##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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 001-32438
 JMG Exploration, Inc.
 (Exact name of registrant as specified in its charter)
 Nevada
(Jurisdiction of incorporation)
    
    20-1373949
(I.R.S. Employer Identification No.)
 Suite 2600, 500 4 th Avenue S.W.
Calgary Alberta, Canada
T2P 2V6
(Address of principal executive offices)
 Registrants telephone number: (403) 537-3250
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange
on which registeredCommon Stock
    
    Pacific Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 Not applicable
(Title of Class)
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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FORWARD LOOKING STATEMENTS
  PART I
 Item 1: Business
 Overview
   
    
    A large farm-in agreement and direct purchase of acreage for several Williston Basin
prospects in Divide and Burke Counties, northern North Dakota. To date JMG has
participated in 4 Upper Devonian Bakken sandstone horizontal oil wells (results being
reviewed) and 4 Mississippian Midale carbonate oil wells. For 2006 the Midale is
targeted for up to 16 horizontal oil wells with other deeper potential zones being
evaluated. These prospect areas are referred to as Candak (approx. 35,000 gross acres),
Myrtle (approx. 5,000 gross acres), Bluffton (approx. 5,000 gross acres), and Crosby
(approx. 60,000 gross acres).
    
    A farm-in agreement on the Cheyenne River Project (Powder River Basin) in Niobrara
County (eastern Wyoming) with 2 existing oil wells and approximately 30,000 gross
acres. The Timber Draw well was drilled in early 2001 and the Hooligan Draw well was
 1




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##### 



drilled in 2004. Both wells targeted the Lower Cretaceous Newcastle sands. The well
performance and the exploration potential of the acreage are both being
re-evaluated.
    
    A joint venture on the Pinedale anticline in the Jonah field (Green River Basin) of
western Wyoming targeting gas in the Upper Cretaceous Lance sandstone. 2 vertical wells
are planned for drilling before year-end 2006.
    
    A joint area of interest in the Fellows Prospects in Weston County in eastern
Wyoming on the eastern edge of the Powder River Basin. Targets are the Lower Cretaceous
Dakota channel sands and the Permian/Pennsylvanian Minnelusa sands. Approximately
20,000 acres have been acquired with no wells drilled to date. Also included in the
Fellows deal is over 5,000 acres in the Gordon Creek project in Carbon County, Utah
with no wells drilled to date.
 Company History
   Strategy
  Business Relationships with JED and Enterra
 Agreement of Business Principles: nd
 2




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##### 



bona fide
 nd
 Services Agreements:
  Interpersonal Relationships with JED and Enterra:
 
    
    H. S. (Scobey) Hartley is our Chief Executive Officer, President, and is a director
of Enterra. Mr. Hartley has announced that he will not stand for re-election to the
Board of Enterra at the 2006 annual general meeting.
    
    Thomas J. Jacobsen is a director of JMG, and is Chief Executive Officer and a
director of JED.
    
    Reg J. Greenslade is Chairman of the JMG board, and is Chairman of Enterra and JED
boards. Mr. Greenslade is resigning as Chairman and a director of Enterra at March 31,
2006.
 Proposed Merger with JED:
 3




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##### 



JED:
 Enterra:
  Exploratory projects
  Consolidation of adjacent assets
  Use of seismic and other data in site selection
  Selection of prospects
   4




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##### 



Sales and Marketing
  Competition
   Geographic Segments
  Employees
  Government regulation
  United States regulation
 5




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##### 



Exploration and production.
 
    
    requiring permits for the drilling of wells;
    
    maintaining bonding requirements in order to drill or operate wells;
    
    implementing spill prevention plans;
    
    submitting notification and receiving permits relating to the presence, use and
release of certain materials incidental to oil and gas operations; regulating the
location of wells;
    
    regulating the method of drilling and casing wells;
    
    regulating the use, transportation, storage and disposal of fluids and materials
used in connection with drilling and production activities;
    
    regulating surface usage and the restoration of properties upon which wells have
been drilled;
    
    regulating the plugging and abandoning of wells; and
    
    regulating the transporting of production.
  Environmental and occupational regulations.
 6




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##### 



Canadian regulation
  The North American Free Trade Agreement.
 
    
    reduce the proportion of energy exported relative to the supply of the energy resource;
    
    impose an export price higher than the domestic price; or
    
    disrupt normal channels of supply. All parties to NAFTA are also
prohibited from imposing minimum export or import price requirements.
 Exploration and production.
 Royalties and incentives.
 7




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##### 



Pricing and marketing.
 Land tenure.
 Environmental regulation.
  Kyoto protocol.
 8




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##### 



Investment Canada Act.
 The following are our executive officers:
 H. S. (Scobey) Hartley.
 Joanne Finnerty.
 Item 1A: Risk Factors
 Risks related to our company and the oil and natural gas industry
 Other than our executive officers, we have no operating personnel and are dependent upon JED for
drilling, field operations and related administrative services. The loss of JEDs services could
substantially increase our costs.
 Relationships with JED and Enterra Services Agreements
 9




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##### 



We depend on our executive officers for critical management decisions and industry contacts. We
have no key person insurance with these individuals and therefore the loss of their services would
be costly to us.
  Potential conflicts of interest in our relationship with JED and Enterra may cause us to receive
proceeds from the sale of our exploration prospects that are less favorable than we might have
obtained from third parties.
  
    
    H. S. (Scobey) Hartley is our Chief Executive Officer, President, and is a
director of Enterra. He has announced that he will not stand for re-election at
Enterras 2006 annual general meeting.
    
    Thomas J. Jacobsen is a director of JMG, and is Chief Executive Officer and a
director of JED.
    
    Reg J. Greenslade is Chairman of the JMG board, and is Chairman of the Enterra
and JED boards. He is resigning as Chairman and a director of Enterra at March 31,
2006.
 Relationships with JED and
Enterra Agreement of Business Principles
 We have a limited operating history, which makes it difficult to predict our future performance.
  A substantial or extended decline in oil and natural gas prices could reduce our future revenue and
earnings.
  
    
    changes in global supply and demand for oil and natural gas;
    
    actions by the Organization of Petroleum Exporting Countries, or OPEC;
    
    priced and quantities of imports of foreign oil and natural gas in Canada and the U.S.;
 10




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##### 




    
    political conditions, including embargoes, which affect other oil-producing activities;
    
    levels of global oil and natural gas exploration and production activity;
    
    levels of global oil and natural gas inventories;
    
    weather conditions affecting energy consumption;
    
    technological advances affecting energy consumption; and
    
    prices and availability of alternative fuels.
  Drilling for and producing oil and natural gas are high risk activities with many uncertainties
that could substantially increase our costs and reduce our profitability.
   
    
    delays imposed by or resulting from compliance with regulatory requirements;
    
    pressure or irregularities in geological formations;
    
    shortages of or delays in obtaining equipment and qualified personnel;
    
    equipment failures or accidents;
    
    adverse weather conditions;
    
    reductions in oil and natural gas prices;
    
    land title problems; and
    
    limitations in the market for oil and natural gas.
 Our insurance coverage does not cover all risks and we may incur substantial losses and be subject
to substantial liability claims as a result of our oil and natural gas operations.
  
    
    environmental hazards, such as uncontrollable flows of oil, natural
gas, brine, well fluids, toxic gas or other pollution into the environment,
including groundwater contamination;
    
    abnormally pressured formations;
    
    mechanical difficulties, such as stuck oilfield drilling and service
tools and casing collapse;
    
    fires and explosions;
    
    personal injuries and death; and
    
    natural disasters.
 11




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##### 



General liability
    
    $
    1,000,000Pollution liability
    
    $
    1,000,000Umbrella legal liability
    
    $
    14,000,000Operators extra expense
    
    $
    20,000,000
 Market conditions or operational impediments may hinder our access to oil and natural gas markets
or delay our production.
  We are subject to complex laws that can affect the cost, manner and feasibility of doing business
thereby increasing our costs and reducing our profitability.
  
    
    discharge permits for drilling operations;
    
    drilling bonds;
    
    reports concerning operations;
    
    spacing of wells;
    
    unitization and pooling of properties; and
    
    taxation.
  We may incur substantial liabilities to comply with environmental laws and regulations.
 12




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##### 




    
    require acquisition of a permit before drilling commences;
    
    restrict the types, quantities and concentration of substances that can
be released into the environment in connection with drilling and production
activities;
    
    limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas; and
    
    impose substantial liabilities for pollution resulting from our
operations.
  The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield
services could adversely affect our ability to execute our plans on a timely basis and within our
budget.
  Competition in the oil and natural gas industry is intense, which may increase our costs and
otherwise adversely affect our ability to compete.
  We may not be able to compete successfully in acquiring prospective reserves, developing reserves,
marketing oil and natural gas, attracting and retaining quality personnel and raising additional
capital.
  13




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##### 



Item 1B. Unresolved Staff Comments
  Item 2: Properties
 Divide and Burke Counties, North Dakota
 0 0
 Pinedale Anticline
  Cheyenne River Project
 1 2
 14




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##### 



Weston County, Wyoming
  Carbon County, Utah
  Item 3: Legal Proceedings
  Item 4: Submission of Matters to a Vote of Security Holders
  15




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##### 



PART II
 Item 5: Market For Our Common Equity And Related Stockholder Matters
 Price Range of Common Stock
  Period
    
    High
    
    LowAugust 5  31, 2005
    
    
    18.75
    
    
    
    12.01September, 2005
    
    
    18.00
    
    
    
    13.25October, 2005
    
    
    15.60
    
    
    
    10.00November, 2005
    
    
    12.50
    
    
    
    8.50December, 2005
    
    
    9.25
    
    
    
    6.00January, 2006
    
    
    11.75
    
    
    
    6.75February, 2006
    
    
    11.30
    
    
    
    7.50March 1  24, 2006
    
    
    11.00
    
    
    
    7.50
 ,
  Recent Sales of Unregistered Securities
  Item 6 : Selected Financial Data
  16




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##### 



Twelve month
    
    Period from the date ofperiod ended
    
    incorporation on July 16,December 31
    
    2004 to December 31$
    
    $
    
    $2005
    
    2004
    
    2003Statement of Operations Data:Revenues
    
    
    854,864
    
    
    
    
    
    
    
    n/aOperating expenses:Less royalties
    
    
    (227,404
    )
    
    
    
    
    
    
    n/aProduction
    
    
    189,598
    
    
    
    
    
    
    
    n/aGeneral and administrative
    
    
    1,768,712
    
    
    
    286,060
    
    
    
    n/aStock-based compensation
    
    
    78,589Geophysical and Geological
    
    
    256,484Depreciation and amortization
    
    
    4,265,162
    
    
    
    479,702
    
    
    
    n/aAccretion
    
    
    3,385Total operating expenses
    
    
    6,561,930
    
    
    
    765,762
    
    
    
    n/aOperating income (loss)
    
    
    (5,934,470
    )
    
    
    (765,762
    )
    
    
    n/aInterest expense
    
    
    
    
    
    
    
    
    
    
    n/aInterest income
    
    
    120,461
    
    
    
    64,630
    
    
    
    n/aGain on warrant liability
    
    
    
    
    
    
    
    
    
    
    n/aNet income (loss)
    
    
    (5,814,009
    )
    
    
    (701,132
    )
    
    
    n/aLess cumulative preferred
dividends
    
    
    (458,342
    )
    
    
    (323,157
    )Net loss applicable to common
shareholders
    
    
    (6,272,351
    )
    
    
    (1,024,289
    )Earnings (loss) per share:Basic
    
    
    (2.97
    )
    
    
    (4.10
    )
    
    
    n/aDiluted
    
    
    (2.97
    )
    
    
    (4.10
    )
    
    
    n/aWeighted average shares
outstanding:Basic
    
    
    2,111,351
    
    
    
    250,000
    
    
    
    n/aDiluted Diluted
    
    
    2,111,351
    
    
    
    250,000
    
    
    
    n/a
 Twelve month
    
    Period from the date ofperiod ended
    
    incorporation on July 16,December 31
    
    2004 to December 31$
    
    $
    
    $2005
    
    2004
    
    2003Total assets
    
    
    17,773,179
    
    
    
    8,429,049
    
    
    
    n/aCurrent Liabilities
    
    
    2,793,111
    
    
    
    656,238
    
    
    
    n/aLong-term obligations, less current portion
    
    
    78,642
    
    
    
    
    
    
    
    n/aTotal shareholders equity
    
    
    14,901,426
    
    
    
    7,772,811
    
    
    
    n/a
 17




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##### 



Item 7: Managements Discussion And Analysis Of Financial Conditions And Results Of Operations
  FORWARD-LOOKING STATEMENTS
   Statements relating to reserves are deemed to be forward-looking statements, as they involve
the implied assessment, based on certain estimates and assumptions, that the reserves described can
be profitably produced in the future. Readers are that the foregoing lists of factors are
not exhaustive. The forward-looking statements contained in this MD&A are made as of the date
hereof and the Company undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, except in
accordance with applicable securities laws. The forward-looking statements contained in this MD&A
are expressly qualified by this cautionary statement.
  Barrel
of Oil Equivalent (BOE) 
 Funds
Flow from Operations (funds flow) 
 18




---



##### 



Overview
     nd
 bona fide
   19




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##### 



Financial operations overview
 Summarized Financial and Operational Data (In US$ thousands, except per share data)Period fromincorporationYear ended
    
    
    July 16, 2004Q4
    
    
    Q4
    
    
    
    
    
    
    December 31,
    
    
    to December2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    31, 2004
    
    
    ChangePetroleum and natural gas revenue
    
    
    398
    
    
    
    
    
    
    
    398
    
    
    
    855
    
    
    
    
    
    
    
    855Net loss
    
    
    (4,435
    )
    
    
    (627
    )
    
    
    (3,808
    )
    
    
    (5,814
    )
    
    
    (701
    )
    
    
    (5,113
    )Per share basic and diluted
    
    
    (0.91
    )
    
    
    (3.29
    )
    
    
    2.38
    
    
    
    (2.97
    )
    
    
    (4.10
    )
    
    
    1.13Exit production rate (BOE/d)
    
    
    129
    
    
    
    
    
    
    
    129
    
    
    
    129
    
    
    
    
    
    
    
    129Funds flow from operations (1)
    
    
    (462
    )
    
    
    (147
    )
    
    
    (315
    )
    
    
    (1,210
    )
    
    
    (221
    )
    
    
    (989
    )Per share  basic and diluted
    
    
    (0.09
    )
    
    
    (0.59
    )
    
    
    0.50
    
    
    
    (0.57
    )
    
    
    (0.88
    )
    
    
    0.31Weighted average number of shares
outstanding   basic
    
    
    4,897
    
    
    
    250
    
    
    
    4,647
    
    
    
    2,111
    
    
    
    250
    
    
    
    1,861
 (1)
    
    Funds flow from operations and earnings from operations are non-GAAP measure. It is managements view that this information is relevant for
investors. Funds flow from operations is reconciled to GAAP in the funds flow from operations section of the management discussion and analysis.
 Quarterly Information
 Quarterly information(In US$ thousands, except per share data)Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q42005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Revenue
    
    
    
    
    
    
    8
    
    
    
    449
    
    
    
    398
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from
operations(1)
    
    
    (217
    )
    
    
    (467
    )
    
    
    (695
    )
    
    
    (4,435
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (627
    )Per share,
basic and
diluted
    
    
    (1.64
    )
    
    
    (2.65
    )
    
    
    (0.26
    )
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    
    
    (0.80
    )
    
    
    (3.29
    )Net loss
    
    
    (217
    )
    
    
    (467
    )
    
    
    (695
    )
    
    
    (4,435
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (627
    )Per share,
basic and
diluted
    
    
    (1.64
    )
    
    
    (2.65
    )
    
    
    (0.26
    )
    
    
    (0.91
    )
    
    
    
    
    
    
    
    
    
    
    (0.80
    )
    
    
    (3.29
    )
 20




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##### 



2 Year Summary
 Summarized financial and operational data(In US$ thousands except for volumes and per share amounts)Period fromincorporationYear ended
    
    
    July 16, 2004December
    
    
    to December31, 2005
    
    
    31, 2004Revenue
    
    
    855
    
    
    
    Funds flow from operations
    
    
    (1,210
    )
    
    
    (221
    )Funds flow
from operations per share  basic and diluted
    
    
    (0.57
    )
    
    
    (0.88
    )Loss from operations(1)
    
    
    (5,814
    )
    
    
    (701
    )Loss from
operations per share  basic and diluted(1)
    
    
    (2.97
    )
    
    
    (4.10
    )Net loss
    
    
    (5,814
    )
    
    
    (701
    )Net loss per
share  basic and diluted
    
    
    (2.97
    )
    
    
    (4.10
    )Weighted
average number of shares  basic and diluted
    
    
    2,111
    
    
    
    250Total assets
    
    
    17,773
    
    
    
    8,429Total long-term debt
    
    
    
    
    
    
    
 (1)
    
    Funds flow, funds flow from operations and loss from operations are non-GAAP measures.
Funds flow, funds flow from operations and loss from operations are reconciled to GAAP loss in
funds flow from operation section of the management discussion and analysis.
 Results of operations
 Revenue.
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004PercentageYear ended December 31,
    
    2005
    
    2004
    
    IncreaseProduction (BOE)
    
    
    15,449
    
    
    
    
    
    
    
    N/aAverage Price
    
    $
    55.33
    
    
    
    Revenues
    
    $
    854,864
    
    
    
    
    
    
    
    N/a
 21




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##### 



Period from incorporation on July 16, 2004 to December 31, 2005Incorporation July 16, 2004 to December 31, 2005.Production (BOE)
    
    
    15,449Average Price
    
    $
    55.33Revenues
    
    $
    854,864
  December 31,
    
    2005
    
    2004West Texas Intermediate grade crude oil, per barrel
    
    $
    59.78
    
    
    $
    41.10
   Royalty expense.
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004% of
    
    
    
    
    
    % of
    
    PercentageYear Ended December 31,
    
    2005
    
    revenue
    
    2004
    
    revenue
    
    IncreaseRoyalty expense
    
    $
    227,404
    
    
    
    26.6
    %
    
    
    
    
    
    
    
    
    
    
    100
    %Royalty expense per BOE:
    
    $
    14.72
    
    
    
    
    
    
    
    
    
    
    
    
 Period from incorporation on July 16, 2004 to December 31, 2005% ofIncorporation July 16, 2004 to December 31, 2005.
    
    
    
    
    
    revenueRoyalty expense
    
    $
    227,404
    
    
    
    26.6
    %Royalty expense per BOE:
    
    $
    14.72
    
    
    
    
 Interest income
 Production expense.
 22




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##### 



Year ended to December 31, 2005 Compared to Year Ended December 31, 2004% of
    
    
    
    
    
    % of
    
    PercentageYear Ended December 31,
    
    2005
    
    revenue
    
    2004
    
    revenue
    
    IncreaseProduction expense
    
    $
    189,598
    
    
    
    22.1
    %
    
    
    
    
    
    
    
    
    
    
    100
    %Production expense per BOE:
    
    $
    12.27
    
    
    
    
    
    
    
    
    
    
    
    
 Period from incorporation on July 16, 2004 to December 31, 2005% ofIncorporation July 16, 2004 to December 31, 2005.
    
    
    
    
    
    revenueProduction expense
    
    $
    189,598
    
    
    
    22.1
    %Production expense per BOE:
    
    $
    12.27
    
    
    
    
 General and administrative expense.
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004PercentageYear ended December 31,
    
    2005
    
    2004
    
    IncreaseGeneral and administrative expense
    
    $
    1,768,712
    
    
    $
    286,060
    
    
    
    518
    %
 Period from incorporation on July 16, 2004 to December 31, 2005
 Incorporation July 16, 2004 to December 31, 2005.General and administrative expense
    
    $
    2,054,772
 Stockbased Compensation.
 for Stock Issued to
Employees
 23




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##### 



Geophysical and geological expense.
 Depletion, depreciation expense.
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004% of
    
    
    
    
    
    % of
    
    PercentageYear Ended December 31,
    
    2005
    
    revenue
    
    2004
    
    revenue
    
    IncreaseDepletion,
depreciation expense
    
    $
    4,265,162
    
    
    
    498.9
    %
    
    $
    479,702
    
    
    
    
    
    
    
    100
    %Depletion,
depreciation expense
per BOE:
    
    $
    276.08
    
    
    
    
    
    
    
    
    
    
    
    
 Period from incorporation on July 16, 2004 to December 31, 2005
 % ofIncorporation July 16, 2004 to December 31, 2005.
    
    
    
    
    
    revenueDepletion, depreciation expense
    
    $
    4,744,864
    
    
    
    555.0
    %Depletion, depreciation expense per BOE:
    
    $
    307.13
 Accretion expense.
 Preferred dividend.
 24




---



##### 



Income taxes.
 2004
    
    2005
    
    Cumulative$
    
    $
    
    $Loss for the period before income taxes
    
    
    (701,132
    )
    
    
    (5,814,009
    )
    
    
    (6,515,141
    )Effective tax rate
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %Expected income tax recovery
    
    
    (273,442
    )
    
    
    (2,424,463
    )
    
    
    (2,540,905
    )Deferred tax asset valuation allowance
    
    
    273,442
    
    
    
    2,424,463
    
    
    
    2,540,905Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
 Earnings (Loss).
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004% of
    
    
    
    
    
    % of
    
    PercentageYear Ended December 31,
    
    2005
    
    revenue
    
    2004
    
    revenue
    
    Increase$
    
    
    
    
    
    $Loss from operations
    
    
    (5,814,009
    )
    
    
    (680.1
    %)
    
    
    (701,132
    )
    
    
    100
    %
    
    
    (129.2
    %)Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (5,814,009
    )
    
    
    (680.1
    %)
    
    
    (701,132
    )
    
    
    100
    %
    
    
    (129.2
    %)Loss from operations
per BOE
    
    
    (376.33
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Per share informationLoss from
operations  per ShareNet loss per share
    
    
    (2.97
    )
    
    
    
    
    
    
    (4.10
    )Average number of
shares outstanding
    
    
    2,111,351
    
    
    
    
    
    
    
    250,000
    
    
    
    
 Period from incorporation on July 16, 2004 to December 31, 2005
 % ofIncorporation July 16, 2004 to December 31, 2005.
    
    
    
    
    
    revenue$Loss from operations
    
    
    (6,515,141
    )
    
    
    (762.1
    %)Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (6,515,141
    )
    
    
    (762.1
    %)Loss from operations per BOE
    
    
    (421.71
    )
    
    
    Per share informationLoss from operations per ShareNet loss per share
    
    
    (4.88
    )Average number of shares outstanding
    
    
    1,494,620
    
    
    
    
 25




---



##### 



Funds flow from operations.
 Year ended to December 31, 2005 Compared to Year Ended December 31, 2004Year ended December 31,
    
    
    
    
    
    2004Net loss
    
    ($
    5,814,009
    )
    
    ($
    701,132
    )Add back
Stock based compensation
    
    $
    78,589
    
    
    
    Geophysical and geological
    
    $
    256,484
    
    
    
    Depletion and deprecation
    
    $
    4,265,162
    
    
    $
    479,702Accretion
    
    $
    3,385
    
    
    
    Funds flow from Operations
    
    ($
    1,210,389
    )
    
    ($
    221,430
    )Funds flow from operations as a percentage
of production revenue
    
    
    (141.5
    %)
    
    
    Funds flow from operations per BOE
    
    ($
    78.34
    )
    
    
    Per share informationFunds flow from operations per share
    
    ($
    0.57
    )
    
    
    Average number of shares outstanding
    
    
    2,111,351
    
    
    
    250,000
 Period from incorporation on July 16, 2004 to December 31, 2005
 Incorporation July 16, 2004 to December 31, 2005.Net loss
    
    ($
    6,515,141
    )Add backStock based compensation
    
    $
    78,589Geophysical and geological
    
    $
    256,484Depletion and deprecation
    
    $
    4,744,864Accretion
    
    $
    3,385Funds flow from Operations
    
    ($
    1,431,819
    )Funds flow from operations as a percentage of production revenue
    
    
    (167.5
    %)Funds flow from operations per BOE
    
    ($
    92.68
    )Per share informationFunds flow from operations per share
    
    ($
    0.96
    )Average number of shares outstanding
    
    
    1,494,620
 Reserves
   26




---



##### 



Constant Prices and Costs
  Light Crude OilGross
    
    NetReserves Category
    
    (bbl)
    
    (bbl)PROVEDDeveloped Producing
    
    
    62,216
    
    
    
    53,907Developed Non-Producing
    
    
    9,153
    
    
    
    7,749Undeveloped
    
    
    
    
    
    
    TOTAL PROVED
    
    
    71,369
    
    
    
    61,656PROBABLE
    
    
    590,030
    
    
    
    515,369TOTAL PROVED PLUS PROBABLE
    
    
    661,339
    
    
    
    577,025
 Net Present Values of Future Net Revenues
Constant Prices and Costs
as at December 31, 2005
 Before and After Income Taxes Discounted at (% / year)0%
    
    5%
    
    10%
    
    15%
    
    20%Reserves Category
    
    (US$thousands)
    
    (US$thousands)
    
    (US$thousands)
    
    (US$thousands)
    
    (US$thousands)PROVEDDeveloped Producing
    
    
    1,548
    
    
    
    1,416
    
    
    
    1,307
    
    
    
    1,216
    
    
    
    1,139Developed Non-Producing
    
    
    172
    
    
    
    156
    
    
    
    142
    
    
    
    131
    
    
    
    120Undeveloped
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL PROVED
    
    
    1,720
    
    
    
    1,572
    
    
    
    1,449
    
    
    
    1,347
    
    
    
    1,259PROBABLE
    
    
    9,256
    
    
    
    6,625
    
    
    
    4,870
    
    
    
    3,622
    
    
    
    2,697TOTAL PROVED PLUS PROBABLE
    
    
    10,976
    
    
    
    8,197
    
    
    
    6,319
    
    
    
    4,969
    
    
    
    3,956
  Producing and Non-producing Wells
as at December 31, 2005
 North Dakota
    
    Wyoming
    
    TotalGross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetOil WellsProducing
    
    
    3
    
    
    
    2.04
    
    
    
    2
    
    
    
    .8
    
    
    
    5
    
    
    
    2.84Non-Producing
    
    
    1
    
    
    
    .12
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1.2
 27




---



##### 



Capital Expenditures
  Period from the
    
    Period from thedate of
    
    date ofFor the twelve month
    
    incorporation
    
    incorporationperiod ended
    
    July 16, 2004 to
    
    July 16, 2004 toDecember 31, 2005
    
    December 31, 2004
    
    December 31, 2005Property Acquisitions
    
    $
    5,719,929
    
    
    $
    136,760
    
    
    $
    5,856,689Drilling Exploration
    
    $
    11,302,720
    
    
    $
    1,916,617
    
    
    $
    13,219,339Other Assets
    
    $
    106,835
    
    
    $
    120,482
    
    
    $
    227,317Reclassification of
capital accrual
    
    ($
    1,210,809
    )
    
    ($
    202,660
    )
    
    ($
    1,413,469
    )$
    15,918,765
    
    
    $
    1,971,199
    
    
    $
    17,889,874
 Liquidity and capital resources
 Cash flows and capital expenditures
    Numberof warrants
    
    Exercise
    
    MaximumWarrant summary as of December 31, 2005.
    
    outstanding
    
    price
    
    proceedsWarrants issued in the preferred stock private placement
    
    
    378,187
    
    
    $
    6.00
    
    
    $
    2,269,122Warrants issued upon conversion of preferred stock
    
    
    1,777,500
    
    
    
    4.25
    
    
    $
    7,554,375Warrants issued our initial public offering
    
    
    1,854,235
    
    
    
    5.00
    
    
    $
    9,271,1754,009,922
    
    
    $
    4.25-$6.00
    
    
    $
    19,094,672
 Cash flow used in operations.
 28




---



##### 



Cash flow used in investing activities
 Cash flow used in financing activities.
  Critical accounting estimates
   29




---



##### 



Successful-efforts method of accounting
       Proved Oil and Gas Reserves
  30




---



##### 



Long-lived assets
  Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
 Stock-based compensation
 Accounting for Stock Issued to
Employees
   Contingencies
  31




---



##### 



Contractual obligations and commitments
  Related Party Transactions
      Recent accounting pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows
   
    
    A modified prospective method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that remain
unvested on the effective date; or
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either for (a) all periods presented or (b) prior interim periods of the year of
adoption.
  32




---



##### 



Outlook and Proposed Transactions
   33




---



##### 



Item 7A: Quantitative And Qualitative Disclosures About Market Risk
  Credit Risk.
 Market Risk.
 Interest Rate Risk.
 34




---



##### 



Item 8 : Financial Statements and Supplementary Data
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 JMG Exploration Inc.
Financial Statements
 PageReports of Ernst & Young, LLP, , Independent Registered Public
Accounting Firm
    
    
    36Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    38Consolidated Statements of Operations for the year ended December
31, 2005, the period from the date of incorporation on July 16,
2004 to December 31, 2004 and to December 31, 2005
    
    
    39Consolidated Statements of Cash Flows for the year ended December
31, 2005, the period from the date of incorporation on July 16,
2004 to December 31, 2004 and to December 31, 2005
    
    
    40Consolidated Statements of Shareholders Equity for the year ended
December 31, 2005, the period from the date of incorporation on
July 16, 2004 to December 31, 2004 and to December 31, 2005
    
    
    41Consolidated Statements of Comprehensive Loss for the year ended
December 31, 2005, the period from the date of incorporation on
July 16, 2004 to December 31, 2004 and to December 31, 2005
    
    
    42Notes to Consolidated Financial Statements
    
    
    43- 53
 35




---



##### 



Report of Independent Registered Public Accounting Firm
     Calgary, CanadaMarch 23, 2006
    
    /s/ Ernst & Young LLP
 36




---



##### 



JMG Exploration, Inc. (a development stage enterprise)  December 31, 2005
 37




---



##### 



JMG Exploration, Inc.
 CONSOLIDATED BALANCE SHEETS
 (In United States Dollars)
 2005
    
    2004As at December 31
    
    $
    
    $ASSETSCurrentCash and cash equivalents
    
    
    1,150,965
    
    
    
    5,040,800Accounts receivable
    
    
    1,284,474
    
    
    
    Loan receivable [note 3]
    
    
    
    
    
    
    1,179,205Prepaid expenses and deposits
    
    
    34,701
    
    
    
    104,8872,470,140
    
    
    
    6,324,892Other assets [note 5]
    
    
    230,000
    
    
    
    50,000Property and equipment [notes 4 and 8]
    
    
    15,073,039
    
    
    
    2,054,15717,773,179
    
    
    
    8,429,049LIABILITIES AND STOCKHOLDERS EQUITYCurrentAccounts payable
    
    
    845,507
    
    
    
    58,616Accrued liabilities
    
    
    1,660,648
    
    
    
    20,000Dividends payable
    
    
    
    
    
    
    196,603Due to JED Oil Inc. [note 8]
    
    
    286,956
    
    
    
    376,855Due to related party
    
    
    
    
    
    
    4,1642,793,111
    
    
    
    656,238Asset retirement obligations [note 9]
    
    
    78,642
    
    
    
    2,871,753
    
    
    
    656,238Stockholders equityShare capital [note 6]Common stock  $.001 par value; 25,000,000
shares authorized; 4,997,578 shares issued
and outstanding at December 31, 2005.
    
    
    4,997
    
    
    
    250Preferred stock  $.001 par value;
10,000,000 shares authorized; 0 shares
issued and outstanding at December 31, 2005
and 1,950,000 outstanding December 31, 2004.
    
    
    
    
    
    
    1,950Additional paid-in capital
    
    
    20,044,296
    
    
    
    8,790,025Share purchase warrants
    
    
    2,151,470
    
    
    
    4,875Deficit accumulated during the development stage
    
    
    (7,296,640
    )
    
    
    (1,024,289
    )Accumulated other comprehensive earnings
    
    
    (2,697
    )
    
    
    14,901,426
    
    
    
    7,772,81117,773,179
    
    
    
    8,429,049
 The accompanying notes are an integral part of these audited consolidated financial statements.
 38




---



##### 



JMG Exploration, Inc.
 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
 Period from the date
    
    Period from the dateTwelve month
    
    of incorporation on
    
    of incorporation onperiod ended
    
    July 16, 2004 to
    
    July 16, 2004 toFor the
    
    December 31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2005$
    
    $
    
    $RevenuePetroleum and natural gas revenue
    
    
    854,864
    
    
    
    
    
    
    
    854,864Royalties
    
    
    (227,404
    )
    
    
    
    
    
    
    (227,404
    )627,460
    
    
    
    
    
    
    
    627,460Interest
    
    
    120,461
    
    
    
    64,630
    
    
    
    185,091747,921
    
    
    
    64,630
    
    
    
    812,551ExpensesProduction
    
    
    189,598
    
    
    
    
    
    
    
    189,598General and administrative [note 8]
    
    
    1,768,712
    
    
    
    286,060
    
    
    
    2,054,772Stock-based compensation [note 6]
    
    
    78,589
    
    
    
    
    
    
    
    78,589Geophysical and Geological
    
    
    256,484
    
    
    
    
    
    
    
    256,484Depletion, depreciation [note 4]
    
    
    4,265,162
    
    
    
    479,702
    
    
    
    4,744,864Accretion on asset retirement
obligation [note 9]
    
    
    3,385
    
    
    
    
    
    
    
    3,3856,561,930
    
    
    
    765,762
    
    
    
    7,327,692Net loss for the period [note 7]
    
    
    (5,814,009
    )
    
    
    (701,132
    )
    
    
    (6,515,141
    )Less: cumulative preferred dividends
    
    
    (458,342
    )
    
    
    (323,157
    )
    
    
    (781,499
    )Net loss applicable to common
shareholders
    
    
    (6,272,351
    )
    
    
    (1,024,289
    )
    
    
    (7,296,640
    )Deficit, beginning of period
    
    
    (1,024,289
    )
    
    
    
    
    
    
    Deficit, end of period
    
    
    (7,296,640
    )
    
    
    (1,024,289
    )
    
    
    (7,296,640
    )Basic weighted average shares
outstanding [note 6]
    
    
    2,111,351
    
    
    
    250,000
    
    
    
    1,494,620Net loss for the period per share,
basic and diluted [note 6]
    
    
    (2.97
    )
    
    
    (4.10
    )
    
    
    (4.88
    )
 The accompanying notes are an integral part of these audited consolidated financial statements.
 39




---



##### 



JMG Exploration, Inc.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Period from theTwelve
    
    date of
    
    Period from themonth
    
    incorporation
    
    date ofperiod ended
    
    on July 16,
    
    incorporation onDecember
    
    2004 to
    
    July 16, 2004 toFor the
    
    31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2005$
    
    $
    
    $OPERATIONSNet loss for the period
    
    
    (5,814,009
    )
    
    
    (701,132
    )
    
    
    (6,515,141
    )Adjustments to reconcile net loss to cash flows from
operating activities:Stock-based compensation
    
    
    78,589
    
    
    
    
    
    
    
    78,589Depletion and depreciation and accretion
    
    
    4,268,547
    
    
    
    479,702
    
    
    
    4,748,249Other changes:Increase in accounts receivable
    
    
    (508,601
    )
    
    
    
    
    
    
    (508,601
    )Decrease( Increase) in prepaid expenses and deposits
    
    
    70,186
    
    
    
    (104,887
    )
    
    
    (34,701
    )Increase in accounts payable and accrued liabilities
    
    
    382,917
    
    
    
    82,780
    
    
    
    252,166Decrease (increase) in due to JED Oil Inc.
    
    
    (89,899
    )
    
    
    170,031
    
    
    
    286,956Decrease in due to related party
    
    
    (4,164
    )
    
    
    4,164
    
    
    
    Decrease (increase) in accrued interest on Loan
receivable
    
    
    16,683
    
    
    
    (39,205
    )
    
    
    (15,815
    )Cash used in operating activities
    
    
    (1,599,751
    )
    
    
    (108,547
    )
    
    
    (1,708,298
    )INVESTINGRepayment (advance) of loan receivable
    
    
    750,000
    
    
    
    (1,500,000
    )
    
    
    (750,000
    )Proceeds on disposition of property
    
    
    391,249
    
    
    
    
    
    
    
    391,249Purchase of property and equipment
    
    
    (15,918,765
    )
    
    
    (1,971,199
    )
    
    
    (17,889,964
    )Increase in other assets
    
    
    (180,000
    )
    
    
    (50,000
    )
    
    
    (230,000
    )Cash used in investing activities
    
    
    (14,957,516
    )
    
    
    (3,521,199
    )
    
    
    (18,478,715
    )FINANCINGIssue of common shares, net of issue costs
    
    
    11,178,479
    
    
    
    1,000,000
    
    
    
    19,970,704Issue of preferred shares
    
    
    
    
    
    
    7,797,100
    
    
    
    Issue of share purchase warrants
    
    
    2,146,595
    
    
    
    
    
    
    
    2,151,470Preferred share dividends
    
    
    (654,945
    )
    
    
    (126,554
    )
    
    
    (781,499
    )Cash provided by financing activities
    
    
    12,670,129
    
    
    
    8,670,546
    
    
    
    21,340,675Effect of foreign exchange on cash and cash equivalents
    
    
    (2,697
    )
    
    
    
    
    
    
    (2,697
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,889,835
    )
    
    
    5,040,800
    
    
    
    1,150,965Cash and cash equivalents, beginning of period
    
    
    5,040,800
    
    
    
    
    
    
    
    Cash and cash equivalents, end of period
    
    
    1,150,965
    
    
    
    5,040,800
    
    
    
    1,150,965
 The accompanying notes are an integral part of these audited consolidated financial statements.
 40




---



##### 



JMG Exploration, Inc.
 STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY
  Shares
    
    Total#
    
    $Common stock, $.001 par value:Balance at July 16, 2004 and December 31, 2004
    
    
    250,000
    
    
    
    1,000,000Preferred shares converted to common stock
    
    
    1,950,000
    
    
    
    7,792,225Issuance of common stock, stock issued for
cash pursuant to initial public offering
    
    
    2,185,000
    
    
    
    11,143,500Warrants exercised for common stock
    
    
    612,578
    
    
    
    3,042,828Share issue costs
    
    
    
    
    
    
    (861,254
    )Portion of
proceeds attributed to share purchase warrants
    
    
    
    
    
    
    (2,146,595
    )Balance at December 31, 2005
    
    
    4,997,578
    
    
    
    19,970,704Additional paid in capitalBalance, July 16, 2004 (inception) and
December 31, 2004
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    78,589Balance at December 31, 2005
    
    
    
    
    
    
    78,589Preferred stock, $.001 par value:Balance at December 31, 2004
    
    
    1,950,000
    
    
    
    7,792,225Preferred shares converted to common stock
    
    
    (1,950,000
    )
    
    
    (7,792,225
    )Balance at December 31, 2005
    
    
    
    
    
    
    Share purchase warrants:Balance at December 31, 2004
    
    
    487,500
    
    
    
    4,875Share purchase warrants: issued pursuant to
initial public offering $5.00
    
    
    2,185,000
    
    
    
    693,866Share
purchase warrants: issued pursuant conversion preferred shares $4.25
    
    
    1,950,000
    
    
    
    1,816,766Warrants exercised for common stock
    
    
    (612,578
    )
    
    
    (364,037
    )Balance at December 31, 2005
    
    
    4,009,922
    
    
    
    2,151,470Deficit:Balance at beginning of period July 16, 2004
    
    
    
    
    
    
    Net loss for the period to December 31, 2004
    
    
    
    
    
    
    (701,132
    )Preferred share dividends
    
    
    
    
    
    
    (323,157
    )Balance at December 31, 2004
    
    
    
    
    
    
    (1,024,289
    )Net loss for the twelve-month period ended
December 31, 2005
    
    
    
    
    
    
    (5,814,009
    )Preferred share dividends
    
    
    
    
    
    
    (458,342
    )Balance at December 31, 2005
    
    
    
    
    
    
    (7,296,640
    )Accumulated other comprehensive incomeBalance at beginning of period July 16, 2004
    
    
    
    
    
    
    Balance December 31, 2004
    
    
    
    
    
    
    Foreign exchange translation adjustment
    
    
    
    
    
    
    (2,697
    )Balance at December 31, 2004
    
    
    
    
    
    
    (2,697
    )Total stockholders equity at December 31, 2005
    
    
    
    
    
    
    (14,901,426
    )
 The accompanying notes are an integral part of these audited consolidated financial
statements.
 41




---



##### 



JMG Exploration, Inc.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 For the period
    
    For the periodFor the twelve
    
    from the date of
    
    from the date ofmonth period
    
    incorporation on
    
    incorporation onended
    
    July 16, 2004 to
    
    July 16, 2004 toDecember 31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2005$
    
    $
    
    $Net loss for the period
    
    
    (5,814,009
    )
    
    
    (701,132
    )
    
    
    (6,515,141
    )Other comprehensive income:Foreign exchange translation
adjustment
    
    
    (2,697
    )
    
    
    
    
    
    
    (2,697
    )Comprehensive loss for the period
    
    
    (5,816,706
    )
    
    
    (701,132
    )
    
    
    (6,517,838
    )
 The accompanying notes are an integral part of these audited consolidated financial
statements.
 42




---



##### 



1. INCORPORATION AND NATURE OF OPERATIONS
    2. SIGNIFICANT ACCOUNTING POLICIES
   a) Principles of consolidation
  b) Cash and cash equivalents
  c) Foreign currency translation
  d) Revenue recognition
  e) Joint operations
  43




---



##### 



f) Property and equipment
      g) Asset retirement obligations
   h) Measurement uncertainty
  44




---



##### 



i) Income taxes
  j) Other comprehensive income (loss)
  k) Stock-based compensation
  Accounting for Stock Issued to Employees,
  l) Net loss per share
  m) Allowance for doubtful accounts
  3. LOAN RECEIVABLE
  45




---



##### 



4. PROPERTY AND EQUIPMENT
      December 31, 2005Accumulateddepletion,Cost
    
    depreciation
    
    Net book value$
    
    $
    
    $Petroleum and
natural gas
properties
    
    
    13,720,365
    
    
    
    4,706,137
    
    
    
    9,014,228Undeveloped Land
    
    
    5,868,691
    
    
    
    
    
    
    
    5,868,691Other assets
    
    
    227,317
    
    
    
    37,197
    
    
    
    190,12019,816,373
    
    
    
    4,743,334
    
    
    
    15,073,039
 46




---



##### 



December 31, 2004Accumulateddepletion,depreciation andCost
    
    accretion
    
    Net book value$
    
    $
    
    $Petroleum and
natural gas
properties
    
    
    2,053,378
    
    
    
    472,172
    
    
    
    1,941,206Other assets
    
    
    120,481
    
    
    
    7,530
    
    
    
    112,9512,173,859
    
    
    
    479,702
    
    
    
    2,054,157
 5. OTHER ASSETS
  6. SHARE CAPITAL
 a) Authorized
  47




---



##### 



b) Issued and outstanding
 AdditionalCapital
    
    Paid-inStock
    
    Capital
    
    Total#
    
    $
    
    $
    
    $Common Stock, $.001 par value:Balance, at July 16, 2004 and
December 31, 2004
    
    
    250,000
    
    
    
    250
    
    
    
    999,750
    
    
    
    1,000,000Preferred shares converted to
common stock
    
    
    1,950,000
    
    
    
    1,950
    
    
    
    7,790,275
    
    
    
    7,792,225Issued for cash, pursuant to
initial public offering
    
    
    2,185,000
    
    
    
    2,185
    
    
    
    11,141,315
    
    
    
    11,143,500Warrants exercised for common
stock
    
    
    612,578
    
    
    
    612
    
    
    
    3,042,216
    
    
    
    3,042,828Share Issue Costs
    
    
    
    
    
    
    
    
    
    
    (861,254
    )
    
    
    (861,254
    )Portion of proceeds
attributed to share purchase
warrants
    
    
    
    
    
    
    
    
    
    
    (2,146,595
    )
    
    
    (2,146,595
    )Balance at December 31, 2005
    
    
    4,997,578
    
    
    
    4,997
    
    
    
    19,965,707
    
    
    
    19,970,704Preferred StockBalance, at July 16, 2004
and December 31, 2004
    
    
    1,950,000
    
    
    
    1,950
    
    
    
    7,798,050
    
    
    
    7,800,000Preferred shares converted to
common stock
    
    
    (1,950,000
    )
    
    
    (1,950
    )
    
    
    (7,790,275
    )
    
    
    (7,792,225
    )Share issue costs, net of tax
    
    
    
    
    
    
    
    
    
    
    (2,900
    )
    
    
    (2,900
    )Portion of proceeds
attributed to share purchase
warrants
    
    
    
    
    
    
    
    
    
    
    (4,875
    )
    
    
    (4,875
    )Balance at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share Purchase WarrantsBalance, at July 16, 2004 and
December 31, 2004
    
    
    487,500
    
    
    
    
    
    
    
    
    
    
    
    4,875Issued pursuant to initial
public offering
    
    
    2,185,000
    
    
    
    
    
    
    
    
    
    
    
    693,866Issued pursuant to conversion
of preferred shares
    
    
    1,950,000
    
    
    
    
    
    
    
    
    
    
    
    1,816,766Warrants exercised for common
stock
    
    
    (612,578
    )
    
    
    
    
    
    
    
    
    
    
    (364,037
    )Balance at December 31, 2005
    
    
    4,009,922
    
    
    
    
    
    
    
    
    
    
    
    2,151,470Additional paid in capitalBalance, July 16, 2004
(inception) and December 31, 2004
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    78,589Total December 31, 2005
    
    
    
    
    
    
    4,997
    
    
    
    20,044,296
    
    
    
    22,122,174
 c) Initial Public Offering
  48




---



##### 



d) Stock options
  Weightedaverage exerciseNumber of
    
    priceoptions
    
    $Outstanding as at December 31, 2004
    
    
    260,000
    
    
    
    4.00Granted   April 5, 2005
    
    
    387,750
    
    
    
    5.00Granted  July 21, 2005
    
    
    79,500
    
    
    
    5.00Granted
 August 19, 2005
    
    
    1,500
    
    
    
    15.25Granted
 August 29, 2005
    
    
    5,000
    
    
    
    14.74Granted
 November 1, 2005
    
    
    10,000
    
    
    
    12.25Cancelled
    
    
    (260,000
    )
    
    
    4.00Cancelled
    
    
    (4,500
    )
    
    
    5.00Options outstanding as at December 31, 2005
    
    
    479,250Exercisable as at December 31, 2005
    
    
    250,000
    
    
    
    5.00
 Pro forma disclosure
  Twelve months endedAs reported
    
    Pro FormaDecember 31, 2005
    
    $
    
    $Net loss
    
    
    (6,272,351
    )
    
    
    (6,485,985
    )Net loss per share, basic and diluted
    
    
    (2.97
    )
    
    
    (3.07
    )
  49




---



##### 



Risk-free interest rate (%)
    
    4.3Expected life (years)
    
    5.0Expected volatility (%)
    
    10 to 50Expected dividend yield (%)
    
    NilVesting period (years)
    
    0 to 3
  d) Loss per share
  7. INCOME TAXES
  (a) Income tax expense (recovery)
  2004
    
    2005
    
    Cumulative$
    
    $
    
    $Loss for the period before income taxes
    
    
    (701,132
    )
    
    
    (5,814,009
    )
    
    
    (6,515,141
    )Effective tax rate
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %Expected income tax recovery
    
    
    (273,442
    )
    
    
    (2,267,463
    )
    
    
    (2,540,905
    )Deferred tax asset valuation allowance
    
    
    273,442
    
    
    
    2,267,463
    
    
    
    2,540,905Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
 (b) Deferred income taxes
  Deferred Tax Assets
 2004
    
    2005$
    
    $
    
    CumulativeNon-capital loss carry forward
    
    
    340,805
    
    
    
    1,303,797
    
    
    
    1,644,602Property Impairments
    
    
    
    
    
    
    963,666
    
    
    
    963,666Total
    
    
    340,805
    
    
    
    2,267,463
    
    
    
    2,608,268Expense of Intangibles
    
    
    (67,363
    )
    
    
    
    
    
    
    (67,363
    )Impairment
    
    
    (273,442
    )
    
    
    (2,267,463
    )
    
    
    (2,540,905
    )
 50




---



##### 



8. RELATED PARTY TRANSACTIONS
      9. ASSET RETIREMENT OBLIGATIONS
  Asset retirement obligation at December 31, 2004
    
    
    Liabilities incurred
    
    $
    75,257Liabilities settled
    
    
    Accretion expense
    
    $
    3,385Asset retirement obligations at December 31, 2005
    
    $
    78,642
 10. FINANCIAL INSTRUMENTS
   51




---



##### 



11. RECENT PRONOUNCEMENTS
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows requires
       12. SUBSEQUENT EVENTS
  52




---



##### 



13. COMPARATIVE FIGURES
  53




---



##### 



Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 9A: Controls And Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  Inherent Limitations on Effectiveness of Controls
  Item 9B: Other Information
  54




---



##### 



PART III
 Item 10: Directors and Executive Officers of the Registrant
 Securities Exchange Act of 1934
  Item 11: Executive Compensation
 Securities Exchange Act of 1934
 Item 12: Security Ownership of Certain Beneficial Owners and Management and related Stockholder
Matters
 Securities Exchange Act of 1934
 [
 Number of securities
    
    Weighted averageto be issued upon
    
    exercise price ofexercise of
    
    outstandingoutstanding options,
    
    options, warrants
    
    Number of availablePlan category
    
    warrants and rights
    
    and rights
    
    for future issuanceEquity compensation
plans approved by
security holders
    
    
    479,250
    
    
    $
    5.28
    
    
    
    20,507Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    479,250
    
    
    $
    5.28
    
    
    
    20,507
 Item 13: Certain Relationships and Related Transactions
 Securities Exchange Act of 1934
 Item 14: Principle Accountant Fees and Services
  55




---



##### 



Year ended December 31,2005
    
    2004Audit fees
    
    $
    171,500
    
    
    $
    10,000Audit related fees
    
    $
    30,000
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    
 PART IV
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 JMG Exploration Inc.
Financial Statements
 PageReports of Ernst & Young, LLP, , Independent Registered Public
Accounting Firm
    
    
    36Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    38Consolidated Statements of Operations for the year ended December
31, 2005, the period from the date of incorporation on July 16,
2004 to December 31, 2004 and to December 31, 2005
    
    
    39Consolidated Statements of Cash Flows for the year ended December
31, 2005, the period from the date of incorporation on July 16,
2004 to December 31, 2004 and to December 31, 2005
    
    
    40Consolidated Statements of Shareholders Equity for the year ended
December 31, 2005, the period from the date of incorporation on
July 16, 2004 to December 31, 2004 and to December 31, 2005
    
    
    41Consolidated Statements of Comprehensive Loss for the year ended
December 31, 2005, the period from the date of incorporation on
July 16, 2004 to December 31, 2004 and to December 31, 2005
    
    
    42Notes to Consolidated Financial Statements
    
    
    43- 53
 Financial Statement Schedules
 (a)3 Exhibits:
 Number
    
    Exhibit3.1(1)
    
    Amended and Restated Articles of Incorporation of the registrant *3.2(1)
    
    By-laws of the registrant *3.3(1)
    
    Certificate of Designation of the Rights and Preferences of the Series A Convertible Preferred Stock4.1(1)
    
    Specimen of Common stock Certificate *4.1(1)
    
    Form of Lockup Agreement  Officers and Directors *4.3(1)
    
    Form of $4.25 Warrant *4.4(1)
    
    Form of $6.00 Warrant *
 56




---



##### 



Number
    
    Exhibit4.5(1)
    
    Form of $5.00 Warrant *4.6(1)
    
    Form of Underwriters Warrant Agreement10.1(1)*
    
    Equity compensation plan *10.2(1)
    
    Hooligan Draw Farm-in Agreement*10.3(1)
    
    Cut Bank Farm-in Agreement*10.4(1)
    
    Fiddler Creek Farm-in Agreement *10.5(1)
    
    JED Oil Technical Services Agreement, as amended *10.6(1)
    
    2nd Amended and Restated Agreement of Business Principles with Enterra Energy Trust, JED
Oil Inc. and JMG Exploration, Inc. *10.7(1)
    
    Fellows Energy Ltd. Exploration and Development and Conveyance Agreement *10.8(1)
    
    Fellows Energy Ltd. Promissory Note *10.9(1)
    
    Fellows Energy Ltd. General Security Agreement *10.10(1)
    
    Candak Farm-in Agreement *10.11(1)
    
    Myrtle Beach Farm-in Agreement *10.12(1)
    
    Bluffton Farm-in Agreement *10.13(1)
    
    Pinedale  Jonah Farm-in Agreement *10.14(1)
    
    Pinedale  Desert Mining, Inc. Agreement *10.15
    
    Termination Agreement dated January 1, 2006 relating to JED Oil Technical Services Agreement, as
amended10.16
    
    Joint Services Agreement between JMG Exploration Inc. and JED Oil Inc. dated January 1, 200614.1
    
    Code of Business Conduct*23.1(1)
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm23.2
    
    Consent of DeGolyer and Mac Naughton Canada Limited, Independent Engineers31.1
    
    Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract(1)
    
    Incorporated by reference to the Companys registration statement on Form SB-2 (333-120082) 57




---



##### 



SIGNATURES
 Securities Exchange Act of 1934
 April 5, 2006
    JMG Exploration Inc.By:
    /s/ Herman S. HartleyHerman S. HartleyChief Executive Officer  Signature
    
    Title
    
    DateBy: /s/ Herman S. Hartley
    
    President, Chief Executive
    
    April 5, 2006Officer and DirectorBy: /s/ Joanne R. Finnerty
    
    Chief Financial Officer and
    
    April 5, 2006Chief Accounting OfficerBy: /s/ Reg Greenslade
    
    Director
    
    April 5, 2006By: /s/ Thomas J. Jacobsen
    
    Director
    
    April 5, 2006By: /s/ Reuben Sandler
    
    Director
    
    April 5, 2006By: /s/ Joseph W. Skeehan
    
    Director
    
    April 5, 2006By: /s/ Donald P. Wells
    
    Director
    
    April 5, 2006
 58