |        |  
|                                                                                            |  |      |         |      |  |   |         |  



| |  | The Company has non-capital losses for income tax purposes of approximately
$37,314,000 which are available for application against future taxable
income and which expire in the years:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |   |            | 
|---- |  | - | ---------- | 
|2005 |  | $ | 6,570,000  | 
|2006 |  |   | 11,410,000 | 
|2007 |  |   | 5,103,000  | 
|2008 |  |   | 14,231,000 | 



| |  | The income tax benefits of these losses have not been recognized in the
financial statements. The Company has unclaimed expenditures of
approximately $41,098,000 available to reduce future years taxable income.
The Company also has approximately $4,939,000 of unclaimed investment tax
credits available to reduce future years income tax.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. CLASS ACTION LAWSUIT



| |  | A class action statement of claim for violations of Federal securities laws
was brought against the Company and its executive officers in the United
States District Court, Southern District of New York, on January 17, 2002. A
second action, citing identical particulars, was filed with the same court
on February 22, 2002, and three other complaints were later filed. These
actions were subsequently consolidated into one claim. Under terms of its
insurance policies, the Company has the obligation to fund $200,000 with
respect to legal costs associated with contesting this action. This amount
was paid on March 8, 2002. An agreement in principle regarding settlement
has been reached with counsel to the plaintiffs in the consolidated action
and the cost of the proposed settlement will be covered by the Companys
insurance policies.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



13. SUBSEQUENT EVENTS



| | a) |  | During January 2003, the Company sold most of the manufacturing
equipment for proceeds approximating its carrying value.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | On March 31, 2003, the Company acquired all of the shares of
1022971 Alberta Ltd. (1022971) for a nominal amount, and was assigned
an option to purchase an undivided interest of up to 49% in certain oil
and gas properties.                                                                                                                                                                                                                                                                                                                                                
|
| | c) |  | On April 3, 2003, pursuant to a financing agreement dated effective
March 7, 2003 with an unrelated party, the Company raised $3,345,364
and issued the following: 395,065 Series A Debentures for $3,318,547;
395,065 Series A Warrants for $10,896; 1,975,325 voting preferred
shares for $5,686; 3,555,586 non-voting preferred shares for $10,235.
The financing was undertaken with the unrelated party in order to
transform the Company into an oil and gas enterprise.                                                                                                  
|
| |    |  | Also on April 3, 2003, the Company issued the following securities to two
other unrelated parties: 75,000 common shares for $45,364; 148,798 common
shares for $90,000; 35,428 Series A Debentures for $297,595; 35,428
Series A Warrants for $977; 177,140 voting preferred shares for $510;
318,852 non-voting preferred shares for $918.                                                                                                                                                                                                                                     
|
| |    |  | Each Series A Warrant entitles the holder thereof to purchase five common
shares and nine Class A shares on the concurrent surrender of the
warrant, five voting preferred shares, nine non-voting preferred shares,
and one Series A Debenture.                                                                                                                                                                                                                                                                                                                                
|
| | d) |  | On April 3, 2003, the Company changed its name to Hawker Resources
Inc. and changed its authorized share capital by adding an unlimited
number of Class A shares. Between March 13, 2003 and April 3, 2003,
275,000 common shares were issued for $192,250 under the Companys
stock option plan.                                                                                                                                                                                                                                                                               
|
| | e) |  | On April 30, 2003, 1022971 obtained a bank loan for $120,000,000 to
acquire all of the shares of Southward Energy Ltd. (Southward).
Immediately thereafter on April 30, 2003, Southward sold its oil and
gas properties, excluding a 1% undivided interest in certain properties
and a 100% interest in related seismic, to an independent third party
for gross proceeds of $164,631,000. The gross proceeds were used to
repay the bank loan obtained to acquire the shares and bank
indebtedness of Southward.                                                             
|
| |    |  | On May 28, 2003, the Company obtained a $28 million extendible revolving
term credit facility from a Canadian chartered bank that bears interest
at rates varying from Canadian prime rate or U.S. base rate of such bank
to the Canadian prime rate or U.S. base rate plus 30 basis points,
payable monthly in arrears. The Company may also borrow by way of
bankers acceptances which are subject to a stamping fee or by way of
LIBOR based loans which are subject to an interest rate spread payable to
the bank. Oil and gas properties have been pledged as collateral.
|
| |    |  | Pursuant to an underwriting agreement dated May 29, 2003, the Company
proposed to raise net proceeds of $41.9 million through the issue and
sale of common shares.                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | Immediately after the issuance of a receipt for the prospectus offering
the Companys common shares for sale and issue, the warrants described in
note 13(c) are to be exercised and the holder will be issued five common
shares and nine Class A shares upon the surrender of five voting
preferred shares, nine non-voting preferred shares and one Series A
Debenture.                                                                                                                                                                                                      

F-20



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##### Table of Contents





|14. |  | RECONCILIATION OF CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The financial statements are prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP) which, in most respects,
conform to United States generally accepted accounting principles (US
GAAP). Significant differences between Canadian GAAP and US GAAP are as
follows:

|                                                                |  |       |    |   |  |      |       |      |  |      |         |   |  |  |         |  
|--------------------------------------------------------------- |  | ----- | -- | - |  | ---- | ----- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                                                |  |       |    |   |  | 2002 |       | 2001 |  | 2000
|(in thousands of dollars)                                       |  | Notes |    | $ |  | $    |       | $   
|                                                                |  |       |    |   |  |      |       |     
|Net earnings (loss) - Canadian GAAP                             |  |       |    |   |  |      | 3,766 |      |  |      | (22,988 | ) |  |  | (7,889  | )
|Share of loss from equity investment in Oncolytics              |  |       | (1 | ) |  |      | 471   |      |  |      | 1,831   |   |  |  | 691     |  
|Gain on sale of Oncolytics shares                               |  |       | (1 | ) |  |      | 5,274 |      |  |      | 476     |   |  |  |        |  
|Gain on dilution of investment in Oncolytics                    |  |       | (1 | ) |  |      |      |      |  |      | (357    | ) |  |  | (4,933  | )
|Amortization                                                    |  |       | (2 | ) |  |      |      |      |  |      | 671     |   |  |  | (671    | )
|                                                                |  |       |    |   |  |      |       |      |  |      |         |   |  |  |         |  
|Net earnings (loss) and comprehensive earnings
(loss) - US GAAP |  |       |    |   |  |      | 9,511 |      |  |      | (20,367 | ) |  |  | (12,802 | )
|Net earnings (loss) per common share - US GAAP                  |  |       |    |   |  |      | 1.92  |      |  |      | (4.11   | ) |  |  | (2.65   | )



| |  | Under US GAAP, the reduction of stated capital through the deficit was
reduced by $3,634,000 to $56,272,000. There are no differences between
Canadian GAAP and US GAAP in amounts reported as cash flows from (used in)
operating, financing and investing activities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Balance sheet items in accordance with US GAAP are as follows:                                                                                                                                                                                                         

|                          |  |       |           |   |  |                   |        |                   |  |          |        |      |  |  |         |   |  |  |         |  
|------------------------- |  | ----- | --------- | - |  | ----------------- | ------ | ----------------- |  | -------- | ------ | ---- |  |  | ------- | - |  |  | ------- | -
|                          |  |       |           |   |  | December 31, 2002 |        | December 31, 2001
|                          |  |       |           |   |  | Canadian          |        | US                |  | Canadian |        | US  
|                          |  |       |           |   |  | GAAP              |        | GAAP              |  | GAAP     |        | GAAP
|(in thousands of dollars) |  | Notes |           | $ |  | $                 |        | $                 |  | $       
|                          |  |       |           |   |  |                   |        |                   |  |         
|Investment                |  |       | (1)       |   |  |                   |       |                   |  |          |       |      |  |  | 5,745   |   |  |  |        |  
|Share capital             |  |       | (3)       |   |  |                   | 12,741 |                   |  |          | 12,741 |      |  |  | 84,271  |   |  |  | 80,637  |  
|Deficit                   |  |       | (1), (2), |   |  |                   |        |                   |  |          |        |      |  |  |         |   |  |  |         |  
|                          |  |       | (3), (4)  |   |  |                   | (9,193 | )                 |  |          | (9,193 | )    |  |  | (72,855 | ) |  |  | (74,966 | )



| |  | 1. | Accounting for Oncolytics Shares                                            
| |  | -- | ----------------------------------------------------------------------------
|
| |  |    | US GAAP differences result when accounting for Oncolytics Shares as
follows:

| |    |                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------
| | i. | During 1999, SYNSORB acquired Oncolytics for $2,500,000.
Under US GAAP, the purchase price would have been allocated to the
following:

|                          |  |   |        |  
|------------------------- |  | - | ------ | -
|(in thousands of dollars) |  | $
|                          |  |  
|Research and development  |  |   | 3,615  |  
|Future tax liability      |  |   | (1,115 | )
|                          |  |   |        |  
|                          |  |   | 2,500  |  
|                          |  |   |        |  

| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      | The research and development had no alternative future uses. Under
Canadian GAAP, the research and development has to be capitalized,
however under US GAAP, this amount would have been charged to expense
and accordingly the investment in Oncolytics had no accounting cost
under US GAAP.                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ii.  | Under Canadian GAAP, a gain may be realized when a
development stage subsidiary issues shares from treasury diluting
the parent companys ownership. US GAAP does not allow the
recognition of a gain on dilution of a development stage subsidiary.                                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | iii. | The write off of the acquisition costs of the Oncolytics
shares, as described in (i), results in a nil accounting cost for
the shares under US GAAP. The accounting cost for Canadian GAAP
subsequently increases for the dilution gains recognized and
decreases to reflect the Companys share of loss from equity
accounting under Canadian GAAP. Adjustments are made under US GAAP
to eliminate the effect of dilution gains, equity losses and the
resulting impact on gains recognized on the sale of Oncolytics
shares.

F-21



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##### Table of Contents





| | 2. |  | Depreciation on Building                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Under US GAAP, amortization of the Companys building must commence when
it is physically ready for use. Under Canadian GAAP, amortization begins
when commercial use of the building begins. On January 1, 2000, the
Companys building was physically ready for use, however commercial use
had not commenced. Therefore $671,000 of additional amortization is
recorded under US GAAP in 2000. In 2001, the building was written down
to its estimated net realizable value. Under US GAAP, given amortization
was recorded in 2000, the writedown in 2001 has been reduced by $671,000.
The building was held for sale during 2002 and once again was written
down to its estimated net realizable value at December 31, 2002.
Therefore, in 2002, there was no difference in accounting under US GAAP.
|
| | 3. |  | Accounting for SYNSORB Limited Partnership Units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    |  | Prior to 1999, the Company accounted for an investment by limited
partners in the SYNSORB Limited Partnership as a component of
shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | Under US GAAP the amounts invested by the limited partners are recorded
as minority interest and are reduced by the amount of the partnership
expenses incurred, resulting in a reduction in share capital and deficit
of $3,634,000. Pursuant to the May 7, 2002 stated capital reduction
associated with the Plan of Arrangement, disclosed in Note 7(d), no US
GAAP difference remains as at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 4. |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | For US reporting purposes, the statement of Financial Accounting Standard
No.123 Accounting for Stock Based Compensation (SFAS 123) requires
the reporting of pro forma amounts for compensation expense that would
have been recorded for the issuance of share options using a fair value
option pricing model. On January 1, 2002, the Company adopted the new
CICA standard for stock-based compensation, resulting in the pro forma
disclosure contained in Note 8. The Company has applied this change
prospectively commencing on the date of adoption, effectively eliminating
the US GAAP difference associated with this accounting.                                                                                                                                                         
|
| |    |  | The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                              |  |        |      |         |  |  |      |  
|--------------------------------------------- |  | ------ | ---- | ------- |  |  | ---- | -
|                                              |  | 2001   |      | 2000   
|                                              |  |        |      |        
|Risk free interest rate                       |  |        | 5.13 | %       |  |  | 5.60 | %
|Dividend yield                                |  |        | 0    | %       |  |  | 0    | %
|Volatility factors of expected market price   |  |        | 119  | %       |  |  | 121  | %
|Weighted average expected life of the options |  | 1 year |      | 2 years



| |  |  | Pro forma disclosures of loss and loss per common share are presented
below as if the Company had adopted the cost recognition requirements
under SFAS 123. The compensation cost for the stock-based compensation
was approximately $382,495 in 2001 and $1,457,725 in 2000.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                  |  |                       |  |      |         |      |  |  |         |  
|----------------------------------------------------------------- |  | --------------------- |  | ---- | ------- | ---- |  |  | ------- | -
|                                                                  |  |                       |  | 2001 |         | 2000
|(in thousands of dollars)                                         |  |                       |  | $    |         | $   
|                                                                  |  |                       |  |      |         |     
|Loss  US GAAP                                                    |  | As reported           |  |      | (20,367 | )    |  |  | (12,802 | )
|                                                                  |  | Pro forma             |  |      | (20,749 | )    |  |  | (14,260 | )
|                                                                  |  |                       |  |      |         |      |  |  |         |  
|Loss per common share  US GAAP (excluding
shares held in escrow) |  | As reported ($/share) |  |      | (4.11   | )    |  |  | (2.65   | )
|                                                                  |  | Pro forma ($/share)   |  |      | (4.19   | )    |  |  | (2.95   | )

F-22



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##### Table of Contents



AUDITORS REPORT

To the Directors ofHawker Resources Inc.:

We have audited the accompanying statements of revenues and operating expenses
relating to the proposed acquisition by Hawker Resources Inc. of certain
petroleum and natural gas properties (the Southward Properties) for each of
the years in the three-year period ended December 31, 2002. This financial
information is the responsibility of the management of Hawker Resources Inc.
Our responsibility is to express an opinion on this financial information based
on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial information is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial information. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial information.

In our opinion, these statements present fairly, in all material respects, the
revenues and operating expenses of the Southward Properties to be acquired as
described in Note 1 for each of the years in the three-year period ended
December 31, 2002 in accordance with Canadian generally accepted accounting
principles.

|                                |  |                                                     
|------------------------------- |  | ----------------------------------------------------
|Calgary, Alberta
April 21, 2003 |  | (Signed) Deloitte & Touche LLP
Chartered Accountants

F-23



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##### Table of Contents



Hawker Resources Inc.
Southward Properties
Statements of Revenues and Operating Expenses

|                                           |  |      |            |      |  |              |            |   |  |   |            |  
|------------------------------------------ |  | ---- | ---------- | ---- |  | ------------ | ---------- | - |  | - | ---------- | -
|                                           |  |      |            |      |  | Years ended  |            |   |  |  
|                                           |  |      |            |      |  | December 31, |            |   |  |  
|                                           |  | 2002 |            | 2001 |  | 2000        
|                                           |  |      |            |      |  |             
|REVENUES                                   |  | $    | 24,395,200 |      |  | $            | 35,146,368 |   |  | $ | 22,121,330 |  
|ROYALTIES                                  |  |      | (6,088,471 | )    |  |              | (9,020,145 | ) |  |   | (6,118,864 | )
|                                           |  |      |            |      |  |              |            |   |  |   |            |  
|                                           |  |      | 18,306,729 |      |  |              | 26,126,223 |   |  |   | 16,002,466 |  
|OPERATING EXPENSES                         |  |      | 3,708,256  |      |  |              | 2,792,051  |   |  |   | 1,915,539  |  
|                                           |  |      |            |      |  |              |            |   |  |   |            |  
|EXCESS OF REVENUES OVER
OPERATING EXPENSES |  | $    | 14,598,473 |      |  | $            | 23,334,172 |   |  | $ | 14,086,927 |  
|                                           |  |      |            |      |  |              |            |   |  |   |            |  

F-24



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##### Table of Contents



Hawker Resources Inc.
Southward Properties
Notes to the Statement of Revenues and Operating Expenses
For Each of the Years in the Three-Year Period Ended December 31, 2002

1. BASIS OF PRESENTATION

The accompanying statements of revenues and operating expenses have been
prepared for inclusion in the prospectus (the Prospectus) of Hawker Resources
Inc. (the Company) relating to the sale and issue of common shares by the
Company.

The Company, through its wholly-owned subsidiary, 1022971 Alberta Ltd., has
entered into an arrangement agreement with Southward Energy Ltd. (Southward)
that contemplates the acquisition of all of the outstanding common shares of
Southward in an arms length transaction. The Company has also entered into an
agreement to sell all of the petroleum and natural gas properties of Southward,
with the exception of a 100% interest in related seismic data and an undivided
interest of 1% in certain properties (the Optioned Properties), which will be
retained by the Company. The Optioned Properties, which are further described
elsewhere in the Prospectus, are comprised of all of the petroleum and natural
gas properties of Southward except for those which are located in the west of
the fifth meridian area in the province of Alberta. The Company holds an
option to acquire an undivided interest of 49% in the Optioned Properties,
which upon exercise will result in the Company holding an aggregate undivided
interest of 50% in the Optioned Properties (the Southward Properties).

These statements have been derived from financial information provided by the
vendor of the Southward Properties and relate only to 50% of the working
interests in such properties, which are to be acquired by the Company.

These statements include only those revenue and operating expenses which are
directly related to the Southward Properties and do not include any expenses
related to general and administrative costs, interest, income and capital taxes
or any provisions related to depletion, depreciation or future site restoration
and abandonment.

2. SIGNIFICANT ACCOUNTING POLICIES



| | a. |  | Revenue                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Production sales are recorded when the commodities are sold. Processing
income is recognized at the time services are performed.    
|
| | b. |  | Operating Expenses                                                                                                                  
|
| |    |  | Operating expenses include all costs related to the lifting, gathering,
transporting and processing of oil and gas related products.

F-25



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##### Table of Contents



AUDITORS REPORT

To the Directors of Southward Energy Ltd.

We have audited the consolidated balance sheets of Southward Energy Ltd. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
retained earnings and of cash flows for each of the years in the three-year
period ended December 31, 2002. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2002 and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.

On March 17, 2003 and February 22,
2002, we reported separately to the shareholders of the Company on
the consolidated financial statements of the Company for the years
ended December 31, 2002 and 2001 and 2000, respectively, prepared in
accordance with Canadian generally accepted accounting principles,
which excluded Note 13 on differences between Canadian and United
States generally accepted accounting principles.

|                 |  |                               
|---------------- |  | ------------------------------
|Calgary, Alberta |  | (Signed) Deloitte & Touche LLP
|March 17, 2003   |  | Chartered Accountants         

F-26



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##### Table of Contents



COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA  U.S. REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining changes in
accounting principles that have been implemented in the consolidated financial
statements. As discussed in Note 13(g) to the consolidated financial
statements, in 2001 the Company changed its method of computing diluted
earnings per share to conform to the new Canadian Institute of Chartered
Accountants Handbook recommendation section 3500. In addition, as discussed in
Note 13(b) to the consolidated financial statements, in 2000 the Company
changed its method of accounting for income taxes to conform to the new
Canadian Institute of Chartered Accountants Handbook recommendation section
3465.

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) outlining
significant subsequent events that have been disclosed in the financial
statements. We have not audited any financial statements of the Company for
any period subsequent to December 31, 2002. However, as discussed in Note 14
to the consolidated financial statements, the Company announced it had entered
into an arrangement agreement, pursuant to which all of the outstanding common
shares of the Company will be acquired by an unrelated third party.

|                                |  |                                                     
|------------------------------- |  | ----------------------------------------------------
|Calgary, Alberta
March 17, 2003 |  | (Signed) Deloitte & Touche LLP
Chartered Accountants

F-27



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##### Table of Contents



SOUTHWARD ENERGY LTD.
CONSOLIDATED BALANCE SHEETS
($ thousands)

|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|------------------------------------ | ------------------------------------------------------ | ---------------------------------------- | ------- | ------------------ | ------ | ---- | ------- | ------- | ------ | 
|                                     |                                                        |                                          |         | As at December 31,
|                                     |                                                        |                                          |         | 2002               |        | 2001
|                                     |                                                        |                                          |         |                    |        |     
|ASSETS                               |                                                        |                                          |         |                    |        |      |         |        
|                                     | Current                                                |                                          |         |                    |        |      |         |         |       
|                                     |                                                        | Accounts receivable                      |         | $                  | 11,663 |      |         | $       | 9,257  | 
|                                     |                                                        | Note receivable (note 3)                 |         |                    | 500    |      |         |         |       | 
|                                     |                                                        | Deposits and other                       |         |                    | 997    |      |         |         | 856    | 
|                                     |                                                        | Marketable securities (note 3)           |         |                    | 750    |      |         |         |       | 
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        |                                          | 13,910  |                    |        |      | 10,113  |        
|                                     | Property and equipment (notes 2, 3 and 4)              |                                          |         | 160,271            |        |      |         | 182,701 |       
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        | $                                        | 174,181 |                    |        | $    | 192,814 |        
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                        |                                          |         |                    |        |      |         |        
|                                     | Current                                                |                                          |         |                    |        |      |         |         |       
|                                     |                                                        | Accounts payable and accrued liabilities |         | $                  | 14,065 |      |         | $       | 16,192 | 
|                                     |                                                        | Deferred revenue                         |         |                    |       |      |         |         | 119    | 
|                                     |                                                        | Income taxes payable                     |         |                    | 17     |      |         |         | 322    | 
|                                     |                                                        | Bank loan (notes 1 and 5)                |         |                    | 47,892 |      |         |         |       | 
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        |                                          | 61,974  |                    |        |      | 16,633  |        
|                                     | Bank loan (notes 1 and 5)                              |                                          |         |                   |        |      |         | 64,690  |       
|                                     | Future income taxes (note 6)                           |                                          |         | 57,607             |        |      |         | 58,364  |       
|                                     | Future site restoration and abandonment
costs (note 4) |                                          |         | 2,642              |        |      |         | 2,669   |       
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        |                                          | 122,223 |                    |        |      | 142,356 |        
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|SHAREHOLDERS EQUITY                 |                                                        |                                          |         |                    |        |      |         |        
|                                     | Share capital (note 7)                                 |                                          |         | 22,897             |        |      |         | 22,284  |       
|                                     | Retained earnings                                      |                                          |         | 29,061             |        |      |         | 28,174  |       
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        |                                          | 51,958  |                    |        |      | 50,458  |        
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 
|                                     |                                                        | $                                        | 174,181 |                    |        | $    | 192,814 |        
|                                     |                                                        |                                          |         |                    |        |      |         |         |        | 

See accompanying notes

On behalf of the Board,

|                         |  |                              
|------------------------ |  | -----------------------------
|(Signed) David A. Tuer |  | (Signed) Ronald P. Mathison
|Director                 |  | Director                     

F-28



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##### Table of Contents



SOUTHWARD ENERGY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
($ thousands)

|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |       | 
|--------------------------------------- | ------------------------------------------------------------------ | ------- | ------ | ----------------------- | ---- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                        |                                                                    |         |        | Year ended December 31,
|                                        |                                                                    |         |        | 2002                    |      | 2001 |        | 2000  
|                                        |                                                                    |         |        |                         |      |      |        |       
|                                        | REVENUES                                                           |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Oil and natural gas sales                                          |         | $      | 61,378                  |      |      | $      | 84,945 |       |   | $      | 44,898 |      
|                                        | Royalties, net                                                     |         |        | 14,784                  |      |      |        | 21,106 |       |   |        | 11,670 |      
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        |                                                                    |         | 46,594 |                         |      |      | 63,839 |        |       |   | 33,228 |       
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | EXPENSES                                                           |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Production                                                         |         |        | 10,050                  |      |      |        | 10,292 |       |   |        | 3,803  |      
|                                        | General and administrative                                         |         |        | 3,335                   |      |      |        | 2,224  |       |   |        | 1,232  |      
|                                        | Interest                                                           |         |        | 2,628                   |      |      |        | 3,557  |       |   |        | 1,144  |      
|                                        | Depletion and depreciation                                         |         |        | 30,480                  |      |      |        | 26,778 |       |   |        | 7,752  |      
|                                        | Site restoration                                                   |         |        | 411                     |      |      |        | 457    |       |   |        | 334    |      
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        |                                                                    |         | 46,904 |                         |      |      | 43,308 |        |       |   | 14,265 |       
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Earnings (loss) before income taxes                                |         |        | (310                    | )    |      |        | 20,531 |       |   |        | 18,963 |      
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Income tax expense (recovery) (note 6)                             |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        |                                                                    | Current |        |                         | (440 | )    |        |        | 1,387 |   |        |        | 1,898 | 
|                                        |                                                                    | Future  |        |                         | (757 | )    |        |        | 3,232 |   |        |        | 5,300 | 
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        |                                                                    |         | (1,197 | )                       |      |      | 4,619  |        |       |   | 7,198  |       
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Net earnings                                                       |         |        | 887                     |      |      |        | 15,912 |       |   |        | 11,765 |      
|                                        | Retained earnings, beginning of year                               |         |        | 28,174                  |      |      |        | 12,262 |       |   |        | 928    |      
|                                        | Adoption of liability method of accounting
for future income taxes |         |        |                        |      |      |        |       |       |   |        | (431   | )    
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|                                        | Retained earnings, end of year                                     |         | $      | 29,061                  |      |      | $      | 28,174 |       |   | $      | 12,262 |      
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|Basic net earnings per share (note 8)   |                                                                    | $       | 0.04   |                         |      | $    | 0.70   |        |       | $ | 0.61   |       
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      
|Diluted net earnings per share (note 8) |                                                                    | $       | 0.04   |                         |      | $    | 0.64   |        |       | $ | 0.51   |       
|                                        |                                                                    |         |        |                         |      |      |        |        |       |   |        |        |      

See accompanying notes

F-29



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##### Table of Contents



SOUTHWARD ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ thousands)

|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |       |  
|------------------------------------------------------------------------------------ | -------------------------- | - | ----------------------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ----- | -
|                                                                                     |                            |   | Year ended December 31,
|                                                                                     |                            |   | 2002                    |        | 2001 |   | 2000   
|                                                                                     |                            |   |                         |        |      |   |        
|Cash provided by (used in):                                                          |                            |   |                         |        |      |   |         |        |   |   |         |      
|OPERATING ACTIVITIES                                                                 |                            |   |                         |        |      |   |         |        |   |   |         |      
|Net earnings                                                                         |                            | $ | 887                     |        |      | $ | 15,912  |        |   | $ | 11,765  |      
|Add (deduct) non-cash items:                                                         |                            |   |                         |        |      |   |         |        |   |   |         |      
|                                                                                     | Depletion and depreciation |   |                         | 30,480 |      |   |         | 26,778 |   |   |         | 7,752 |  
|                                                                                     | Site restoration           |   |                         | 411    |      |   |         | 457    |   |   |         | 334   |  
|                                                                                     | Future income taxes        |   |                         | (757   | )    |   |         | 3,232  |   |   |         | 5,300 |  
|                                                                                     | Deferred revenue           |   |                         | (119   | )    |   |         | (119   | ) |   |         | (142  | )
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|Cash flow from operations                                                            |                            |   | 30,902                  |        |      |   | 46,260  |        |   |   | 25,009  |      
|Changes in non-cash working capital (note 9)                                         |                            |   | (4,979                  | )      |      |   | 4,542   |        |   |   | (300    | )    
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|                                                                                     |                            |   | 25,923                  |        |      |   | 50,802  |        |   |   | 24,709  |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|INVESTING ACTIVITIES                                                                 |                            |   |                         |        |      |   |         |        |   |   |         |      
|Expenditures on property and equipment                                               |                            |   | (21,285                 | )      |      |   | (48,141 | )      |   |   | (30,393 | )    
|Acquisitions of property and equipment                                               |                            |   | (2,680                  | )      |      |   | (13,248 | )      |   |   |        |      
|Dispositions of property and equipment
(net of non-cash proceeds of $1,250) (note 3) |                            |   | 14,665                  |        |      |   |        |        |   |   |        |      
|Future site restoration and abandonment
costs incurred                               |                            |   | (438                    | )      |      |   |        |        |   |   |        |      
|Benson shares acquired previously (note 2)                                           |                            |   |                        |        |      |   |        |        |   |   | (2,538  | )    
|Benson acquisition, net of shares acquired
previously (note 2)                       |                            |   |                        |        |      |   | (26,155 | )      |   |   |        |      
|Inventory increase                                                                   |                            |   |                        |        |      |   |        |        |   |   | (1,038  | )    
|Deferred charges                                                                     |                            |   |                        |        |      |   | 1,175   |        |   |   | (1,176  | )    
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|                                                                                     |                            |   | (9,738                  | )      |      |   | (86,369 | )      |   |   | (35,145 | )    
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|FINANCING ACTIVITIES                                                                 |                            |   |                         |        |      |   |         |        |   |   |         |      
|(Decrease) increase in bank loan                                                     |                            |   | (16,798                 | )      |      |   | 29,919  |        |   |   | 10,106  |      
|Issue of common shares, net of costs                                                 |                            |   | 613                     |        |      |   | 5,270   |        |   |   | 154     |      
|Share issue expense                                                                  |                            |   |                        |        |      |   |        |        |   |   | (3      | )    
|Note receivable                                                                      |                            |   |                        |        |      |   | 378     |        |   |   | 179     |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|                                                                                     |                            |   | (16,185                 | )      |      |   | 35,567  |        |   |   | 10,436  |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|Increase in cash                                                                     |                            |   |                        |        |      |   |        |        |   |   |        |      
|Cash, beginning of year                                                              |                            |   |                        |        |      |   |        |        |   |   |        |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|Cash, end of year                                                                    |                            | $ |                        |        |      | $ |        |        |   | $ |        |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|Basic cash flow from operations per share (note 8)                                   |                            | $ | 1.28                    |        |      | $ | 2.05    |        |   | $ | 1.29    |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      
|Diluted cash flow from operations per share (note 8)                                 |                            | $ | 1.25                    |        |      | $ | 1.87    |        |   | $ | 1.07    |      
|                                                                                     |                            |   |                         |        |      |   |         |        |   |   |         |      

See accompanying notes

F-30



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



|1. |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Southward Energy Ltd. is a publicly traded company engaged in the oil and
gas business and is incorporated under the Alberta Business Corporations
Act. These consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles, as follows:



| | (a) |  | Basis of Consolidation
| | --- |  | ----------------------



| |  | These consolidated financial statements include the accounts of Southward
Energy Ltd. (the Company), its wholly-owned subsidiary, 925011 Alberta
Ltd., which together own 100% of the Southward Energy Partnership.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Capitalized Costs
| | --- |  | -----------------



| |  | The Company follows the full cost method of accounting whereby all costs
associated with the exploration for, and development of, oil and gas
reserves, whether productive or non-productive, are capitalized in a
single Canadian cost center. Such costs include land acquisition,
drilling, geological and geophysical expenses related to exploration and
development activities.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Gains or losses are not recognized upon the disposition of oil and gas
properties unless such a disposition would change the depletion rate by
20 percent or more. Gains and losses are recognized upon the disposition
of other assets.                                                                                                                                             



| | (c) |  | Depletion and Depreciation
| | --- |  | --------------------------



| |  | Depletion of petroleum and natural gas properties and depreciation of
production equipment, is provided using the unit of production method
based on estimated proved petroleum and natural gas reserves as
determined by independent engineers.                                           
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The depletion and depreciation base includes total capitalized costs,
less costs of unproved properties, net of impairment and future salvage
values, plus provision for future development costs of undeveloped
reserves, as determined by independent engineers and management
estimates.
|
| |  | The relative volumes of oil and natural gas reserves and production are
converted to equivalent barrels of oil based on the relative energy
content of each product on a 6 to 1 basis.                                                                                                     
|
| |  | Furniture, fixtures and office equipment are carried at cost and are
depreciated over the estimated useful lives of the assets at annual rates
of 20 percent to 30 percent calculated on a declining basis.                                                                                

F-31



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| | (d) |  | Future Site Restoration and Abandonment Costs
| | --- |  | ---------------------------------------------



| |  | The Company annually estimates the future costs associated with the site
restoration and abandonment of well sites and facilities by specific
areas. An accrual for abandonment is made using the unit of production
method. Actual abandonment expenditures are charged as incurred against
the accumulated abandonment accrual.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Ceiling Test Limitations
| | --- |  | ------------------------



| |  | The Company applies a ceiling test to capitalized costs, net of future
income taxes and future site restoration and abandonment costs, to ensure
that the net carrying value does not exceed the estimated value of future
net revenues from production of proven reserves plus undeveloped
properties less future production-related general and administrative
expenses, financing costs, estimated future abandonment costs and income
taxes. Any reduction in the net carrying value of property and equipment
as a result of the ceiling test is charged to operations.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The calculation of future net revenues is based on sales prices, costs
and regulations in effect at year-end.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The carrying value of undeveloped property (land and seismic data) is
reviewed periodically and written down to net realizable value if
impairment is determined.                                                                                                                                                                                                                                                                                                                                                                                                           



| | (f) |  | Marketable Securities
| | --- |  | ---------------------



| |  | Marketable securities are carried at the lower of cost and market value.
| |  | ------------------------------------------------------------------------



| | (g) |  | Future Income Taxes
| | --- |  | -------------------



| |  | The Company accounts for income taxes using the liability method. Under
this method, future income tax assets and liabilities are measured based
on temporary differences between the carrying values of assets and
liabilities and their tax bases. Future income tax expense (recovery) is
computed based on the change during the year in the future tax assets and
liabilities. Effects of changes in tax laws and tax rates are recognized
when substantially enacted.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | Revenue Recognition
| | --- |  | -------------------



| |  | Oil and natural gas sales are recognized as revenue when the commodities
are delivered to purchasers.
| |  | -----------------------------------------------------------------------------------------------------



| | (i) |  | Per Share Amounts
| | --- |  | -----------------



| |  | Basic earnings per share and basic cash flow from operations per share
are computed by dividing earnings and cash flow from operations by the
weighted average number of common shares outstanding during the year.
Diluted per share amounts reflect the
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-32



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |  | potential dilution that could occur if options or warrants to purchase
common shares were exercised. The treasury stock method is used to
determine the dilutive effect of stock options and warrants.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Financial Instruments
| | --- |  | ---------------------



| |  | The fair value of the Companys accounts receivable, deposits and other,
and accounts payable and accrued liabilities, approximate the respective
carrying values due to their short-term nature. The Companys bank loan
bears interest at a floating market rate; accordingly, the fair value
approximates the carrying value.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Hedging Contracts
| | --- |  | -----------------



| |  | The Company may enter into contracts to manage its exposure to commodity
price fluctuations. Gains and losses on commodity price hedges are
included in income at the time of the sale of the related production.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (l) |  | Interest Rate and Credit Risk
| | --- |  | -----------------------------



| |  | The Companys bank loan bears interest at a floating market rate,
accordingly, the Company is exposed to interest rate risk. The majority
of the Companys accounts receivable are due from large, reputable
companies, therefore management has assessed the risk of credit-related
losses as being minimal.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (m) |  | Joint Ventures
| | --- |  | --------------



| |  | Certain of the Companys exploration, development and production
activities are conducted jointly with others and, accordingly, these
financial statements reflect only the Companys proportionate interest in
such activities.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (n) |  | Stock Option Plan
| | --- |  | -----------------



| |  | The Company has granted stock options to certain directors, officers and
employees. No compensation expense is recognized for this plan when
stock or stock options are issued at market value. Any consideration
paid on exercise of stock options or purchase of stock is credited to
share capital.                                                                               
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company does not record compensation expense for stock options
granted to employees and directors in the financial statements. As now
required by CICA section 3870, Stock-Based Compensation and Other
Stock-Based Payments, the Company discloses what the impact would be
using the fair value method for stock options granted or modified
subsequent to December 31, 2001.

F-33



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| | (o) |  | Bank Loan
| | --- |  | ---------



|   |  | The Company has included its revolving loan facility as a current
liability on the consolidated balance sheet. This presentation is in
accordance with the recommendations set forth by the Emerging Issues
Committee of the CICA Abstract (EIC-122), whereby effective January 1,
2002, callable debt obligations to be refinanced are classified as
current liabilities.                                                                                                                                                                                          
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Benson Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Effective March 5, 2001, the Company completed the acquisition of all the
issued and outstanding shares of Benson Petroleum Ltd. (Benson) for
$3.05 cash per share, for an aggregate value, including assumed debt, of
$93,196,414. Prior to the completion of the acquisition, in December
2000, Southward Energy Ltd. had acquired 1,257,700 common shares of
Benson for $2,538,222. Also in conjunction with the acquisition, the
Company caused Benson to sell certain oil and gas properties to a third
party for cash proceeds of approximately $53 million.
|  
|   |  | The acquisition has been accounted for using the purchase method of
accounting, effective from March 1, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                               |                                               |   |         |         |  
|------------------------------ | --------------------------------------------- | - | ------- | ------- | -
|Consideration given:           |                                               |   |         |        
|                               | Cash for shares                               |   | $       | 75,588  |  
|                               | Acquisition costs                             |   |         | 6,177   |  
|                               |                                               |   |         |         |  
|                               |                                               |   | 81,765  |        
|Cash proceeds received on sale |                                               |   | (53,071 | )      
|                               |                                               |   |         |         |  
|                               |                                               | $ | 28,694  |        
|                               |                                               |   |         |         |  
|Allocation of purchase price:  |                                               |   |         |        
|                               | Property and equipment                        |   | $       | 93,196  |  
|                               | Future site restoration and abandonment costs |   |         | (1,293  | )
|                               | Debt including working capital deficiency     |   |         | (15,694 | )
|                               | Future income tax liability                   |   |         | (47,515 | )
|                               |                                               |   |         |         |  
|                               |                                               | $ | 28,694  |        
|                               |                                               |   |         |         |  



|3. |  | Disposition of Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In January, 2002, the Company disposed of the last of the heavy oil
properties acquired with the Benson transaction. Proceeds of the
disposition included $1,987,829 cash, a note receivable for $500,000,
bearing interest at prime plus two percent, and 3,750,000 common shares
of Connacher Oil & Gas Ltd. with a market value of $750,000 at the date
of the disposition. The market value of the shares at December 31, 2002
was $1,462,500. The note receivable was repaid in January, 2003.

F-34



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



|4. |  | Property and Equipment
|-- |  | ----------------------

|                                       |  |      |         |      |  |   |         |  
|-------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                       |  | 2002 |         | 2001
|                                       |  |      |         |     
|Oil and gas properties                 |  | $    | 237,843 |      |  | $ | 229,860 |  
|Furniture and other                    |  |      | 661     |      |  |   | 594     |  
|                                       |  |      |         |      |  |   |         |  
|                                       |  |      | 238,504 |      |  |   | 230,454 |  
|Accumulated depletion and depreciation |  |      | (78,233 | )    |  |   | (47,753 | )
|                                       |  |      |         |      |  |   |         |  
|                                       |  | $    | 160,271 |      |  | $ | 182,701 |  
|                                       |  |      |         |      |  |   |         |  



|   |  | As at December 31, 2002,
$35,370,000 (2001 - $30,265,127) was excluded
from the depletion calculation, which was $22,027,000 (2001 - $19,558,000) for undeveloped land and $13,343,000 (2001 - $10,707,127)
for unevaluated seismic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Total future site restoration and abandonment costs are estimated to be
$4,839,000 (2001 - $4,806,000) of which $2,642,000 has been recorded
(2001 - $2,669,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | General and administrative expenses in the amount of $2,074,000 (2001-
$1,085,000) relating directly to exploration and development have been
capitalized as part of oil and gas properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|5. |  | Bank Loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company has a credit facility with a major Canadian bank. This
facility is a demand revolving loan facility to a maximum of $65,000,000
bearing interest at prime plus one-half of one percent. Collateral for
the facility consists of a general security agreement with a floating
charge on land. This facility is subject to an annual review, with the
next review being May 31, 2003. No principal repayments have been
stipulated by the bank for 2003 provided that the terms of the facility
are complied with, and that there is no adverse change in the financial
position of the Company. As at December 31, 2002, $47,892,482 (2001 -
$64,689,825) was drawn under this loan arrangement.
|  
|6. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Effective January 1, 2000, the Company adopted the new accounting
recommendation of the Canadian Institute of Chartered Accountants,
Income Taxes. The standard was adopted retroactively without
restatement of the prior year financial statements. The impact of
adoption relating to prior years was to record a future income tax
liability of $949,000, decrease the Companys retained earnings by
$431,000 and increase property and equipment by $518,000.                                                                                                                                                                                                                                      
|  
|   |  | The provision for current and future income taxes differs from the amount
computed by applying the combined federal and provincial tax rate of
42.12% (2001 and 2000 - 42.62%) to earnings before income taxes. The
difference results from the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-35



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)

|                                                        |                                 |   |        |        |      |   |       |        |   |   |       |        |  
|------------------------------------------------------- | ------------------------------- | - | ------ | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                                                        |                                 |   | 2002   |        | 2001 |   | 2000 
|                                                        |                                 |   |        |        |      |   |      
|Computed expected provision (recovery)
for income taxes |                                 | $ | (131   | )      |      | $ | 8,750 |        |   | $ | 8,471 |       
|Effect on taxes of:                                     |                                 |   |        |        |      |   |       |        |   |   |       |       
|                                                        | Non-deductible crown royalties  |   |        | 4,308  |      |   |       | 6,270  |   |   |       | 3,242  |  
|                                                        | Alberta royalty tax credit      |   |        | (134   | )    |   |       | (213   | ) |   |       | (230   | )
|                                                        | Resource allowance              |   |        | (4,593 | )    |   |       | (7,105 | ) |   |       | (4,395 | )
|                                                        | Decrease in provincial tax rate |   |        | (685   | )    |   |       | (2,677 | ) |   |       |       |  
|                                                        | Capital taxes                   |   |        | 119    |      |   |       | 381    |   |   |       |       |  
|                                                        | Other                           |   |        | (81    | )    |   |       | (787   | ) |   |       | 110    |  
|                                                        |                                 |   |        |        |      |   |       |        |   |   |       |       
|                                                        |                                 | $ | (1,197 | )      |      | $ | 4,619 |        |   | $ | 7,198 |       
|                                                        |                                 |   |        |        |      |   |       |        |   |   |       |       



| |  | The major components of the future income tax liability at December 31,
2002 and 2001 using the combined federal and provincial income tax rates
of 42.12% (2001 - 42.62%) are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              |                      |   |                              |         |      |   |         |         |  
|--------------------------------------------- | -------------------- | - | ---------------------------- | ------- | ---- | - | ------- | ------- | -
|                                              |                      |   | Future Tax Asset (Liability)
|                                              |                      |   |                             
|                                              |                      |   | 2002                         |         | 2001
|                                              |                      |   |                              |         |     
|Property and equipment                        |                      | $ | (58,740                      | )       |      | $ | (59,476 | )      
|Future site restoration and abandonment costs |                      |   | 1,133                        |         |      |   | 1,112   |        
|                                              |                      |   |                              |         |      |   |         |        
|                                              | Balance, December 31 |   | $                            | (57,607 | )    |   | $       | (58,364 | )
|                                              |                      |   |                              |         |      |   |         |        



|7. |  | Share Capital
|-- |  | -------------
|  
|   |  | Authorized   

Unlimited number of common shares
Unlimited number of preferred shares



| |  | Common shares issued:
| |  | ---------------------

|                           |                      |  |            |         |               |   |        |     |               |  |            |           |               |   |        |       |  |  |            |         |  |   |        |     | 
|-------------------------- | -------------------- |  | ---------- | ------- | ------------- | - | ------ | --- | ------------- |  | ---------- | --------- | ------------- | - | ------ | ----- |  |  | ---------- | ------- |  | - | ------ | --- | 
|                           |                      |  | 2002       |         | 2001          |   | 2000  
|                           |                      |  |            |         |               |   |       
|                           |                      |  | Number     |         | Consideration |   | Number |     | Consideration |  | Number     |           | Consideration
|                           |                      |  |            |         |               |   |        |     |               |  |            |           |              
|Balance, beginning of year |                      |  | 23,908,157 |         |               | $ | 22,284 |     |               |  | 19,517,888 |           |               | $ | 17,014 |       |  |  | 19,388,588 |         |  | $ | 16,864 |    
|Shares issued              |                      |  |            |         |               |   |        |     |               |  |            |           |               |   |        |       |  |  |            |         |  |   |        |    
|                           | Exercise of options  |  |            | 462,869 |               |   |        | 613 |               |  |            | 583,537   |               |   |        | 702   |  |  |            | 123,300 |  |   |        | 146 | 
|                           | Exercise of warrants |  |            |        |               |   |        |    |               |  |            | 3,806,732 |               |   |        | 4,568 |  |  |            | 6,000   |  |   |        | 7   | 
|Share issue costs          |                      |  |           |         |               |   |       |     |               |  |           |           |               |   |       |       |  |  |           |         |  |   | (3     | )  
|                           |                      |  |            |         |               |   |        |     |               |  |            |           |               |   |        |       |  |  |            |         |  |   |        |    
|Balance, end of year       |                      |  | 24,371,026 |         |               | $ | 22,897 |     |               |  | 23,908,157 |           |               | $ | 22,284 |       |  |  | 19,517,888 |         |  | $ | 17,014 |    
|                           |                      |  |            |         |               |   |        |     |               |  |            |           |               |   |        |       |  |  |            |         |  |   |        |    

F-36



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |  | Warrants issued and outstanding:
| |  | --------------------------------

|                    |  |              |           |        |  |           |   |               |  |             |            |              |  |  |   |  |  |                    |  | 
|------------------- |  | ------------ | --------- | ------ |  | --------- | - | ------------- |  | ----------- | ---------- | ------------ |  |  | - |  |  | ------------------ |  | 
|                    |  | December 31, |           |        |  |           |   |               |  |             |            | December 31, |  |  |   | 
|                    |  | 2000         |           | Issued |  | Exercised |   | 2001 and 2002 |  | Expiry date
|                    |  |              |           |        |  |           |   |               |  |            
|2000 issue at $1.20 |  |              | 6,344,562 |        |  |           |  |               |  |             | (6,344,562 | )            |  |  |  |  |  | September 15, 2001



| |  | In September 1999, the Company completed a private placement of 6,354,562
common shares in exchange for cash of $3,710,534 and marketable
securities of $836,739. Attached to these private placement shares
issued were 6,354,562 share purchase warrants. Each warrant entitled the
holder to acquire 0.6 of one common share and the purchase price for each
whole common share acquired was $1.20. During the year ended December
31, 2000, 10,000 warrants were exercised to acquire 6,000 common shares.
The remaining warrants outstanding at December 31, 2000 were exercised
during the fiscal year 2001 to acquire 3,806,732 shares.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Options



| |  | The Board of Directors has approved the granting of options to certain
directors, officers and employees to purchase the Companys common
shares.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A summary of the status and changes in the number of the Companys stock
options is presented below:                                             

|                                                                     |           |  |           |          |          |   |           |      |          |  |           |           |          |   |      |      |  |  |           |          |   |   |      |      | 
|-------------------------------------------------------------------- | --------- |  | --------- | -------- | -------- | - | --------- | ---- | -------- |  | --------- | --------- | -------- | - | ---- | ---- |  |  | --------- | -------- | - | - | ---- | ---- | 
|                                                                     |           |  | 2002      |          | 2001     |   | 2000     
|                                                                     |           |  |           |          |          |   |          
|                                                                     |           |  |           |          |          |   | Weighted  |      |          |  |           |           | Weighted |   |      |      |  |  | Weighted 
|                                                                     |           |  |           |          |          |   | Average   |      |          |  |           |           | Average  |   |      |      |  |  | Average  
|                                                                     |           |  | Number of |          | Exercise |   | Number of |      | Exercise |  | Number of |           | Exercise
|                                                                     |           |  | Options   |          | Price    |   | Options   |      | Price    |  | Options   |           | Price   
|                                                                     |           |  |           |          |          |   |           |      |          |  |           |           |         
|Outstanding, beginning of
year (see note below on
re-priced options) |           |  | 2,086,106 |          |          | $ | 2.81      |      |          |  | 1,867,643 |           |          | $ | 1.39 |      |  |  | 1,781,443 |          |   | $ | 1.19 |     
|                                                                     | Granted   |  |           | 702,500  |          |   | $         | 3.10 |          |  |           | 1,072,000 |          |   | $    | 5.59 |  |  |           | 209,500  |   |   | $    | 2.92 | 
|                                                                     | Exercised |  |           | (462,869 | )        |   | $         | 1.32 |          |  |           | (583,537  | )        |   | $    | 1.20 |  |  |           | (123,300 | ) |   | $    | 1.18 | 
|                                                                     | Cancelled |  |           | (228,300 | )        |   | $         | 4.21 |          |  |           | (270,000  | )        |   | $    | 4.75 |  |  |           |         |   |   |      |     | 
|                                                                     |           |  |           |          |          |   |           |      |          |  |           |           |          |   |      |      |  |  |           |          |   |   |      |     
|Outstanding, end of year                                             |           |  | 2,097,437 |          |          | $ | 3.08      |      |          |  | 2,086,106 |           |          | $ | 3.16 |      |  |  | 1,867,643 |          |   | $ | 1.39 |     
|                                                                     |           |  |           |          |          |   |           |      |          |  |           |           |          |   |      |      |  |  |           |          |   |   |      |     
|Options exercisable, end of
year                                     |           |  | 547,100   |          |          | $ | 2.54      |      |          |  | 1,166,606 |           |          | $ | 1.36 |      |  |  | 996,337   |          |   | $ | 1.26 |     
|                                                                     |           |  |           |          |          |   |           |      |          |  |           |           |          |   |      |      |  |  |           |          |   |   |      |     

F-37



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |  | Options outstanding at December 31, 2002:
| |  | -----------------------------------------

|                |  |                     |           |                     |  |           |     |             |  |         |      |          |  |           |         |          |  |  |     |  |  |   |      | 
|--------------- |  | ------------------- | --------- | ------------------- |  | --------- | --- | ----------- |  | ------- | ---- | -------- |  | --------- | ------- | -------- |  |  | --- |  |  | - | ---- | 
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           |                     |  | Average   |     | Weighted    |  |         |      |          |  | Average   |         | Weighted
|                |  |                     |           |                     |  | Remaining |     | Average     |  |         |      |          |  | Remaining |         | Average 
|Range of        |  | Number              |           | Life in             |  | Exercise  |     | Number      |  | Life in |      | Exercise
|Exercise Prices |  | Outstanding         |           | Years               |  | Price     |     | Exercisable |  | Years   |      | Price   
|                |  |                     |           |                     |  |           |     |             |  |         |      |         
|$0.75 - 1.65    |  |                     | 540,837   |                     |  |           | 1.4 |             |  | $       | 0.92 |          |  |           | 267,600 |          |  |  | 1.2 |  |  | $ | 1.03 | 
|$2.15 - 3.60    |  |                     | 1,230,400 |                     |  |           | 4.1 |             |  | $       | 3.26 |          |  |           | 209,700 |          |  |  | 3.5 |  |  | $ | 3.31 | 
|$6.00 - 6.00    |  |                     | 326,200   |                     |  |           | 4.0 |             |  | $       | 6.00 |          |  |           | 69,800  |          |  |  | 4.0 |  |  | $ | 6.00 | 
|                |  |                     |           |                     |  |           |     |             |  |         |      |          |  |           |         |          |  |  |     |  |  |   |      | 
|                |  |                     | 2,097,437 |                     |  |           |     |             |  |         |      |          |  |           | 547,100 |          |  |  |     |  |  |   |      | 
|                |  |                     |           |                     |  |           |     |             |  |         |      |          |  |           |         |          |  |  |     |  |  |   |      | 



| |  | The Company presently has the maximum number of options allowed under the
plan fixed at 4,500,000, which is reduced to 3,084,800 after deducting
options previously granted and exercised. This maximum is further
restricted so as not to exceed 10 percent of the actual shares issued and
outstanding at any time. At December 31, 2002 the number of shares
issued and outstanding was 24,371,026 and, therefore, the maximum number
of options permitted to be issued was 2,437,103.                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company re-priced a total of 206,500 stock options with an original
average price of $7.14 per share on May 1, 2002 to certain non-management
employees. These options were re-priced at $3.60 per share and
re-aligned the options more closely with the current market price of the
shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Beginning of the year weighted average exercise prices have been restated
to reflect the re-pricings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Company does not record compensation expense for stock options
granted to employees and directors in the financial statements because
there is no intrinsic value, as defined by CICA section 3870, at the date
of grant. Had the fair value method been used, the total expense related
to the year ended December 31, 2002 for stock options granted or modified
subsequent to December 31, 2001, would be $163,525. The resulting effect
would be to decrease net earnings by $163,525 and reduce both basic and
diluted earnings per share by $0.01. The fair value of options granted
and modified has been estimated using the Black-Scholes option-pricing
model assuming a risk free interest rate of 5.1 percent, expected average
volatility of 83 percent, expected weighted average life of 5.75 years
and no annual dividends paid.
|
| |  | The weighted average fair value of options granted during 2002 was $2.26
at the date grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-38



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



|8. |  | Per Share Amounts
|-- |  | -----------------

|        |                                               |  |      |            |      |  |      |            |  |  |   |            | 
|------- | --------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|        |                                               |  | 2002 |            | 2001 |  | 2000
|        |                                               |  |      |            |      |  |     
|Basic   |                                               |  |      |            |      |  |      |            |  |  |   |           
|        | Earnings per share                            |  | $    | 0.04       |      |  | $    | 0.70       |  |  | $ | 0.61       | 
|        | Cash flow from operations per share           |  | $    | 1.28       |      |  | $    | 2.05       |  |  | $ | 1.29       | 
|        | Weighted average number of shares
outstanding |  |      | 24,093,888 |      |  |      | 22,599,501 |  |  |   | 19,452,588 | 
|Diluted |                                               |  |      |            |      |  |      |            |  |  |   |           
|        | Earnings per share                            |  | $    | 0.04       |      |  | $    | 0.64       |  |  | $ | 0.51       | 
|        | Cash flow from operations per share           |  | $    | 1.25       |      |  | $    | 1.87       |  |  | $ | 1.07       | 
|        | Weighted average number of shares
outstanding |  |      | 24,733,283 |      |  |      | 24,727,002 |  |  |   | 23,283,800 | 



|   |  | The number of shares used to calculate diluted earnings and cash flow
from operations per share for the year ended December 31, 2002 of
24,733,283 included the weighted average number of shares outstanding
24,093,888 plus 639,395 shares related to the dilutive effect of stock
options.                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The number of shares used to calculate diluted earnings and cash flow
from operations per share for the year ended December 31, 2001 of
24,727,002 included the weighted average number of shares outstanding of
22,599,501 plus 2,127,501 shares related to the dilutive effect of stock
options.             
|  
|   |  | The number of shares used to calculate diluted earnings and cash flow
from operations per share for the year ended December 31, 2000 of
23,283,800 included the weighted average number of shares outstanding of
19,452,588 plus 3,831,212 shares related to the dilutive effect of stock
options and warrants.
|  
|   |  | The respective exercise price of the stock options and warrants excluded
from the diluted earnings and cash flow from operations per share
calculations for 2002, 2001 and 2000 exceeded the average market price of
the common shares, and therefore the effect would be anti-dilutive.                       
|  
|9. |  | Cash Flow Information                                                                                                                                                                                                                                                                                          
|  
|   |  | Changes in non-cash working capital is comprised of the following:                                                                                                                                                                                                                                             

|                                         |  |      |        |      |  |      |       |   |  |   |        |  
|---------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                         |  | 2002 |        | 2001 |  | 2000
|                                         |  |      |        |      |  |     
|Accounts receivable                      |  | $    | (2,406 | )    |  | $    | 1,006 |   |  | $ | (7,586 | )
|Deposits and other                       |  |      | (141   | )    |  |      | (531  | ) |  |   | (20    | )
|Accounts payable and accrued liabilities |  |      | (2,127 | )    |  |      | 4,675 |   |  |   | 6,927  |  
|Income taxes payable                     |  |      | (305   | )    |  |      | (608  | ) |  |   |       |  
|Marketable securities                    |  |      |       |      |  |      |      |   |  |   | 379    |  
|                                         |  |      |        |      |  |      |       |   |  |   |        |  
|                                         |  | $    | (4,979 | )    |  | $    | 4,542 |   |  | $ | (300   | )
|                                         |  |      |        |      |  |      |       |   |  |   |        |  

F-39



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |  | The following shows the actual cash amounts paid in the current year
excluding any accruals:
| |  | --------------------------------------------------------------------------------------------

|              |  |      |       |      |  |      |       |  |  |   |       | 
|------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|              |  | 2002 |       | 2001 |  | 2000
|              |  |      |       |      |  |     
|Interest paid |  | $    | 2,451 |      |  | $    | 3,691 |  |  | $ | 1,144 | 
|Taxes paid    |  | $    | 330   |      |  | $    | 2,000 |  |  | $ | 135   | 



|10. |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The nature of the Companys operations result in exposure to fluctuations
in commodity prices. The Company monitors and when appropriate, utilizes
financial instruments to manage its exposure to these risks. The Company
deals only with major financial institutions and purchasers and does not
anticipate non-performance by the counter parties.                                                                                                                                      
|   
|    |  | The Company uses natural gas agreements to hedge anticipated sales of
natural gas. At December 31, 2002, the Company had entered into physical
gas contracts at pre-determined prices to sell 2,685,000 gigajoules (GJ)
at a weighted average price of $4.67 per GJ in 2003.                                                                                                                                                                                                                 
|   
|    |  | Also, at December 31, 2002, the Company had entered into natural gas put
option contracts at pre-determined floor prices at a weighted average
price of $4.48 for 1,350,000 GJs in 2003.                                                                                                                                                                                                                                                                                                     
|   
|    |  | In addition, in conjunction with the Benson transaction, the Company
assumed a commitment to sell 635 GJs per day of natural gas until October
2009 at a price of $1.959 per GJ.                                                                                                                                                                                                                                                                                                             
|   
|    |  | Further, the Company has committed to sell 13,500 barrels of oil at a
price of $45.15 per barrel in 2003.                                                                                                                                                                                                                                                                                                                                                                                    
|   
|11. |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company, in the normal course of operations, is subject to a variety
of legal and other claims against the Company. Management and the
Companys legal counsel evaluate all claims on their apparent merits, and
accrue managements best estimate of the likely costs to satisfy such
claims. Management believes that the outcome of legal and
other claims filed against the Company will not have a significant impact
on the Companys financial position, operations or cash flows.

F-40



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



|12. |  | Comparative Figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Certain of the comparative figures have been reclassified to conform to
the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|13. |  | Reconciliation to United States Generally Accepted Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The consolidated financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting principles
(Canadian GAAP), which in most respects, conform to accounting
principles generally accepted in the United States of America (U.S.
GAAP). Differences from U.S. GAAP having a significant effect on the
Companys consolidated balance sheets and consolidated statements of
operations and of cash flows are described and quantified below for the
years indicated:



| | (a) |  | Under U.S. GAAP, the carrying value of petroleum and natural
gas property and equipment at the balance sheet date, net of
deferred income taxes and accumulated site restoration and
abandonment liability, is limited to the present value of after-tax
future net revenue from proven reserves, discounted at 10 percent,
plus the lower of cost and fair value of unproved petroleum and
natural gas properties. Under Canadian GAAP, the ceiling test
calculation is performed using undiscounted after-tax net revenues,
less future estimated general and administrative and financing costs
plus the lower of cost and fair value of unproved petroleum and
natural gas properties. Had the ceiling test been applied in
accordance with U.S. GAAP, a write-down for the year ended December
31, 1997 would have been recorded in the amount of $6,018,000
($3,400,000 after tax). The application of the full cost ceiling
test under U.S. GAAP did not result in a write-down of capitalized
costs for the years ended December 31, 2002, 2001 or 2000, or for
any other prior period. Periods for which the ceiling test was
calculated using pricing subsequent to the balance sheet date and
the resulting impacts are described below.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | At June 30, 2001, the net capitalized costs of petroleum and natural
gas properties exceeded the present value of estimated future cash
flows by $6,947,000 using prices of $2.98 per mcf for natural gas.
However, subsequent to June 30, 2001, commodity prices increased to
$4.12 per mcf for gas based on pricing as at a date close to the
release of the Companys financial statements. Using the increased
subsequent prices at June 30, 2001, the carrying value of the
Companys petroleum and natural gas properties did not exceed the
present value of the estimated future cash flows; and accordingly, no
further write-down was recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | At September 30, 2001, the net capitalized costs of petroleum and
natural gas properties exceeded the present value of estimated future
cash flows by $29,902,000 using prices of $1.88 per mcf for natural
gas and $27.72 per bbl for oil. However,
subsequent to September 30, 2001, commodity prices increased to $3.42
per mcf for gas and $23.91 per bbl for oil based on pricing at a date
close to the release of the Companys financial statements. Using
the increased subsequent prices at                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-41



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |     |  | September 30, 2001, the carrying
value of the Companys petroleum and natural gas properties did not
exceed the present value of the estimated future cash flows; and
accordingly, no further write-down was recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | At December 31, 2001, the net capitalized costs of petroleum and
natural gas properties exceeded the present value of estimated future
cash flows by $11,101,000 using prices of $3.50 per mcf for natural
gas and $26.33 per bbl for oil. However, subsequent to September 30,
2001, commodity prices increased to $4.75 per mcf for gas and $34.61
per bbl for oil based on pricing at a date close to the release of the
Companys financial statements. Using the increased subsequent
prices at December 31, 2001, the carrying value of the Companys
petroleum and natural gas properties did not exceed the present value
of the estimated future cash flows; and accordingly, no further
write-down was recorded.                                                                
|
| |     |  | At June 30, 2002, the net capitalized costs of petroleum and natural
gas properties exceeded the present value of estimated future cash
flows by $15,946,000 using prices of $2.08 per mcf for natural gas and
$36.53 per bbl for oil. However, subsequent to June 30, 2002,
commodity prices increased to $3.02 per mcf for gas and $39.10 per bbl
for oil based on pricing at a date close to the release of the
Companys financial statements. Using the increased subsequent
prices at June 30, 2002, the carrying value of the Companys petroleum
and natural gas properties did not exceed the present value of the
estimated future cash flows; and accordingly, no further write-down
was recorded.                                                                             
|
| | (b) |  | Prior to 2000, Canadian GAAP required the use of the deferral
method of accounting for income taxes. For fiscal periods beginning
on or after January 1, 2000, retroactive adoption of the liability
method of accounting for income taxes was required, which is
substantially the same as Financial Accounting Standards Board
Statement No. 109 under U.S. GAAP. Upon adoption of the new
recommendation for Canadian GAAP, companies were permitted to record
the impact of differences in accounting and tax bases to retained
earnings as a one-time transition adjustment, accordingly,
cumulative opening retained earnings at January 1, 2000 are the same
under both Canadian and U.S. GAAP.                                                                                    
|
| | (c) |  | Under U.S. GAAP, all derivative instruments are to be
recognized on the balance sheet as either an asset or a liability
measured at fair value. Changes in the fair value of derivatives are
recognized in earnings unless specific hedge criteria are met. As
the criteria for hedge treatment was not in place with respect to
the Companys fixed forward price commodity and option contracts, an
adjustment of $1,857,000 ($1,075,000 after tax) and $1,848,000
($1,060,000 after tax) for the years ended December 31, 2002 and
2001, respectively would be required under U.S. GAAP. In addition,
a cumulative adjustment amount of $2,471,000 ($1,418,000 after tax)
upon adoption of Financial Accounting Standards Board Statement No.
133 would be required at January 1, 2001.

F-42



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| | (d) |  | Under U.S. GAAP, all shares designated as available-for-sale
are to be recorded in the balance sheet at market value at the end
of the period with unrealized gains recorded as other comprehensive
income. Under Canadian GAAP, other comprehensive income is not
presented, and temporary investments are recorded at market only
when the market value of the investments has declined below the
carrying value. The impact of recording the shares
available-for-resale at market value under U.S. GAAP would result in
an increase in the carrying value of the shares of $863,000 and an
increase in future income tax liability of $184,000 at December 31,
2002, and an increase in other comprehensive income of $863,000
($679,000 after tax) for the year ended December 31, 2002.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (e) |  | As a result of the Canadian  U.S. GAAP differences resulting
from the ceiling test write-down as outlined in (a), depletion and
depreciation expense and property and equipment under U.S. GAAP
would have been decreased for each of the years ended December 31,
2002, 2001 and 2000 in the amount of $563,000, $524,000, and
$603,000, respectively. The cumulative decrease in depletion and
depreciation expense for years prior to 2000 was $1,407,000.                                                                                                                                                                                                                                                                                                                               
|
| | (f) |  | Future income taxes have been adjusted for the years ended
December 31, 2002, 2001 and 2000 for the tax impact of the Canadian
 U.S. GAAP differences outlined in (a) through (e). The impact
under U.S. GAAP for each of the years ended December 31, 2002 and
2001 to decrease future income tax expense by $545,000 and $564,000,
respectively, and to increase future income tax expense for the year
ended December 31, 2000 by $269,000. The cumulative decrease in
future income tax expense for years prior to 2000 was $1,992,000.                                                                                                                                                                                                                                                 
|
| | (g) |  | Prior to 2001, Canadian GAAP required the use of the imputed
earnings method for purposes of the calculation of fully diluted
earnings per share. For fiscal periods beginning on or after
January 1, 2001, retroactive application of the treasury stock
method with restatement of prior periods is required, which is
substantially the same as Financial Accounting Standards Board
Statement No. 128 under U.S. GAAP. Accordingly, no adjustments are
required to conform the diluted earnings per share figures to U.S.
GAAP, except for the net income effect of the above-noted Canadian 
U.S. GAAP differences identified.                                                                                                                                                         



| |  | The application of U.S. GAAP would have the following effects on the
Statements of Operations and Comprehensive Income:
| |  | -----------------------------------------------------------------------------------------------------------------------

|                                              |                                                  |   |                          |        |      |   |        |        |   |   |        |     | 
|--------------------------------------------- | ------------------------------------------------ | - | ------------------------ | ------ | ---- | - | ------ | ------ | - | - | ------ | --- | 
|                                              |                                                  |   | Years Ended December 31,
|                                              |                                                  |   |                         
|                                              |                                                  |   | 2002                     |        | 2001 |   | 2000  
|                                              |                                                  |   |                          |        |      |   |       
|Net earnings, as reported under Canadian GAAP |                                                  | $ | 887                      |        |      | $ | 15,912 |        |   | $ | 11,765 |    
|                                              | Derivative financial instruments (c)             |   |                          | (1,857 | )    |   |        | (1,848 | ) |   |        |    | 
|                                              | Depreciation, depletion and site restoration (e) |   |                          | 563    |      |   |        | 524    |   |   |        | 603 | 

F-43



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)

|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------- | - | ------------------------ | ----- | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                                                                                  |                                                                      |   | Years Ended December 31,
|                                                                                  |                                                                      |   |                         
|                                                                                  |                                                                      |   | 2002                     |       | 2001 |   | 2000  
|                                                                                  |                                                                      |   |                          |       |      |   |       
|                                                                                  | Future income taxes (f)                                              |   |                          | 545   |      |   |        | 564    |   |   |        | (269 | )
|                                                                                  | Cumulative effect on prior years of FAS 133
adoption, net of tax (c) |   |                          |      |      |   |        | (1,418 | ) |   |        |     |  
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Net earnings, U.S. GAAP                                                           |                                                                      | $ | 138                      |       |      | $ | 13,734 |        |   | $ | 12,099 |     
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Other comprehensive income, gain on
available-for-sale securities, net of tax (d) |                                                                      |   | 679                      |       |      |   |       |        |   |   |       |     
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Comprehensive income, U.S. GAAP                                                   |                                                                      | $ | 817                      |       |      | $ | 13,734 |        |   | $ | 12,099 |     
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Basic earnings per share, as reported under
Canadian GAAP                         |                                                                      | $ | 0.04                     |       |      | $ | 0.70   |        |   | $ | 0.61   |     
|                                                                                  | Effect of increase (decrease) in net earnings
under U.S. GAAP        |   |                          | (0.03 | )    |   |        | (0.09  | ) |   |        | 0.01 |  
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Basic earnings (loss) per share, U.S. GAAP (g)                                    |                                                                      | $ | 0.01                     |       |      | $ | 0.61   |        |   | $ | 0.62   |     
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Diluted earnings per share, as reported under
Canadian GAAP                       |                                                                      | $ | 0.04                     |       |      | $ | 0.64   |        |   | $ | 0.51   |     
|                                                                                  | Effect of increase (decrease) in net earnings
under U.S. GAAP        |   |                          | (0.03 | )    |   |        | (0.09  | ) |   |        | 0.01 |  
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  
|Diluted earnings per share, U.S. GAAP (g)                                         |                                                                      | $ | 0.01                     |       |      | $ | 0.55   |        |   | $ | 0.52   |     
|                                                                                  |                                                                      |   |                          |       |      |   |        |        |   |   |        |      |  



| |  | The application of U.S. GAAP would have the following effects on the
Balance Sheets:
| |  | ------------------------------------------------------------------------------------

|                                     |  |                         |         |                         |  |      |        |                |  |            |         |            |  |   |         |  |  |   |        |   |  |   |         | 
|------------------------------------ |  | ----------------------- | ------- | ----------------------- |  | ---- | ------ | -------------- |  | ---------- | ------- | ---------- |  | - | ------- |  |  | - | ------ | - |  | - | ------- | 
|                                     |  | As At December 31, 2002 |         | As At December 31, 2001
|                                     |  |                         |         |                        
|                                     |  | As                      |         | Cumulative              |  |      |        |                |  | As         |         | Cumulative |  |   |         | 
|                                     |  | Reported Under          |         | Increase                |  | U.S. |        | Reported Under |  | Increase   |         | U.S.      
|                                     |  | Canadian GAAP           |         | (Decrease)              |  | GAAP |        | Canadian GAAP  |  | (Decrease) |         | GAAP      
|                                     |  |                         |         |                         |  |      |        |                |  |            |         |           
|ASSETS                               |  |                         |         |                         |  |      |        |                |  |            |         |            |  |   |         |  |  |   |        |   |  |   |         | 
|Marketable Securities (d)            |  | $                       | 750     |                         |  | $    | 863    |                |  | $          | 1,613   |            |  | $ |        |  |  | $ |       |   |  | $ |        | 
|Property and equipment
(a)(e)        |  |                         | 160,271 |                         |  |      | (2,921 | )              |  |            | 157,350 |            |  |   | 182,701 |  |  |   | (3,484 | ) |  |   | 179,217 | 
|LIABILITIES                          |  |                         |         |                         |  |      |        |                |  |            |         |            |  |   |         |  |  |   |        |   |  |   |         | 
|Derivative financial
instruments (c) |  |                         |        |                         |  |      | 6,176  |                |  |            | 6,176   |            |  |   |        |  |  |   | 4,319  |   |  |   | 4,319   | 
|Future income taxes (f)              |  |                         | 57,607  |                         |  |      | (3,701 | )              |  |            | 53,906  |            |  |   | 58,364  |  |  |   | (3,340 | ) |  |   | 55,024  | 

F-44



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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)

|                                           |                      |  |                         |  |                         |  |        |   |                |  |            |  |            |  |        |  |  |  |        |   |  |  |        |  | 
|------------------------------------------ | -------------------- |  | ----------------------- |  | ----------------------- |  | ------ | - | -------------- |  | ---------- |  | ---------- |  | ------ |  |  |  | ------ | - |  |  | ------ |  | 
|                                           |                      |  | As At December 31, 2002 |  | As At December 31, 2001
|                                           |                      |  |                         |  |                        
|                                           |                      |  | As                      |  | Cumulative              |  |        |   |                |  | As         |  | Cumulative |  |        |  | 
|                                           |                      |  | Reported Under          |  | Increase                |  | U.S.   |   | Reported Under |  | Increase   |  | U.S.      
|                                           |                      |  | Canadian GAAP           |  | (Decrease)              |  | GAAP   |   | Canadian GAAP  |  | (Decrease) |  | GAAP      
|                                           |                      |  |                         |  |                         |  |        |   |                |  |            |  |           
|                                           | SHAREHOLDERS
EQUITY |  |                         |  |                         |  |        |   |                |  |            |  |            |  |        |  |  |  |        |   |  |  |        |  | 
|Retained earnings
(a)(c)(e)(f)             |                      |  | 29,061                  |  |                         |  | (5,212 | ) |                |  | 23,849     |  |            |  | 28,174 |  |  |  | (4,463 | ) |  |  | 23,711 | 
|Accumulated other
comprehensive income (d) |                      |  |                        |  |                         |  | 679    |   |                |  | 679        |  |            |  |       |  |  |  |       |   |  |  |       | 



| |  | The application of U.S. GAAP would have the following effects on the
Statements of Cash Flows:
| |  | ----------------------------------------------------------------------------------------------

|                                                 |                                                          |   |                          |       |      |   |        |        |   |   |        |      |  
|------------------------------------------------ | -------------------------------------------------------- | - | ------------------------ | ----- | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                                                 |                                                          |   | Years Ended December 31,
|                                                 |                                                          |   |                         
|                                                 |                                                          |   | 2002                     |       | 2001 |   | 2000  
|                                                 |                                                          |   |                          |       |      |   |       
|OPERATING ACTIVITIES                             |                                                          |   |                          |       |      |   |        |        |   |   |        |     
|Cash flow from operating activities, as reported |                                                          | $ | 25,923                   |       |      | $ | 50,802 |        |   | $ | 24,709 |     
|Increase (decrease) in:                          |                                                          |   |                          |       |      |   |        |        |   |   |        |     
|                                                 | Net earnings                                             |   |                          | (749  | )    |   |        | (2,178 | ) |   |        | 334  |  
|                                                 | Depletion and depreciation (e)                           |   |                          | (563  | )    |   |        | (524   | ) |   |        | (603 | )
|                                                 | Future income taxes (f)                                  |   |                          | (545  | )    |   |        | (564   | ) |   |        | 269  |  
|                                                 | Derivative financial instruments (c)                     |   |                          | 1,857 |      |   |        | 1,848  |   |   |        |     |  
|                                                 | Cumulative effect on prior years of FAS 133
adoption (c) |   |                          |      |      |   |        | 1,418  |   |   |        |     |  
|                                                 |                                                          |   |                          |       |      |   |        |        |   |   |        |     
|Cash flow from operating activities, U.S. GAAP   |                                                          | $ | 25,923                   |       |      | $ | 50,802 |        |   | $ | 24,709 |     
|                                                 |                                                          |   |                          |       |      |   |        |        |   |   |        |     



| |  | Under Canadian GAAP, companies are permitted to present a sub-total prior
to changes in non-cash working capital within operating activities. This
information is perceived to be useful information for various users of
the financial statements and is commonly presented by Canadian public
companies. Under U.S. GAAP, this sub-total is not permitted to be shown
and would be removed in the statements of cash flows for all periods
presented. In addition, cash flow from operations per share figures
would not be presented under U.S. GAAP.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



| |  | Recent U.S. Accounting Developments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Statement No. 143, Accounting for Asset Retirement Obligations (FAS
143) was released by the Financial Accounting Standards Board
(FASB) in June
2001. FAS 143 requires liability recognition for retirement obligations
associated with tangible long-lived assets. The initial amount of the
asset retirement obligation is to be recorded at fair value. The
asset retirement cost equal to the fair value of the retirement
obligation is to be capitalized as part of the cost of the related
long-lived asset and amortized to expense over the useful life of the
asset. Enterprises are required to adopt FAS 143 for fiscal years
beginning after June 15, 2002. The future impact on the Companys
financial position and results of operations has not yet been determined.                                                                                                                                                                                                                                                           
|
| |  | The FASB also recently issued Statement
No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets
(FAS 144). FAS 144 will replace previous United States generally
accepted accounting principles regarding accounting for impairment of
long-lived assets and accounting and reporting for discontinued
operations. FAS 144 retains the fundamental provisions of the prior
standard for recognizing and measuring impairment losses on long-lived
assets. FAS 144 retains the basic provisions of the prior standard for
presentation of discontinued operations in the income statement, but
broadens that presentation to include a component of an entity rather
than a segment of a business. Enterprises are required to adopt FAS 144
for fiscal years beginning after December 15, 2001. The Company adopted
the accounting standard effective January 1, 2002. The standard did not
have a significant impact on the Companys financial position as at
December 31, 2002 or results of operations for the year then ended.
|
| |  | In April 2002, the FASB issued FAS No. 145, Rescission of FASB No. 4,
44, and 64, Amendments of FASB Statement No. 13 and Technical
Corrections (FAS 145). FAS 145 clarifies guidance related to the
reporting of gains and losses from extinguishment of debt and resolves
inconsistencies related to the required accounting treatment of certain
lease modifications. SFAS 145 also amends other existing pronouncements
to make various technical corrections, clarify meanings or describe their
applicability under changed conditions. The provisions relating to the
reporting of gains and losses from extinguishment of debt were effective
beginning January 1, 2003, the future impact of which on the Companys
financial position and results of operations has not yet been determined.
All other provisions of this standard have been effective for the
Company as of May 15, 2002 and did not have a significant impact on the
Companys financial position or results of operations.                                            
|
| |  | In June 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (FAS 146). FAS 146
requires costs associated with exit or disposal activities to be
recognized when they are incurred rather than at the date of commitment
to an exit or disposal plan. FAS 146 was effective beginning January 1,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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##### Table of Contents



SOUTHWARD ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(all tabular amounts are in $ thousands except for share and per share amounts)



|    |  | 2003. The future impact of this standard on the Companys financial
position or results of operations has not yet been determined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In January 2003, the FASB issued
Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure re: Amendment
of FAS 123. FAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting and the effect of the method on
reported results. This statement has no material impact on the
Company, as there is no current plan to adopt the fair value method
of accounting for stock-based compensation.
|   
|14. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | On March 17, 2003, the Company announced it had entered into an
arrangement agreement, pursuant to which all of the outstanding common
shares of the Company will be acquired by an unrelated third party for
cash proceeds of $4.77 per common share. The transaction is subject to
approval by a minimum of 66 2/3 percent of the votes cast
by the Companys shareholders and option holders attending a special
meeting that is being held on April 28, 2003 to vote on the transaction,
as well as judicial and regulatory approvals.                                                                                                                                                                

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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                
|------- |  | -------------------------------------------------------------------------------
|Exhibit |  |                                                                                
|Number  |  | Description                                                                    
|        |  |                                                                                
|1.1(1)  |  | Articles of Incorporation of the Company dated February 14, 1994.              
|        |  |                                                                                
|1.2(1)  |  | Articles of Amendment of the Company dated March 31, 1994.                     
|        |  |                                                                                
|1.3(1)  |  | Articles of Amendment of the Company dated July 12, 1994.                      
|        |  |                                                                                
|1.4     |  | Articles of Arrangement of the Company dated May 8, 2002.                      
|        |  |                                                                                
|1.5     |  | Restated Articles of Incorporation of the Company dated May 8, 2002.           
|        |  |                                                                                
|1.6     |  | Articles of Amendment and Restated Articles of the Company dated April 3, 2003.
|        |  |                                                                                
|1.7     |  | Articles of Amendment and Restated Articles of the Company dated April 3, 2003.
|        |  |                                                                                
|1.8(1)  |  | By-Law Number 1 of the Company dated March 31, 1994.                           
|        |  |                                                                                
|4.1(1)  |  | Stock Option Plan of the Company                                               
|        |  |                                                                                
|10.1    |  | Certification under Section 906 of the Sarbanes-Oxley Act                      

|      |  |                                  |  |  |  | 
|----- |  | -------------------------------- |  |  |  | 
|Note: |  |                                  |  |  |  | 
|     
|(1)   |  | Previously filed by the Company.

I-1