FORM 20-F  US SECURITIES AND EXCHANGE COMMISSION Washington, D.C.  20549  o  REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934  OR  xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2004  OR  [   ]  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 000-30766  NETCO ENERGY INC. (Exact name of Registrant as specified in its charter)  Not Applicable (Translation of Registrant's Name into English)  Alberta, Canada (Jurisdiction of incorporation or organization)  1100  609 West Hastings Street Vancouver, British Columbia, Canada  V6B 4W4 (Address of principal executive offices)  Securities registered or to be registered pursuant to Section 12(b) of the Act: None Title of Class None Name of Each Exchange on Which Registered Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares Without Par Value (Title of Class)       Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:



None

Title of Class



Indicate the number of outstanding shares of each of the Issuer's classes of capital or common stock as of the close of the period covered by the annual report.



There were 16,488,651 common shares, without par value, issued and outstanding as of June 28, 2005.



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 period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES [ X ] NO o



Indicate by check mark which financial statement item the Registrant has elected to follow.

ITEM 17 o ITEM 18x










i





TABLE OF CONTENTS

PART 1

Item 1 Identity of Directors, Senior Management and Advisers

Item 2 Offer Statistics and Expected Timetable

Item 3 Key Information

Item 4 Information on Netco Energy Inc.

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 / not applicable

Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds / not applicable

Item 15 Controls and Procedures

Item 16 (Reserved)

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

SIGNATURES











ii







ABBREVIATIONS



bbls - barrels

mbbls - thousand barrels

mmbbls - millions barrels

bopd - barrels of oil per day

boe - barrels of oil equivalent

boepd - barrels of oil equivalent per day

mcf - thousand cubic feet

mmcf - million cubic feet

bcf - billion cubic feet

mmcf/d - million cubic feet per day

mmbtu - million British Thermal Units

ngls - natural gas liquids

mstb  thousand stock tank barrels

mlt  thousand long tons



CONVERSION TABLE


To Convert From
        To
        Multiply ByMcfCubic metresFeetMetresMilesKilometresAcres
        Cubic metres ("m3")Cubic feetMetresFeetKilometresMilesHectares
        28.17435.4940.3053.2811.6090.6210.405





1





PART I

FORWARD-LOOKING STATEMENTS

This Form 20-F Annual Report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our Company's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

As used in this prospectus, the terms "we", "us", "our", and "Netco" mean Netco Energy Inc. and Netco's subsidiary, unless otherwise indicated.


ITEM 1
        Identity of Directors, Senior Management and AdvisersNot applicable.ITEM 2
        Offer Statistics and Expected TimetableNot applicable.ITEM 3
        Key InformationA.
        Selected Financial DataThe selected financial data presented below for the five year period ended December 31, 2004 is derived from our consolidated financial statements which were examined by our independent auditor.  The information set forth below should be read in conjunction with our consolidated financial statements (including related notes thereto) and "Operating and Financial Review and Prospects" (Item 5).  The data is presented in Canadian dollars and in accordance with Canadian generally accepted accounting principles.









2







Selected Financial Data

(Stated in Canadian Dollars)



Fiscal Year Ended December 31 (Audited)




CANADIAN GAAP
        2004
        2003
        2002
        2001
        2000Gross Sales or Operating Revenue
        2,787,153
        3,409,365
        1,281,645
        604,160
        592,072Royalties
        $695,086
        $862,286
        $208,154
        $94,812
        137,198Administrative Expenses
        603,417
        368,388
        201,245
        266,808
        250,267Depletion and Asset Write-down
        1,077,056
        1,526,893
        311,000
        37,181
        150,419Income (Loss) From Operations
        (950,456)
        174,296
        878,125
        192,826
        81,047Net Income (Loss) from ContinuingOperations
        (950,456)
        174,296
        878,125
        192,826
        81,047Net Income (Loss) for the year
        (950,456)
        174,296
        878,125
        192,826
        81,047Net Income (Loss) from Operationsper Common Share
        (0.07)
        0.03
        0.14
        0.06
        0.03Income (Loss) from ContinuingOperations per Common Share
        (0.07)
        0.03
        0.14
        0.06
        0.03Total Assets
        6,489,078
        4,526,921
        2,873,267
        1,737,938
        1,009,379Net Assets
        5,166,410
        3,320,497
        2,752,551
        1,489,176
        984,350Capital Stock
        12,728,307
        10,024,234
        9,634,484
        9,249,234
        8,937,234Number of Common Shares(adjusted to reflect changesin capital)
        16,488,651
        8,149,329
        6,461,829
        4,749,329
        3,199,329Diluted Net Income perCommon Share
        (0.06)
        0.02
        0.13
        0.05
        0.02Long-Term Debt
        $1,000,000
        $1,000,000
        Nil
        Nil
        NilCash Dividends per Common Share
        Nil
        Nil
        Nil
        Nil
        Nil









3








UNITED STATES GAAP
        2004
        2003
        2002
        2001
        2000Gross Sales or Operating Revenue
        2,787,153
        3,409,365
        1,281,645
        604,160
        592,072Royalties
        $695,086
        $862,286
        $208,154
        $94,812
        137,198Administrative Expenses
        603,417
        368,388
        201,245
        266,808
        250,667Depletion and Asset Write-down
        1,077,056
        1,526,893
        311,000
        37,181
        150,419Income (Loss) From Operations
        (1,310,456)
        (167,151)
        878,125
        192,826
        81,047Net Income (Loss) from ContinuingOperations
        (1,310,456)
        (167,151)
        878,125
        192,826
        81,047Net Income (Loss) for the year
        (1,310,456)
        (167,151)
        878,125
        192,826
        81,047Net Income (Loss) from Operationsper Common Share
        (0.07)
        (0.03)
        0.14
        0.06
        0.03Income (Loss) from ContinuingOperations per Common Share
        (0.07)
        (0.03)
        0.14
        0.06
        0.03Total Assets
        6,489,078
        4,526,921
        2,873,267
        1,873,472
        1,144,913Net Assets
        5,166,410
        3,320,497
        2,752,551
        1,624,710
        1,119,884Capital Stock
        12,728,307
        10,024,234
        9,634,484
        9,249,234
        8,937,234Number of Common Shares(adjusted to reflect changesin capital)
        16,488,651
        8,149,329
        6,461,829
        4,749,329
        3,199,329Diluted Net Income perCommon Share
        (0.09)
        (0.03)
        0.13
        0.05
        0.02Long-Term Debt
        $1,000,000
        $1,000,000
        Nil
        Nil
        NilCash Dividends per Common Share
        Nil
        Nil
        Nil
        Nil
        NilDifferences Between Generally Accepted Accounting Principles (GAAP) in Canada and the United States

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles.  The following summarizes the significant adjustments or disclosures which would be required to present these consolidated financial statements in accordance with US generally accepted accounting principles.

Earnings (Loss) Per Share

Canadian generally accepted accounting principles require that basic earnings per share (EPS) be based solely on the common shares actually issued and outstanding, whereas US generally accepted accounting principles require the inclusion of "common stock equivalents" in the calculation of primary EPS when their inclusion would have dilutive effect.  Our common stock equivalents are the unexercised common share stock options and share purchase warrants.  In the current periods, inclusion of such common stock equivalents would have an anti-dilutive effect on primary EPS and have not, therefore, been included.  Accordingly, there is no difference in the calculations of income and loss per share presented in the periods covered by these consolidated financial statements.

A reconciliation to United States generally accepted accounting principles is included in Note 10 to the Audited Financial Statements.







4





Exchange Rate Summary

Since June 1, 1970, the government of Canada has permitted a floating exchange rate to determine the value of the Canadian dollar as compared to the United States dollar.  On June 24, 2005, the exchange rate in effect for Canadian dollars exchanged for United States dollars, expressed in terms of Canadian dollars (based on the noon buying rates in New York City, for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York) was $1.2329.  For the past five fiscal years ended December 31 and for the period between December 31, 2004 and May 31, 2005, the following exchange rates were in effect for Canadian dollars exchanged for United States dollars, expressed in terms of Canadian dollars (based on the noon buying rates in New York City, for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York):




Year Ended
        AverageDecember 31, 2000
        $1.4855December 31, 2001
        $1.5489December 31, 2002
        $1.5642December 31, 2003
        $1.4008December 31, 2004
        $1.3017


Month ended
        Low / HighDecember 31, 2004
        $1.1856 / $1.2401January 31, 2005
        $1.1982 / $1.2422February 29, 2005
        $1.2294 / $1.2562March 31, 2005
        $1.2017 / $1.2463April 30, 2005
        $1.2146 / $1.2568May 31, 2005
        $1.2474 / $1.2703We have not issued any dividends in the past five fiscal years.D.
        Risk FactorsMuch of the information included in this annual report includes or is based upon estimates, projections or other "forward looking statements".  Such forward looking statements include any projections or estimates made by our company and our management in connection with our business operations.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, however







5





actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other "forward looking statements" involve various risks and uncertainties as outlined below.  We caution the reader that important factors in some cases have affected and could materially affect actual results in the future, and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward looking statements".  Prospective investors should consider carefully the risk factors set out below.

We are a company with a limited operating history which makes it difficult to evaluate whether we will operate profitably.

We have a limited oil and gas operating history and therefore have a limited history of earnings. We started our oil and gas operations in August, 1997.  In the past, we have incurred substantial net losses.  For the year ended December 31, 2004, we had a cumulative deficit of $7,658,093.  Our ability to generate significant revenues is uncertain.  In order for us to make a profit, our revenues will need to increase significantly.

The potential profitability of oil and gas ventures depends upon factors beyond the control of our company.

The potential profitability of oil and gas properties is dependent upon many factors beyond our control.  For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments.  Additionally, due to worldwide economic uncertainty, the availability and cost of funds for exploration and production and other expenses have become increasingly difficult, if not impossible, to project.  These changes and events may materially affect our financial performance.

Adverse weather conditions can also hinder drilling operations.  A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well.  In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances.  The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control.  These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. The extent of these factors cannot be accurately predicted but the combination of these factors may result in our company not receiving an adequate return on invested capital.

Because the process of estimated oil and gas prices is complex and such estimation are inherently imprecise, actual production, revenues, taxes, development expenditures and operating expenses with respect to our reserves will likely vary from our estimates, and such variances may be material.

Under applicable regulatory requirements, we are required to identify and disclose proved oil and gas reserves, estimated quantities of crude oil, natural gas and natural gas liquids.  This geological and engineering data demonstrates with reasonable certainty the estimated quantities of crude oil, natural gas and natural gas liquids which will be recoverable in future years from known reservoirs under existing economic and operating conditions.  However, the process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir.  As a result, such estimates are inherently imprecise.  Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating







6





expenses and quantities of recoverable oil and gas reserves may vary substantially from our estimations from year to year.  Any significant variance in the assumed values could materially affect the estimated quantities and present values of reserves.  For example, a material drop in oil and gas prices, or a material increase in applicable taxes, will require management to reassess whether known reservoirs can continue to be reasonably judged as economically productive from one year to the next.  In addition, our reserves may be subject to downward or upward revisions based upon production history, results of future exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.  Actual production, revenues, taxes, development expenditures and operating expenses with respect to our reserves will likely vary from our estimates, and such variances may be material.


If we do not acquire further oil and gas properties, our reserves will  decline as reserves are produced.In general, the volume of production from oil and gas properties declines as reserves are depleted.  The decline rates depend on reservoir characteristics and vary from steep declines to the relatively slow declines characteristic of long-lived fields in other regions.  Because we do not currently intend to acquire further oil and gas properties, our reserves will decline as reserves are produced.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company.

We are subject to laws and regulations that control the discharge of materials into the environment, require removal and cleanup in certain circumstances, require the proper handling and disposal of waste materials or otherwise relate to the protection of the environment.  In operating and owning petroleum interests, we may be liable for damages and the costs of removing hydrocarbon spills for which we are held responsible.  Laws relating to the protection of the environment have in many jurisdictions become more stringent in recent years and may, in certain circumstances, impose strict liability, rendering our company liable for environmental damage without regard to actual negligence or fault.  Such laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts of our company.  We believe that we have complied in all material respects with
applicable environmental laws and regulations.

We have not obtained title reports and our properties may be subject to prior unregistered agreements, native land claims or transfers which have not been recorded or detected, resulting in a possible claim against any future revenues generated by such properties.

We have not obtained any recent legal opinion as to title of our assets.  As a result, no assurances can be given that title defects do not exist.  If title defects do exist, it is possible that we may lose all or a portion of our right, title, estate and interest in and to our assets.

Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.

Drilling operations generally involve a high degree of risk.  Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labour, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or which we may elect not to insure.  Incurring any such liability may have a material adverse effect on our financial position and operations.







7





Competition in the oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring desirable oil and gas leases.

The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs.  Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds.  There can be no assurance that the necessary funds can be raised or that any projected work will be completed.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company.

Our oil and gas operations are subject to various Canadian federal, provincial and local governmental regulations.  Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation.  From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.  The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, provincial and local laws and regulations relating primarily to the protection of human health and the
environment.  To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company.  The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

Trading of our stock may be restricted by the SEC's "Penny Stock" regulations which may limit a stockholder's ability to buy and sell our stock.

The US Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors."  The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form
prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the
transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny







8





stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock.

Our directors and officers own a minor amount of stock and, if they act as a group, will not have a significant influence on all matters requiring shareholder approval which may delay or prevent a change in control.

As of June 28, 2005, directors and executive officers beneficially owned approximately 0.73% of our outstanding common shares.  As a group, the directors and officers also have options to purchase 120,000 additional shares which if exercised would represent approximately 0.72% of our outstanding common shares.  As a result, these shareholders, if they act as a group, will not have a significant influence on all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions.

Trading in our common shares on the TSX Venture Exchange is limited and sporadic making it difficult for our shareholders to sell their shares or liquidate their investments.

The trading price of our shares has been and may continue to be subject to wide fluctuations.  Trading prices of our shares may fluctuate in response to a number of factors, many of which are beyond our control. In addition, the stock market in general, and the market for oil and gas exploration companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.  These broad market and industry factors may adversely affect the market price of our shares, regardless of our operating performance.

In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted.  Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources.

Our By-laws contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.

Our By-laws contain provisions limiting the liability of our officers and directors for all acts, receipts, neglects or defaults of themselves and all of our other officers or directors or for any other loss, damage or expense incurred by our company which shall happen in the execution of the duties of such officers or directors.  Such limitations on liability may reduce the likelihood of derivative litigation against our officers and directors and may discourage or deter our shareholders from suing our officers and directors based upon breaches of their duties to our company, though such an action, if successful, might otherwise benefit our company and our shareholders.

Investors interests in our company will be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities.

In the event that we are required to issue additional shares or decide to enter into joint ventures with other parties in order to raise financing through the sale of equity securities, investors' interests in our company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold.  There are also outstanding common share purchase warrants exercisable into 3,589,624 common shares which, if exercised, would represent approximately 17.88% of our issued and outstanding shares.  If all of these shares are exercised and issued, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders.  Dilution may result in a decline in the market price of our shares.







9





US investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

We may be treated as a passive foreign investment company, or PFIC, for United States federal income tax purposes during the 2004 tax year or in subsequent years.  We may be deemed a PFIC because previous financings combined with proceeds of future financings may produce, or be deemed to be held to produce, passive income.  Additionally, US citizens should review the section entitled "Taxation-US Federal Income Taxation - Passive Foreign Investment Companies" contained in this annual report for a more detailed description of the PFIC rules and how those rules may affect their ownership of our capital shares.

If we are or become a PFIC, many of the US shareholders will be subject to the following adverse tax consequences:

- they will be taxed at the highest ordinary income tax rates in effect during their holding period on certain distributions on our capital shares, and gains from the sale or other disposition of our capital shares;

- they will be required to pay interest on taxes allocable to prior periods; and

- the tax basis of our capital shares will not be increased to fair market value at the date of their date.

We do not expect to declare or pay any dividends.

We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.


ITEM 4
        Information on Netco Energy Inc.A.
        History and Development of Netco Energy Inc.Netco Energy Inc. was incorporated on May 21, 1993 as "567905 Alberta Ltd." pursuant to theBusiness Corporations Act (Alberta)(the "ABCA").  We changed our name to "Hilstar Capital Corporation" on September 8, 1993.  Pursuant to Articles of Amendment filed on October 5, 1995, we changed our name to "KINeSYS Pharmaceutical Inc.", and our then issued and outstanding common shares were consolidated on a three-for-one basis (one new common share for every three common shares then outstanding).  On August 20, 1997, we changed our name to "Green River Petroleum Inc.", and on July 6, 1999, to "Green River Holdings Inc.".  Also on July 6, 1999, our then issued and outstanding common shares were consolidated on a one-for-five basis (one new common share for every five common shares then outstanding).  On July 28, 2000, we changed our name to "Netco
Energy Inc.", and our then issued and outstanding common shares were consolidated on a one-for-two basis (one new common share for every two common shares then outstanding).

As at the date of this annual report, we have one wholly-owned subsidiary, Green River Petroleum (USA) Inc.  Green River Petroleum (USA) Inc., incorporated on October 13, 1997, under the laws of the State of Wyoming, was dissolved by the State of Wyoming during 2002.  We reincorporated Green River Petroleum (USA) Inc. on November 22, 2004.







10





Development of Our Company

Our common shares were listed and posted on the Alberta Stock Exchange on January 4, 1994 as a junior capital pool corporation under the name "Hilstar Capital Corporation".  As a junior capital pool corporation, our principal business was to identify and evaluate properties or businesses with a view to acquisition or participation.  The Alberta Stock Exchange was a predecessor exchange of the Canadian Venture Exchange, which was formed by the merger of the Alberta and Vancouver Stock Exchanges effective November 26, 1999.  The Canadian Venture Exchange is now the TSX Venture Exchange.

On August 19, 1997, acting through our subsidiary, Green River Petroleum (USA) Inc., we entered into a farm-in agreement with Ultra Resources, Inc. and Ultra Petroleum (USA) Inc. (together, "Ultra"), both wholly-owned subsidiaries of Ultra Petroleum Corp., pursuant to which our subsidiary agreed to pay prospect fees and drill three wells in order to earn a portion of Ultra's interest in certain petroleum and natural gas assets located in Sublette County, Wyoming.  The farm-in agreement was formalized by way of an Exploration Development Agreement among our subsidiary and Ultra.  Pursuant to the farm-in agreement, we agreed to drill three (3) wells and pay various costs and expenses with respect to certain of Ultra's land holdings in Sublette County, Wyoming to earn an interest in such leasehold.  The farm-in agreement covered prospects in four areas:  Warbonnet (406.40 net acres), Lovatt
Draw (4,847.9 net acres), Fort Bonneville (7,239.3 net acres) and Merna (9,920 net acres).  Ultra was to be the initial operator in all four areas.

Pursuant to a letter agreement dated October 31, 1997 with Ultra Petroleum (USA) Inc., William Charles Helton, Barbara Mary Helton and Enterprise Exploration and Production Co., Inc., our company, acting through our subsidiary, acquired a 17.75% working interest and a 13.274211% net revenue interest in certain petroleum and natural gas assets covering 430.808 gross acres in the Bon Air Field, Jefferson Davis Parish, Louisiana, USA.  The transaction closed on January 16, 1998, with an effective date of July 1, 1997.  The assets on the Louisiana property include one producing gas well, the Mildred Landry MT#1 well.

Pursuant to a letter agreement dated April 27, 1998, acting through our subsidiary, we acquired a non-convertible 0.5% gross overriding royalty interest in certain petroleum and natural gas leases known as the Corona Property, located in Sublette County, Wyoming.  Our subsidiary received 0.5% of the gross revenues from any production on the leases and is only responsible for its 0.5% share of the costs incurred after the production reaches the sales point.

None of the wells drilled in Wyoming pursuant to our agreements with Ultra achieved commercial production.  As a result of the drilling and completion of operations of the three wells, we were indebted to Ultra Resources, Inc. in the amount of US$830,942 as of April 30, 1999.  As a result of negotiations between Ultra and our company, the parties entered into an agreement dated August 5, 1999, pursuant to which the debt owing to Ultra was settled by payment to Ultra of US$35,000, and our relinquishment of all of the interests that we had earned under the farm-in agreement, except for an interest equal to 20% of Ultra's interest in approximately 10,000 acres in one area called the Lovatt Draw.  The interest retained by our company amounted to a 17% working interest in certain leases in the Lovatt Draw, excluding the 40-acre spacing unit where Ultra's Lovatt Draw well is located.  As a
working interest owner in the Lovatt Draw leases, we had the right, but not the obligation, to participate in any further exploration programs that might be proposed, as well as the obligation to pay our proportionate share of the annual rentals of between US$1.00 and US$2.00 per acre.







11





Our Business

Our principal business has been the exploration, development and production of oil and natural gas reserves.

As noted herein, we have recently acquired interests in oil and gas properties located in Alberta, Canada.  To date we have received modest revenues from such interests.  However, there are no assurances that any revenue stream derived from such interests will be consistent in the future.  To the extent that we receive an uncertain cash flow from our oil and gas revenues and that these amounts are not significant, we are highly dependent on external sources of financing to maintain a positive cash flow.

Sale of Our Assets to Patriot Petroleum Corp. (formerly Patriot Capital Corp.)

Pursuant to a letter of intent dated May 25, 2001 from Patriot Capital Corp. ("Patriot"), we received an offer to purchase our subsidiary's interest in our assets located in Louisiana and Wyoming.  Pursuant to the terms of the letter of intent, and a definitive agreement dated August 7, 2001 (the "Patriot Agreement") the consideration to be paid by Patriot for the acquisition of our subsidiarys interest in the Louisiana and Wyoming assets was US$644,419, payable as to US$521,419 for the assets located in Wyoming and US$123,000 for the assets located in Louisiana.

Pursuant to the Patriot Agreement, we sold all of our interests in oil and gas assets located in the States of Louisiana and Wyoming to Patriot, based upon their value as at May 1, 2001, in consideration for the total sale price of US$644,419.  The sale closed on March 1, 2002.  Pursuant to the terms of the Patriot Agreement, all income collected or accrued on the oil and gas assets from May 1, 2001 to March 1, 2002 was credited to Patriot.  As a result of the income that accrued to Patriot, we entered into an amendment to the Patriot Agreement such that the total purchase price payable was reduced to US$494,734.04 to account for the accrued income.

At that time, two of the directors of Patriot, Donald Sharpe and John Hislop, were also members of our board of directors.  As a result, both Mr. Sharpe and Mr. Hislop abstained from voting on the resolution approving the sale of the Louisiana and Wyoming assets to Patriot.


B.
        Business OverviewPresent Operations of Our Company

Our current operations consist of holding working interests in various oil and gas properties located in Alberta, Canada.  Our working interests range from 18.75% to 68.75% depending upon the property.  Our more material properties and interests are discussed below.

On August 2, 2001 we entered into a farm-out agreement with Moxie Exploration Ltd. ("Moxie") pursuant to which we drilled a well in the Jumpbush area of Alberta.  We paid $376,418, or 75% of the drilling costs of the well and earned a 37.5% interest in the well and the farm-out lands.  The well was put into production in February, 2002.  The farm-out lands that are encompassed by our agreement with Moxie are more particularly described as Twp. 20 Rge. 19 W4M:  Sections 3 and 22.

Further to our initial agreement with Moxie, on September 21, 2001 we entered into a second farm-out agreement with Moxie.  Under this farm-out, we again paid for 75% of the cost to drill and complete a further well in the Jumpbush area of Alberta to thereby earn out 37.5% interest.  This well has been drilled and cased to a depth of 757 meters and is waiting on a tie-in to production.  Our total cost was $117,371.







12





We subsequently entered into a further farm-out agreement with Moxie Exploration Ltd. dated October 10, 2001.  Pursuant to the terms of the farm-in, we participated for 50% in the drilling of a well in the Eyremore area of Alberta.  The cost to us was $177,550 and we acquired a 50% interest in the well.  The well commenced production in February, 2002.

We have also entered into a farm-out arrangement with Daybreak Energy Inc. ("Daybreak") in the Wainwright area of Alberta pursuant to an agreement dated September 14, 2001, as amended by an agreement dated October 18, 2001.  Under the terms of the farm-in, we paid $79,131 for a 50% interest in the land and paid 100% of the cost to re-enter, drill and complete a well in order to earn a 68.75% interest, after payout, in the prospect.  Our cost to drill and complete the well was $146,867.  Donald A Sharpe, our president at the time, was also a director of Daybreak Energy Inc.

On November 22, 2001, Daybreak re-entered the well bore in the Wainwright area at 6-2-44-5 W4 targeting the Colony formation.  The well was completed and put on production in April, 2002.

On November 26, 2002, we entered into a farm-out agreement with Zorin Exploration whereby we can earn a 27.75% working interest in two wells in the Granlea area of Alberta and the farm-out lands by paying 55.5% of the costs to drill and complete the wells.

On January 15, 2003, we entered into a participation agreement with Moxie Exploration Ltd. whereby we can earn a 35% working interest in three test wells in the West Jumpbush area of Alberta and the farm-out lands by paying 70% of the costs to drill and complete the three wells.

We entered into a farm-in agreement dated January 24, 2003 with Warrior Energy Corporation (Warrior), whereby we can earn an undivided 60% working interest in Block 1 of the farm-in lands, and an undivided 20% working interest in Block 11 of the farm-in lands, by the drilling of a test well, located in the Greencourt Area, Alberta.

We subsequently entered into a participation agreement dated February 19, 2003 with Warrior whereby we can earn a 40% interest before pay-out (24% after pay-out) in two wells located in the Morningside Area, Alberta.

On April 21, 2003, we entered into a farm-in agreement with Warrior whereby we have the option to pay 20% of the costs to drill, test, cap, complete or abandon one well in the Carrot Creek area of Alberta in order to earn a 12% working interest in the well and farm-in lands.

On May 1, 2003, we entered into a participation agreement with Makah Energy Corporation whereby we can participate in an undivided 50% interest in joint oil and gas exploration and development activities within an area of mutual interest in the Provost area of Alberta.

On June 2, 2003 we entered into a farm-out and participation agreement with Mustang Resource Inc., whereby we can earn a 30% working interest in a well and farm-out lands in the Sylvan Lake area of Alberta by paying 60% of the costs to drill to casing point or abandon the well.

On December 12, 2003 the farm-in agreement dated January 24, 2003 with Warrior was amended whereby we agreed to waive the requirement to complete and test the well to earn a 60% interest in the well and one section in favour of us earning a 50% earned working interest in the test well, one section and a 20% working interest in an adjoining section comprising the farm-in lands located in Greencourt, Alberta.







13





On January 5, 2004 we entered into a farm-out agreement with Chirripo Resources Inc. (Chirripo), whereby Chirripo at its cost can earn an undivided 100% of our 50% working interest in the Greencourt test well and section by completing the test well and if successful bringing the test well on production. We will retain a 5% gross override on any production from the test well and upon payout of Chirripos completion and tie-in costs will convert our 5% gross override interest into a 20% working interest.

Subsequent to our year ended December 31, 2004, we entered into a farm-in agreement with Nation Energy Inc., whereby we have the right to earn 60% of Nations interest in two sections of land in the Boltan area of Alberta.  Under the terms of the agreement, we will pay 100% of Nations costs relation to Nations 15% working interest in the drilling and development of exploratory well Boltan 14-10-59-2W6; a 3500 meter test well operated by Accrete Energy Inc.  We will earn a 9% interest, after payout, in Boltan 14-10-59-2W6 and the well spacing unit and one additional section of land.  Estimated gross drilling and casing costs are approximately $2,000,000 of which our share of costs would be approximately $300,000.  Boltan 14-10-59-2W6 is an offset location to Accrete operated Boltan 9-9-059-2W6; a successful Gething gas well turned to sales mid-2004.   The Bolton
14-10-59-2W6 well has been drilled and successfully completed.  A gathering line has been laid.  Due to facility constraints the operator recommends installing compression facilities, that if installed, would enable the well to flow to sales on an uninterrupted basis.  Based on initial production tests the well is forecast to produce a gross raw gas rate of two million cubic feet per day.  Netcos shares of actual cots incurred through tie-in are approximately $875,000.

Revenues

For the year ended December 31, 2004 we received total revenues of $2,787,153 from our interests in our oil and gas properties located in Alberta, Canada.

Market Prices of Oil and Natural Gas

The market prices of oil and natural gas have historically fluctuated widely and are affected by numerous global factors beyond our control.  A decline in such market prices may have an adverse effect on revenues we receive from the sale of oil and gas.  A decline in prices will also reduce our exploration efforts and make it more difficult to raise capital.

Governmental Regulation/Environmental Issues

Our oil and gas operations are subject to various United States federal, state and local governmental regulations.  Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation.  From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.  The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the
environment.  To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company.  The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.







14








C.
        Organizational StructureAs of the date of this annual report, we have one subsidiary, Green River Petroleum (USA) Ltd., incorporated under the laws of the State of Wyoming was dissolved during 2002 and reincorporated under the laws of the State of Wyoming on November 22, 2004.


D.
        Property, Plants and EquipmentOur executive office is located at Suite 1100 - 609 West Hastings Street, Vancouver, British Columbia, Canada  V6B 4W4.  Management, administration, information services, accounting, rent, utilities and compliance services are provided by a private management company wholly owned by a former director of the Company.  The services are provided on a month to month basis and there is no formal written agreement.

Our Jumpbush Area Assets

We hold a working interest of 18.75% to 37.5% in certain oil and gas assets located in the Jumpbush areas of Alberta, Canada.

Our Wainwright Area Assets

We hold a 68.75% working interest in certain oil and gas assets located in the Wainwright area of Alberta, Canada.

Our Eyremore Area Assets

We hold a 50% working interest in certain oil and gas assets located in the Eyremore area of Alberta, Canada.

Our Granlea Area Assets

We hold a 27.75% working interest in certain oil and gas assets located in the Granlea area of Alberta, Canada.

Our Majorville Area Assets

We hold a 35% working interest in certain oil and gas assets located in the Majorville area of Alberta, Canada.

Our Carrot Creek Area Assets

We hold a 12% working interest in certain oil and gas assets located in the Carrot Creek area of Alberta, Canada.

Our Provost Area Assets

We hold a 50% working interest in certain oil and gas assets located in the Provost area of Alberta, Canada.







15





Our Sylvan Lake Area Assets

We hold a 30% working interest in certain oil and gas assets located in the Sylvan Lake area of Alberta, Canada.

Boltan Property, West Central Alberta

We have the right to acquire a 60% of Nations interest in two sections of land in the Boltan area of Alberta.

Production History and Drilling Activity


Our oil and gas assets in Alberta, Canada began production during 2002.As at the date of this annual report, the following 22 wells have been drilled on the properties located in Alberta, Canada in which we hold an interest:

Production History and Drilling Activity


Our oil and gas assets in Alberta, Canada began production during 2002.As at the date of this annual report, the following 25 wells have been drilled on the properties located in Alberta, Canada in which we hold an interest:




Property
        Well
        Well Type
        Status
        Working InterestJumpbush
        16-3-20-19W4
        Natural Gas
        Producing
        37.50%Jumpbush
        10-21-20-19W4
        Natural Gas
        Producing
        37.50%Jumpbush
        10-22-20-19W4
        Natural Gas
        Producing
        37.50%Jumpbush
        6-16-20-19W4
        Natural Gas
        Producing
        37.50%Jumpbush
        10-24-20-19W4
        Natural Gas
        Producing
        35.625%Jumpbush
        5-17-20-19W4
        Natural Gas
        Producing
        18.75%Jumpbush
        1-1-20-19W4
        Oil
        Producing
        35.00%Eyremore
        16-8-19-18W4
        Natural Gas
        Producing
        50.00%Eyremore
        3-8-19-18W4
        Natural Gas
        Producing
        25.00%Eyremore
        8-8-19-18W4
        Natural Gas
        Producing
        25.00%Eyremore
        14-8-19-18W4
        Natural Gas
        Producing
        25.00%Jumpbush
        6-29-20-19W4
        Natural Gas
        Producing
        37.50%Jumpbush
        8-28-20-19W4
        Natural Gas
        Shut In
        37.50%Jumpbush
        12-29-19-20W4M
        Natural Gas
        Producing
        37.50%Majorville
        15-25-19-20W4
        Natural Gas
        Abandoned
        35.00%Jumpbush
        11-36-19-20W4M
        Natural Gas
        Producing
        35.00%Granlea
        6-23-08-10W4M
        Natural Gas
        Dry Hole
        27.75%







16








Granlea
        16-14-08-10W4M
        Natural Gas
        Dry Hole
        27.75%Greencourt
        4-20-60-9W5M
        Natural Gas
        Producing
        0%Morningside
        8-13-42-1W5M
        Natural Gas
        Producing
        24.00%Morningside
        14-12-42-1W5M
        Natural Gas
        Producing
        24.00%Wainwright
        6-2-44-5W4M
        Natural Gas
        Producing
        68.75%Provost
        8-29-38-7W4
        Natural Gas
        Producing
        50.00%Carrot Creek
        8-27-53-12W5M
        Natural Gas
        Dry Hole
        12.00%Sylvan Lake
        7-2-38-4W5
        Natural Gas
        Shut In
        30.00%Geology and Reserve Summaries

AJM Petroleum Consultants (AJM) independent geological and petroleum engineering consultants of Calgary, Alberta, have prepared a report utilizing escalating cost and price assumptions dated December 31, 2004, evaluating as at December 31, 2004 the crude oil and natural gas reserves attributable to the Assets (the AJM Report).  All of the reserves identified in the AJM Report are located in Alberta, Canada.  The AJM Report is summarized in the table below.









17





Total Reserves and Present Worth Values

Escalating Prices as of December 31, 2004

Proved and Probable Reserves - Unrisked

Total of All Areas


RESERVESLight & Medium
Crude Oil
        Heavy
Crude Oil
        Residue & Solution
Sales Gas
        Natural Gas
Liquids
        SulphurRESERVE
        Gross(1)
        Net(2)
        Gross(1)
        Net(2)
        Gross(1)
        Net(2)
        Gross(1)
        Net(2)
        Gross(1)
        Net(2)CLASSIFICATION
        (Mstb)
        (Mstb)
        (Mstb)
        (Mstb)
        (MMcf)
        (MMcf)
        (Mstb)
        (Mstb)
        (Mlt)
        (Mlt)ProvedDeveloped Producing
        18
        15
        0
        0
        683
        525
        1
        1
        0
        0Developed Non-Producing
        0
        0
        0
        0
        0
        0
        0
        0
        0
        0Undeveloped
        0
        0
        0
        0
        167
        127
        0
        0
        0
        0-------
        ------
        ----
        ------
        -------
        ------
        ------
        -------
        -----
        ---------Total Proved
        18
        15
        0
        0
        850
        653
        1
        1
        0
        0Probable
        11
        9
        0
        0
        659
        500
        1
        1
        0
        0--------
        ------
        -----
        ------
        -------
        ------
        -------
        -------
        -------
        ----------Total Proved + Probable
        28
        24
        0
        0
        1,508
        1,152
        2
        2
        0
        0NET PRESENT VALUES OF FUTURE NET REVENUEBefore Income Taxes
Discounted at (%/year) (3) (4)(5)
        After Income Taxes
Discounted at (%/year)RESERVE
        0%
        5%
        10%
        15%
        20%
        0%
        5%
        10%
        15%
        20%CLASSIFICATION
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)
        (M$)ProvedDeveloped Producing
        2,928
        2,742
        2,579
        2,437
        2,312
        2,928
        2,742
        2,579
        2,437
        2,472Developed Non-Producing
        0
        0
        0
        0
        0
        0
        0
        0
        0
        0Undeveloped
        524
        438
        370
        316
        274
        524
        438
        370
        316
        274-------
        --------
        ---------
        -------
        -------
        -------
        -------
        ------
        ------
        -------Total Proved
        3,452
        3,180
        2,949
        2,753
        2,586
        3,452
        3,180
        2,949
        2,753
        2,586Probable
        2,279
        1,813
        1,487
        1,249
        1,071
        2,279
        1,813
        1,487
        1,249
        1,071--------
        --------
        -------
        -------
        -------
        -------
        --------
        -------
        -------
        --------Total Proved + Probable
        5,731
        4,993
        4,435
        4,002
        3,657
        5,731
        4,993
        4,435
        4,002
        3,657


(1)
        Before royalty deductions.(2)
        After royalty deductions.(3)
        No allowance was made for the degree of risk associated with any of the reserve categories.(4)Includes allowance for Alberta(5)Costs associated with extraction of natural gas products have in most cases been deducted from the natural gas revenues.

Royalty Tax Credit.







18





The values may not necessarily be fair market value of the reserves.

The AJM Report contains an evaluation prior to provision for income taxes, interest, and site restoration costs and general and administrative costs, after deduction of royalties and estimated future capital.  It should not be assumed that the discounted net present value estimated by AJM represents the fair market value of the reserves.  Where the present value is based on escalating or constant price and cost assumptions, there is no assurance that such price and cost assumptions will be attained and variances could be material.  Other assumptions and qualifications relating to costs, prices for future production and other matters are summarized in the notes following the tables contained in the report.

We are subject to laws and regulations that control the discharge of materials into the environment, require removal and cleanup in certain circumstances, require the proper handling and disposal of waste materials or otherwise relate to the protection of the environment.  In operating and owning petroleum interests, we may be liable for damages and the costs of removing hydrocarbon spills for which we are held responsible.  Laws relating to the protection of the environment have in many jurisdictions become more stringent in recent years and may, in certain circumstances, impose strict liability, rendering our company liable for environmental damage without regard to actual negligence or fault.  Such laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts of our company.  We believe that we have complied in all material respects with
applicable environmental laws and regulations.


ITEM 5
        Operating and Financial Review and ProspectsThe information in this section is presented in accordance with Canadian generally accepted accounting principles, and has not been reconciled to United States generally accepted accounting principles.  The following discussion of our financial condition and results of operations for the fiscal years ended December 31, 2004, 2003 and 2002 should be read in conjunction with our consolidated financial statements and related notes included in this annual report in accordance with Item 8 - "Financial Information".


A.
        Operating ResultsRevenues

For the year ended December 31, 2004 we received revenues totalling $2,787,153 from our interest in our Alberta assets before deduction of royalties.  For the year ended December 31, 2003 we received revenues of $3,409,365.  For the year ended December 31, 2002 we received revenues of $1,281,645. The increase in revenues from 2002 to 2003 is due to the production from our oil and gas assets located in Alberta, Canada which went into production during 2002, and the decrease in revenues from 2003 to 2004 was due primarily to declines in production.

Expenses

During the year ended December 31, 2004, general and administrative expenses were $603,417 compared to $368,388 during the year ended December 31, 2003.  The increase was primarily due to the increase in investor relations expenses (2004:  $69,654; 2003:  $Nil)  and an increase in office and general expenses (2004:  $157,591; 2003:  $71,983) and an increase in stock-based compensation (2004:  $92,296; 2003: $3,900) due to stock option grants.

During the year ended December 31, 2004, we paid $695,086 in royalties and $1,455,212 in direct operating expenses compared to $862,286 paid in royalties and $2,007,298 in direct operating







19





expenses during the year ended December 31, 2003.  The decrease in royalties and operating expenses from the 2003 to the 2004 fiscal year was as a result of decreased revenues from operations and drilling activities.

Other Income

Over the year ended December 31, 2004, we had interest income of $35,541 compared to interest income of $5,003 and a foreign exchange loss of $368 for the year ended December 31, 2003.

Pursuant to the Patriot Agreement, we sold all of our interests in oil and gas assets located in the States of Louisiana and Wyoming to Patriot, based upon their value as at May 1, 2001, in consideration for the total purchase price of US$644,419.  The sale closed on March 1, 2002.  Pursuant to the terms of the Patriot Agreement, all income collected or accrued on the oil and gas assets from May 1, 2001 to March 1, 2002 was credited to Patriot.  Given the income that accrued to Patriot, we entered into an amendment to the Patriot Agreement such that the total purchase price payable was reduced to US$494,734.04 to account for the accrued income.

Income Taxes

We have exploration and development expenses of $4,500,000 to offset future taxable income as calculated under the Canadian income tax act.

Net Income or Loss

Our net loss for the year ended December 31, 2004 was $950,456, or $0.07 per share, compared to the year ended December 31, 2003 when the net income was $174,296 or $0.03 per share.  The increase in our net loss was primarily due to our decrease in revenues and a write down of oil and natural gas interests of $1,019,435.

We do not believe that inflation will significantly affect our operations at this stage of our development.


B.
        Liquidity and Capital ResourcesIn February 2003, we arranged an operating credit line with the National Bank of Canada consisting of an $850,000 revolving operating demand loan, and a $250,000 non-revolving acquisition and development demand loan.  National Bank of Canada periodically reviews the operating credit line and effective March 2004 our credit line consists of a $750,000 revolving operating demand loan, and a $300,000 non-revolving acquisition and development demand loan. These loans are secured by an Acknowledgement of Debt Revolving Demand Credit Agreement, a General Assignment of Book Debts, a Negative Pledge, and a Floating Charge Demand Debenture from us to National Bank in the principal amount of $5,000,000 securing all of our present and after-acquired real and personal property.

In April 2003, we completed a non-brokered private placement consisting of 100 convertible debentures valued at $10,000 per debenture for net proceeds of $1,000,000.  Each debenture carries interest at the rate of 15% per annum, payable quarterly, in arrears and has a term of three years, expiring on March 28, 2006, as may be extended upon mutual agreement between us and the placees.  All or any portion of the outstanding principal sum and accrued interest of each debenture is convertible at the option of the placees into units in the capital of our company at a price of $0.30 per unit if converted during the first two years of the debenture or at a price of $0.33 per unit if converted during the third year of the debenture.







20





Each unit consists of one common share and one non-transferable share purchase warrant.  Each warrant entitles the placees to purchase one additional common share at a price of:

i)$0.30 per warrant share if the debenture is converted after the date of issuance of the debenture and on or before one year following the date of issuance of the debenture;

ii)$0.40 per warrant share if the debenture is converted after the first anniversary of the issuance of the debenture and on or before two years following the date of issuance of the debenture; and

iii)$0.50 per warrant share if the debenture is converted after the second anniversary of the issuance of the debenture and on or before the due date of the debenture.

Related parties to our company subscribed for a total of 69.88 debentures of the total offering of 100 debentures.  Proceeds from this private placement will be used to further our exploration and drilling program in Alberta.

During the first quarter of 2004 all of the 15% convertible debentures relating to the private placement that closed April 2003 were converted.

Our commitments for capital expenditures are limited to our participation in the Canadian properties in which we have an interest or a right to acquire an interest, and for our office rent.  We have sufficient cash from our operations and financing activities to be able to pay for these commitments.

On July 8, 2004, we closed a private placement with certain investors of 15% Convertible Debentures for aggregate gross proceeds of up to $1,000,000; and 2,000,000 flow through units at a price of $0.44 per flow-through unit, for additional gross proceeds of $880,000.

The debentures have a term of three (3) years and carry interest at 15% per annum, payable quarterly, in arrears.  All or any portion of the outstanding principal sum and accrued interest of each debenture is convertible into units in the capital stock of our company at a price of $0.55 if converted during the first two years of the debenture, or at a price of $0.61 if converted during the third year of the debenture.  We will grant the debentureholders a floating charge general security subordinated to existing security agreements in regards to collateral.

Each debenture unit consists of one common share in the capital stock of our company and one non-transferable share purchase warrant.  Each debenture warrant entitles the holder to purchase on additional common share at a price of $0.55 per debenture warrant in the first two years of conversion and at a price of $0.61 in the third year of conversion.  The debenture warrant shall expire on the earlier of: (a) the due date of the debenture or (b) two years from the issuance of the warrant upon conversion of the debenture.

Each flow-through unit consists of one common share in the capital stock of our company and one non-transferable share purchase warrant.  Each flow-through warrant entitles the holder to purchase on additional common flow-through share at a price of $0.55 per flow-through warrant.  The flow-through warrants shall expire five years from the issuance of the flow-through unit.

We will use the proceeds of the financing to fund our oil and gas exploration programs in Alberta and for general working capital.







21





US GAAP

The results of operations discussed above are based on our audited financial statements prepared in accordance with Canadian generally accepted accounting principles.  Differences between Canadian generally accepted accounting principles and principles generally accepted in the United States are listed and quantified in Note 10 to our consolidated financial statements included elsewhere in this document.  Significant differences between Canadian GAAP and US GAAP include:

- the requirement under US GAAP to record compensation expense when shares or share options are issued or granted to officers at prices below market value at the time of issuance or grant, whereas under Canadian GAAP, compensation expense is generally not recorded under these circumstances;

- the requirement under Canadian GAAP requires that basic earnings per share ("EPS") be based solely on the common shares actually issued and outstanding, whereas US GAAP requires the inclusion of "common stock equivalents" in the calculation of primary EPS when their inclusion would have dilutive effect.  Our common stock equivalents are the unexercised common share stock options and share purchase warrants;

As at December 31, 2004 there were no material differences between the loss per share under Canadian generally accepted accounting principles and under United States generally accepted accounting principles.  The reasons for the losses are as discussed above under "Results from Operations".


C.
        Research and Development, patents, licenses etc.We do not currently, and did not previously, have research and development policies in place.  Over the past three fiscal years, we have not expended any material amounts on research or development of our oil and gas properties.


D.
        Trend InformationWe are not aware of any other trends, demands uncertainties, commitments or events which are reasonably likely to have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.


E.
        Off-balance Sheet ArrangementsWe do not have any off-balance sheet arrangements.F.
        Contractual ObligationsWe do not have any contractual obligations for financial expenditures.ITEM 6
        Directors, Senior Management and EmployeesA.
        Directors and Senior ManagementThe following table sets forth the names, business experience and function/areas of expertise of each of our directors and officers:







22








NameOffice HeldAge
        Area of Experience and Functions in  Netco Energy Inc.Gordon NielsenPresident, Chief ExecutiveOfficer, Secretary and Director
Age:  44
        Director, President, CEO since June 3, 2005
As President and CEO, Mr. Nielsen is responsible for the day to day operations of our company and as a director, he is responsible for the management and supervision of the affairs and business of our company.Michael SchoenDirector
Age:  51
        Director since October 22, 2003.
As a director, Mr. Schoen is responsible for the management and supervision of the affairs and business of our company.Daniel WeisbeckChief Financial Officer
Age: 64
        CFO since May 11, 2004 and Secretary since June 3, 2005.
As the CFO, Mr Weisbeck is primarily responsible for internal accounting and record keeping, general administration and SEC reporting.  As Secretary, Mr. Weisbeck is responsible for keeping all records, making all necessary filings, general administration and internal accounting for our company.David FinnDirector
Age:  58
        Director since June 17, 2004.
As a director, Mr. Finn is responsible for the management and supervision of the affairs and business of our company.Gordon Nielsen, President, CEO and Director

Mr. Nielsen devotes approximately twenty-five percent (25%) of his working time to the affairs of our company.  Mr. Nielsen has also served or serves as: (a) Director of Gemini Energy Corp., a public resource company listed on the Toronto Stock Exchange since March 2005; (b) Investment Adviser and /or Registered Representative for Canaccord Capital Corp from February 1992 to February 2005.

Michael Schoen, Director

Mr. Schoen devotes approximately five percent (5%) of his working time to the affairs of our company.  Mr. Schoen has also served or serves as: (a) Director of Gemini Energy Corp., a public resource company listed on the Toronto Stock Exchange since April 2002; (b) Director of Ultra Holdings Inc., a investment holding company listed on the TSX Venture Exchange from July 1999 to October 2001; (c) Director of Q Investments Ltd. (formerly Cubix Investments Ltd.), a public investments holding company listed on the TSX Venture Exchange from November 1996 to January 2001; (d) Director of Ultra Petroleum Corp., public resource company listed on the Toronto Stock Exchange from August 1999 to December 1999; (e) Lecture at the University of British Columbia since October 1992.

Daniel Weisbeck, CFO and Secretary

Mr. Weisbeck devotes approximately five percent (5%) of his working time to the affairs of our company.  Mr. Weisbeck also served or serves as: (a) CFO of Gemini Energy Corp., a public resource company listed on the Toronto Stock Exchange since May 2002 and as Secretary of Gemini Energy Corp. since October 2003; (b) CFO of FM Resources Corp., a public resource company listed on the TSX Venture Exchange since May 2004 and as Secretary of FM Resources Corp. since June 2005; (c) Self-employed consultant since October 2001; (d) Partner at KPMG from June 1976 to September 2001 and Associate from September 1999 to September 2001.







23





David Finn, Director

Mr. Finn devotes approximately five percent (5%) of his working time to the affairs of our company.  Mr. Finn has also served or served as: (a) Director of Pennant Energy Inc. (formerly Penteco Resources Limited, a public resources company listed on the TSX Venture Exchange since September 2003 and (b) Director of ADDA Resources Ltd., a public resource company listed on the Vancouver Stock Exchange (now called the TSX Venture Exchange) from March 1998 to April 2000.


There are no family relationships between any of our officers and/or directors.B.
        CompensationNone of our directors or executive officers was paid or earned compensation for performing their respective duties during the fiscal year ended December 31, 2004.

No cash compensation was paid to any of our directors for director's services as a director during the fiscal year ended December 31, 2004. We have no standard arrangement pursuant to which directors are compensated by us for their services in their capacity as directors except for the granting from time to time of incentive stock options.

Our Incentive Stock Option Plan, as amended by the 2002 Stock Option Plan, effective as of June 17, 2004, provides for the granting of an aggregate of 1,412,631 stock options to officers, directors, employees, consultants and other key personnel of our company.  We intend to utilize the stock options available under our 2002 Stock Option Plan, as amended, to encourage the interest of those persons to whom stock options are granted in the growth and development of our company by providing them with an opportunity to acquire an increased proprietary interest in our company.

During our fiscal year ended December 31, 2004 we granted a total of 50,000 stock options to Michael Schoen.  The stock options are exercisable at a price of $0.53 per share until January 26, 2009.

Also during our fiscal year ended December 31, 2004, we granted a total of 70,000 stock options to David Finn and Daniel Weisbeck.  The stock options are exercisable at a price of $0.52 per share until June 17, 2009.

As of the date of this annual report, we have no compensatory plan or arrangement with respect to any officer that results or will result in the payment of compensation in any form from the resignation, retirement or any other termination of employment of such officer's employment with our company, from a change in control of our company or a change in such officer's responsibilities following a change in control.

We have no formal plan for compensating our directors for their service in their capacity as directors, although such directors are expected in the future to receive stock options to purchase common shares as awarded by our board or a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board. Our board may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. No director received and/or accrued any compensation for their services as a director, including committee participation and/or special assignments for the fiscal year ended December 31, 2004.







24








C.
        Board PracticesThe directors are re-elected and the officers are re-appointed at the annual general meeting of shareholders.  The last annual meeting was held on June 3, 2005, and each of our current directors and officers will continue to hold his respective office until his successor is elected or appointed, unless his office is earlier vacated under any of the relevant provisions of our Articles or of theAlberta Business Corporations Act.

There are no service contracts between our company and any of our officers, directors or employees providing for benefits upon termination of employment.

The members of our company's audit committee include Gordon Nielsen, Michael Schoen and David Finn.  The audit committee reviews and approves the scope of the audit procedures employed by our independent auditors, reviews the results of the auditor's examination, the scope of audits, the auditor's opinion on the adequacy of internal controls and quality of financial reporting and our accounting and reporting principles, policies and practices, as well as our accounting, financial and operating controls.  The audit committee also reports to the board of directors with respect to such matters and recommends the selection of independent auditors.  Before financial statements that are to be submitted to the shareholders at an annual general meeting are considered by the board of directors, such financial statements are submitted to the audit committee for review with the independent auditors,
following which the report of the audit committee on the financial statements is submitted to the board of directors.


We do not currently have a remuneration or compensation committee.D.
        EmployeesAs of December 31, 2004, we did not have any employees, and as of June 30, 2005, we did not have any employees.  Our operations are managed by Gordon Nielsen.


E.
        Share OwnershipThere were 16,488,651 common shares issued and outstanding as of June 28, 2005.  Of the shares issued and outstanding and the stock options granted, our directors and officers owned the following common shares as of June 28, 2005:




NameOffice Held
        Number of Common  SharesBeneficially Owned as of June 28, 2005
        Percentage(1)Gordon NielsenPresident, CEO and Director
        Nil
        *%Michael SchoenDirector
        50,000(2)
        *%Daniel Weisbeck
CFO
        13,332(3)
        *%David FinnDirector
        33,330(4)
        *%*
        Less than 1%







25





(1)Based on 16,488,651 common shares issued and outstanding as at June 28, 2005, and the number of shares issuable upon the exercise of issued and outstanding stock options which are exercisable within 60 days of June 28, 2005.

(2)Includes 50,000 stock options granted on January 26, 2004 at an exercise price of $0.53, expiring on January 26, 2009.

(3)Includes 13,332 of 20,000 stock options granted on June 17, 2004 at an exercise price of $0.52, expiring on June 17, 2009.

(4)Includes 33,330 of 50,000 stock options granted on June 17, 2004 at an exercise price of $0.52, expiring on June 17, 2009.

The voting rights attached to the common shares owned by our officers and directors do not differ from those voting rights attached to shares owned by shareholders who are not officers or directors of our company.

There were no long-term incentive awards made to our executive officers during the fiscal year ended December 31, 2004.  There are no pension plan benefits in place for our executive officers.

Our Incentive Stock Option Plan, as amended by the 2002 Stock Option Plan, effective as of June 17, 2004, provides for the granting of an aggregate of 1,4,12,631 stock options to officers, directors, employees, consultants and other key personnel of our company.  We intend to utilize the stock options available under our 2002 Stock Option Plan, as amended, to encourage the interest of those persons to whom stock options are granted in the growth and development of our company by providing them with an opportunity to acquire an increased proprietary interest in our company.

During our fiscal year ended December 31, 2004 we granted a total of 50,000 stock options to Michael Schoen.  The stock options are exercisable at a price of $0.53 per share until January 26, 2009.

Also during our fiscal year ended December 31, 2004, we granted a total of 70,000 stock options to David Finn and Daniel Weisbeck.  The stock options are exercisable at a price of $0.52 per share until June 17, 2009.


ITEM 7
        Major Shareholders and Related Party TransactionsA.
        Major ShareholdersThere were 16,488,651 of our common shares issued and outstanding as of June 28, 2005. The following table sets forth, as of June 28, 2004, persons known to us to be the beneficial owner of more than five (5%) of our common shares:




Name of Shareholder
        No. of CommonShares Owned
        Percentage ofOutstandingCommon SharesJohn R. Hislop(1)
        2,529,600
        15.34%

(1)In addition, Mr. Hislop holds 1,486,100 warrants at a price of $0.30 expiring on March 29, 2006, 1,000,000 warrants at a price of $0.55 expiring on July 7, 2009 and a 15% convertible debenture in the principal amount of







26





$500,000 convertible into units of the capital of the Company at a price of $0.55 in the first two years and at a price of $0.61 in the third year.  Each unit consists of one common share and one debenture warrant.  Each debenture warrant is exercisable for two years at a price of $0.55 per share  and at a price of $0.61 per share in the third year from the date of issuance of the debenture.

The voting rights of our major shareholders do not differ from the voting rights of non-major shareholders.

As of June 28, 2005, the registrar and transfer agent for our company reported that there were 16,488,651 common shares issued and outstanding.  Of those common shares issued and outstanding, 16,022,307 common shares were registered to Canadian residents (13 shareholders), 466,344 common shares were registered to residents of the United States (29 shareholders) and no common shares were registered to residents of other foreign countries.

To the best of our knowledge, our company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person.

If Mr. Hislop were to exercise all his warrants and his 15% convertible debenture and debenture warrants he would then own 6,833,886 common shares of Netco representing 37.87% of the issued and outstanding shares assuming that no further common shares of the Company has been issued,.which may at a subsequent date result in a change in the control of our company.


B.
        Related Party TransactionsOn April 22, 2003, we closed a non-brokered private placement for aggregate proceeds of $1,000,000 and issued a total of 100 15% convertible debentures at a price of $10,000 per convertible debenture.  Chris Schultze, the President, CEO, Secretary and director of our company at the time, purchased 3 convertible debentures and Donald Sharpe, a former director of our company, purchased 11.63 convertible debentures.  During the first quarter of 2004, all of the 15% convertible debentures relating to the completed private placement announced April 22, 2004 were converted.


None of the following persons was indebted to Netco at any time during the last three fiscal years:1.
        any of our directors or officers; and2.
        any associate of any such director or officer.ITEM 8
        Financial InformationOur financial statements are stated in Canadian dollars and are prepared in accordance with Canadian generally accepted accounting principles.  In this annual report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars.


All Audited Statements are in Canadian dollars.Financial Statements Filed as Part of the Annual Report:

Financial Statements of Netco Energy Inc. for the years ended December 31, 2004, 2003, and 2002 (audited), reported on by Ellis Foster, Chartered Accountants:







27





Auditor's Report dated April 27, 2005, as to disclosure changes for generally accepted accounting principles in the United States

Consolidated Balance Sheets as at December 31, 2004 and 2003

Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003

Notes to Consolidated Financial Statements

Legal Proceedings

There are no pending legal proceedings to which Netco or our subsidiary is a party or of which any of our property is the subject.  There are no legal proceedings to which any of the directors, officers or affiliates or any associate of any such directors, officers or affiliates of either our company or our subsidiary is a party or has a material interest adverse to us.

Dividend Distributions

Holders of our common shares are entitled to receive such dividends as may be declared from time to time by our board of directors, in the board's discretion, out of funds legally available for that purpose.  We intend to retain future earnings, if any, for use in the operation and expansion of our business and does not intend to pay any cash dividends in the foreseeable future.


B.
        Significant ChangesNone.ITEM 9
        The Offer and ListingPrice History

Full Financial Years

The annual high and low market prices for the five most recent full financial years (January 1, 2000 through December 31, 2004) on the TSX Venture Exchange (formerly the Canadian Venture Exchange) were as follows:




Year/Period Ended
        High
        LowDecember 31, 2000
        $0.90
        $0.19December 31, 2001
        $0.75
        $0.23December 31, 2002
        $0.52
        $0.25December 31, 2003
        $0.55
        $0.25December 31, 2004
        $0.75
        $0.42







28





Full Financial Quarters (two most recent financial years)

The high and low market prices for each full financial quarter for the two most recent full fiscal years, and for subsequent financial quarters, on the TSX Venture Exchange were as follows:




Quarter Ended
        High
        LowDecember 31, 2004
        $0.58
        $0.42September 30, 2004
        $0.65
        $0.45June 30, 2004
        $0.75
        $0.46March 31, 2004
        $0.71
        $0.45December 31, 2003
        $0.55
        $0.34September 30, 2003
        $0.48
        $0.265June 30, 2003
        $0.40
        $0.28March 31, 2003
        $0.28
        $0.25

Most Recent 6 Months

The high and low market prices for each of the most recent six months (December 1, 2004 through May 31, 2005) on the TSX Venture Exchange were as follows:




Month Ended
        High
        LowDecember 31, 2004
        $0.44
        $0.44January 31, 2005
        $0.53
        $0.43February 28, 2005
        $0.58
        $0.45March 31, 2005
        $0.65
        $0.47April 30, 2005
        $0.52
        $0.41May 31, 2005
        $0.45
        $0.38C.
        MarketsOur common shares trade on the TSX Venture Exchange.  Our symbol is "NEI" and our CUSIP number is 64108H-10-9.


ITEM 10
        Additional InformationB.
        Memorandum and Articles of AssociationOur Articles provide as follows:(a)A director who is, in any way, directly or indirectly interested in a proposed contract or transaction with our company shall disclose the nature and extent of his interest at a meeting of the directors in accordance with the provisions of theAlberta Business Corporations Act, and the contract shall be submitted to our board of directors or our shareholders for approval.  A director shall not vote in respect of any contract or transaction with our company in which he is interested,







29





and if he shall do so, his vote shall not be counted but he may be counted in the quorum present at the meeting at which such vote is taken.

(b)Subject to the provisions of any ordinary resolution, the remuneration of the directors may from time to time be determined by the directors themselves.

(c)The directors may, at their discretion and subject to any restrictions in our Articles or in theAlberta Business Corporations Act, authorize us to borrow any sum of money and may raise or secure the repayment of such sum of money in such manner and upon such terms and conditions as the directors of our company think fit.

(d)There are no provisions with respect to the retirement of a director or the non-retirement of a director under an age requirement.

(e)A director is not required to hold a share in the capital of our company as qualification for his office.

With respect to the above noted matters, there are generally no significant differences between Canadian and United States law.

Rights, Preference and Restrictions

Common Shares

All of the authorized common shares of our company, once issued, rank equally as to dividends, voting powers, and participation in assets.  Holders of common shares are entitled to one vote for each common share held of record on all matters to be acted upon by the shareholders.  Holders of common shares are entitled to receive such dividends as may be declared from time to time by the board of directors, in its discretion, out of funds legally available therefore.  Our Articles do not provide for cumulative voting.

Upon liquidation, dissolution or winding up of our company, holders of common shares are entitled to receive pro rata our assets, if any, remaining after payments of all debts and liabilities.  No common shares have been issued subject to call or assessment.  There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.  There are no restrictions on the repurchase or redemption of common shares by our company while there is any arrearage in the payment of dividends or sinking fund instalments.

With respect to the rights, preferences and restrictions attaching to our common shares, there are generally no significant differences between Canadian and United States law as the board of directors, or the applicable corporate statute, will determine the rights, preferences and restrictions attaching to each class of a company's shares.

Changes to Our Common Shares

Provisions as to the modification, amendment or variation of the rights attaching to our common shares are contained in theAlberta Business Corporations Act.  TheAlberta Business Corporations Actrequires approval by a special resolution (ie. approved by at least two-thirds of the votes cast at a meeting of our shareholders or consented to in writing by each of the shareholders entitled to vote) of our company's shareholders in order to effect any of the following changes:







30








(a)
        create new classes of shares;(b)change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;

(c)change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same of a different number of shares of other classes or series;

(d)divide a class of shares, whether issued or unissued, into series, and fix the number of shares in each series and the rights, privileges, restrictions and conditions of that series;

(e)cancel a class or series of shares where there are no issued or outstanding shares of that class or series;

(f)authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions of that series;

(g)authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares or any series; and

(h)revoke, diminish or enlarge any authority conferred under clauses [(h) and (i)] (of theAlberta Business Corporations Act).

Generally, there are no significant differences between Canadian and United States law with respect to changing the rights of shareholders as most state corporation statutes require shareholder approval (usually a majority) for any such changes that affect the rights of shareholders.

Annual General Meetings and Extraordinary General Meetings

Annual general meetings must be held once every financial year, within 15 months of the previous annual general meeting.  Under theAlberta Business Corporations Act, we must give our shareholders written notice of an annual general meeting not less than 21 days and not more than 50 days before the annual general meeting is to be held.  TheAlberta Business Corporations Actalso requires that we publish, notice of the record date with respect to the annual general meeting in a newspaper published or distributed in the place where our registered office is located, and in each place in Canada that we have a transfer agent, not less than 7 days before the record date, which may be not less than 21 days and not more than 50 days prior to the annual general meeting.

Our directors may, whenever they think fit, convene an extraordinary general meeting.  An extraordinary general meeting may also be requisitioned by one or more shareholders of our company so long as such shareholders own not less than 5% of the issued and outstanding shares at the date such shareholders requisition an extraordinary general meeting.  Within 21 days of receiving such requisition, our directors must call a meeting, failing which any shareholder who signed the requisition may call the meeting.

All shareholders entitled to attend and vote at an annual general meeting or an extraordinary general meeting will be admitted to the meeting.







31





Most state corporation statutes require a public company to hold an annual meeting for the election of directors and for the consideration of other appropriate matters.  The state statutes also include general provisions relating to shareholder votings and meetings.  Apart from the timing of when an annual general meeting must be held and the percentage of shareholders required to call an annual general meeting or extraordinary general meeting, there are generally no material differences between Canadian and United States law respecting annual general meetings and extraordinary general meetings.

Rights to Own Securities

There are no limitations on the rights of non-resident or foreign shareholders to hold or exercise voting rights.

Except as provided in the Investment Canada Act, there are no limitations under the applicable laws of Canada or by our charter or other constituent documents of our company on the right of foreigners to hold or vote common shares or other securities of our company.

The Investment Canada Act will prohibit implementation, or if necessary, require divestiture of an investment deemed "reviewable" under the Investment Canada Act by an investor that is not a "Canadian" as defined in the Investment Canada Act (a "non-Canadian"), unless after review the Minister responsible for the Investment Canada Act ("the Minister") is satisfied that the "reviewable" investment is likely to be of net benefit to Canada.  An investment in our common shares by a non-Canadian would be reviewable under the Investment Canada Act if it was an investment to acquire control of our company and the value of our assets was $5 million or more.  A non-Canadian would be deemed to acquire control of our company for the purposes of the Investment Canada Act if the non-Canadian acquired a majority of our outstanding common shares (or less than a majority but controlled our company in fact
through the ownership of one-third or more of our outstanding common shares) unless it could be established that, on the acquisition, our company was not controlled in fact by the acquirer through the ownership of such common shares.  Certain transactions in relation to our common shares would be exempt from review under the Investment Canada Act, including, among others, the following:

1.acquisition of common shares by a person in the ordinary course of that person's business as a trader or dealer in securities;

2.acquisition of control of our company in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Canada Act; and

3.acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control of our company, through the ownership of voting interests, remains unchanged.

The Investment Canada Act was amended with the World Trade Organization Agreement to provide for special review thresholds for "WTO Investors" of countries belonging to the World Trade Organization, among others, nationals and permanent residents (including "WTO Investor controlled entities" as defined in the Investment Canada Act).  Under the Investment Canada Act, as amended, an investment in our common shares by WTO Investors would be reviewable only if it was an investment to acquire control of our company and the value of our assets was equal to or greater than a specified amount (the "Review Threshold"), which is published by the Minister after its determination for any particular year.  The Review Threshold is currently $209 million for the year 2001.







32





Change in Control

There are no provisions in our Articles or By-laws that would have the effect of delaying, deferring or preventing a change in control of our company, and that would operate only with respect to a merger, acquisition or corporate restructuring involving our company.

TheAlberta Business Corporations Actdoes not contain any provisions that would have the effect of delaying, deferring or preventing a change of control of our company.  Generally, there are no significant differences between Canadian and United States law in this regard, as many state corporation statutes also do not contain such provisions and only empower a company's board of directors to adopt such provisions.

Ownership Threshold

There are no provisions in our Articles or Bylaws or in theAlberta Business Corporations Actgoverning the threshold above which shareholder ownership must be disclosed.  TheSecurities Act(Alberta) requires that we disclose, in our annual general meeting proxy statement, holders who beneficially own more than 10% of our issued and outstanding shares.  Most state corporation statutes do not contain provisions governing the threshold above which shareholder ownership must be disclosed.  United States federal securities laws require a company to disclose, in its annual report on Form 20-F, holders who own more than 5% of a company's issued and outstanding shares.

Changes in the Capital of our Company

There are no conditions imposed by our Articles which are more stringent than those required by theAlberta Business Corporations Act.


C.
        Material ContractsOn January 15, 2003, we entered into a participation agreement with Moxie Exploration Ltd. whereby we can earn a 35% working interest in three test wells in the West Jumpbush area of Alberta and the farm-out lands by paying 70% of the costs to drill and complete the three wells.

On January 27, 2005, we entered into a farm-in agreement with Nation Energy Inc. to earn 60% of Nations interest in two sections of land in the Boltan area of Alberta.


D.
        Exchange ControlsThere are no government laws, decrees or regulations in Canada which restrict the export or import of capital or which affect the remittance of dividends, interest or other payments to non-resident holders of our common shares.  Any remittances of dividends to United States residents and to other non-residents are, however, subject to withholding tax.  See "Taxation" below.


E.
        TaxationCanadian Federal Income Taxation

We consider that the following summary fairly describes the principal Canadian federal income tax consequences applicable to a holder of our common shares who at all material times deals at arm's length with our company, who holds all common shares as capital property, who is resident in the United States, who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold,







33





his common shares of our company in connection with carrying on a business in Canada (a "non-resident holder").  It is assumed that the common shares will at all material times be listed on a stock exchange that is prescribed for purposes of theIncomeTax Act(Canada) (the "ITA") and regulations thereunder.  Investors should be aware that the Canadian federal income tax consequences applicable to holders of our common shares will change if, for any reason, we cease to be listed on a prescribed stock exchange.  Accordingly, holders and prospective holders of our common shares should consult with their own tax advisors with respect to the income tax consequences of them purchasing, owing and disposing of our common shares should we cease to be listed on a prescribed stock exchange.

This summary is based upon the current provisions of the ITA, the regulations thereunder, the Canada-United States Tax Convention as amended by the Protocols thereto (the "Treaty") as at the date of the Registration Statement and the currently publicly announced Administrative and Assessing Policies of the Canada Revenue Agency (the "CRA").  This summary does not take into account Canadian provincial income tax consequences.  This description is not exhaustive of all possible Canadian federal income tax consequences and does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action.  This summary does, however, take into account all specific proposals to amend the ITA and regulations thereunder, publicly announced by the Government of Canada to the date hereof.

This summary does not address potential tax effects relevant to our company or those tax considerations that depend upon circumstances specific to each investor.  Accordingly, holders and prospective holders of our common shares should consult with their own tax advisors with respect to the income tax consequences to them of purchasing, owning and disposing of common shares in our company.

Dividends

The ITA provides that dividends and other distributions deemed to be dividends paid or deemed to be paid by a Canadian resident corporation (such as our company) to a non-resident of Canada shall be subject to a non-resident withholding tax equal to 25% of the gross amount of the dividend of deemed dividend.  Provisions in the ITA relating to dividend and deemed dividend payments to and gains realized by non-residents of Canada, who are residents of the United States, are subject to the Treaty.  The Treaty may reduce the withholding tax rate on dividends as discussed below.

Article X of the Treaty as amended by the US-Canada Protocol ratified on November 9, 1995 provides a 5% withholding tax on gross dividends or deemed dividends paid to a United States corporation which beneficially owns at least 10% of the voting stock of the company paying the dividend.  In cases where dividends or deemed dividends are paid to a United States resident (other than a corporation) or a United States corporation which beneficially owns less than 10% of the voting stock of a company, a withholding tax of 15% is imposed on the gross amount of the dividend or deemed dividend paid.  Accordingly, we would be required to withhold any such tax from the dividend and remit the tax directly to CRA for the account of the investor.


The reduction in withholding tax from 25%, pursuant to the Treaty, will not be available:(a)if the shares in respect of which the dividends are paid formed part of the business property or were otherwise effectively connected with a permanent establishment or fixed base that the holder has or had in Canada within the 12 months preceding the disposition, or


(b)
        the holder is a US LLC which is not subject to tax in the US







34





The Treaty generally exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization exclusively administering a pension, retirement or employee benefit fund or plan, if the organization is resident in the US and is exempt from income tax under the laws of the United States.

Capital Gains

A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of one of our shares unless the share represents "taxable Canadian property" to the holder thereof.  Our common shares will be considered taxable Canadian property to a non-resident holder only if-.


(a)
        the non-resident holder;(b)
        persons with whom the non-resident holder did not deal at arm's length- or(c)
        the non-resident holder and persons with whom he did not deal at arm's length,owned not less than 25% of the issued shares of any class or series of our company at any time during the five year period preceding the disposition.  In the case of a non-resident holder to whom shares of our company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will generally be payable on a capital gain realized on such shares by reason of the Treaty unless:

(a)the value of such shares is derived principally from real property (including resource property) situated in Canada,

(b)the holder was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he ceased to be a resident of Canada,

(c)they formed part of the business property or were otherwise effectively connected with a permanent establishment or fixed base that the holder has or bad in Canada within the 12 months preceding the disposition, or


(d)
        the holder is a US LLC which is not subject to tax in the USIf subject to Canadian tax on such a disposition, the taxpayer's capital gain (or capital loss) from a disposition is the amount by which the taxpayer's proceeds of disposition exceed (or are exceeded by) the aggregate of the taxpayer's adjusted cost base of the shares and reasonable expenses of disposition.  For Canadian income tax purposes, the "taxable capital gain" is equal to one-half of the capital gain.

United States Federal Income Taxation

The following is a discussion of the material United States Federal income tax consequences, under current law, applicable to a US Holder (as defined below) of our common shares who holds such shares as capital assets.  This discussion does not address all potentially relevant Federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of Federal income tax law, such as those described below as excluded from the definition of a US Holder.  In addition, this discussion does not cover any state, local, or foreign tax consequences. (See "Canadian Federal Income Tax Consequences" above.)







35





The following discussion is based on 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.  In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.

The discussion below does not address potential tax effects relevant to our company or those tax considerations that depend upon circumstances specific to each investor.  In addition, this discussion does not address the tax consequences that may be relevant to particular investors subject to special treatment under certain US Federal income tax laws, such as, dealers in securities, tax-exempt entities, banks, insurance companies and non-US Holders.  Purchasers of the common stock should therefore satisfy themselves as to the overall tax consequences of their ownership of the common stock, including the State, local and foreign tax consequences thereof (which are not reviewed herein), and should consult their own tax advisors with respect to their particular circumstances.

US Holders

As used herein, a "US Holder" includes a beneficial holder of common shares of our company who is a citizen or resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof, any trust if a US court is able to exercise primary supervision over the administration of the trust and one or more US persons have the authority to control all substantial decisions of the trust, any entity created or organized in the United States which is taxable as a corporation for US tax purposes and any other person or entity whose ownership of common shares of our company is effectively connected with the conduct of a trade or business in the United States.  A US Holder does not include persons subject to special provisions of Federal income tax law, such as tax-exempt organizations, qualified retirement plans,
financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of our common shares is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation.

Dividend Distribution on Shares of our Company

US Holders receiving dividend distributions (including constructive dividends) with respect to the common shares of our company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that we have current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions.  Such Canadian tax withheld may be deducted or may be credited against actual tax payable, subject to certain limitations and other complex rules, against the US Holder's United States Federal taxable income.  See "Foreign Tax Credit" below.  To the extent that distributions exceed our current or accumulated earnings and profits, they will be treated first as a return of capital to the extent of the shareholder's basis in the common shares of our company and thereafter as gain from the sale or
exchange of the common shares of our company.  Preferential tax rates for net long term capital gains may be applicable to a US Holder which is an individual, estate or trust.

In general, dividends paid on our common shares will not be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations.







36





Foreign Tax Credit

A US Holder who pays (or who has had withheld from distributions) Canadian income tax with respect to the ownership of our common shares may be entitled, at the election of the US Holder, to either a deduction or a tax credit for such foreign tax paid or withheld.  This election is made on a year-by-year basis and generally applies to all foreign income taxes paid by (or withheld from) the US Holder during that year.  There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the US Holder's United States income tax liability that the US Holder's foreign source income bears to his or its world-wide taxable income.  In determining the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources.  Complex rules govern
income such as "passive income", "high withholding tax interest", "financial services income", "shipping income" and certain other classifications of income.  A US Holder who is treated as a domestic US corporation owning 10% or more of our voting stock is also entitled to a deemed paid foreign tax credit in certain circumstances for the underlying foreign tax of our company related to dividends received or Subpart F income received from us. (See the discussion below of Controlled Foreign Corporations).  The availability of the foreign tax credit and the application of the limitations on the foreign tax credit are fact specific and holders and prospective holders of our common shares should consult their own tax advisors regarding their individual circumstances.

Disposition of Common Shares

If a "US Holder" is holding shares as a capital asset, a gain or loss realized on a sale of our common shares will generally be a capital gain or loss, and will be long-term if the shareholder has a holding period of more than one year.  However, gains realized upon sale of our common shares may, under certain circumstances, be treated as ordinary income, if we were determined to be a "collapsible corporation" within the meaning of Code Section 341 based on the facts in existence on the date of the sale (See below for definition of "collapsible corporation").  The amount of gain or loss recognized by a selling US Holder will be measured by the difference between (i) the amount realized on the sale and (ii) his tax basis in our common shares.  Capital losses are deductible only to the extent of capital gains.  However, in the case of taxpayers other than corporations (US)$3,000 ($1,500 for
married individuals filing separately) of capital losses are deductible against ordinary income annually.  In the case of individuals and other non-corporate taxpayers, capital losses that are not currently deductible may be carried forward to other years.  In the case of corporations, capital losses that are not currently deductible are carried back to each of the three years preceeding the loss year and forward to each of the five years succeeding the loss year.

A "collapsible corporation" is a corporation that is formed or availed principally to manufacture, construct, produce, or purchase prescribed types or property that the corporation holds for less than three years and that generally would produce ordinary income on its disposition, with a view to the stockholders selling or exchanging their stock and thus realizing gain before the corporation realizes two thirds of the taxable income to be derived from prescribed property.  Prescribed property includes: stock in trade and inventory; property held primarily for sale to customers in the ordinary course of business; unrealized receivables or fees, consisting of rights to payment for noncapital assets delivered or to be delivered, or services rendered or to be rendered to the extent not previously included in income, but excluding receivables from selling property that is not prescribed; and
property gain on the sale of which is subject to the capital gain/ordinary loss rule.  Generally, a shareholder who owns directly or indirectly 5 percent or less of the outstanding stock of the corporation may treat gain on the sale of his shares as capital gain.







37





Other Considerations for US Holders

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 of the Registrant.  Our management is of the opinion that there is little, if not, any likelihood that we will be deemed a "Foreign Personal Holding Company", a "Foreign Investment Company" or a "Controlled Foreign Corporation" (each as defined below) under current and anticipated conditions.

Foreign Personal Holding Company

If at any time during a taxable year more than 50% of the total combined voting power or the total value of our outstanding shares is owned, actually or constructively, by five or fewer individuals who are citizens or residents of the United States and 60% or more of our gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), we would be treated as a "foreign personal holding company." In that event, US Holders that hold common shares in our capital would be required to include in income for such year their allocable portion of our passive income which would have been treated as a dividend had that passive income actually been distributed.

Foreign Investment Company

If 50% or more of the combined voting power or total value of our outstanding shares are held, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and we are found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that we might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a US Holder selling or exchanging our common shares to be treated as ordinary income rather than capital gains.

Passive Foreign Investment Company

A US Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a passive foreign investment company ("PFIC") is subject to US federal income taxation of that foreign corporation under one of two alternative tax methods at the election of each such US Holder.

Section 1297 of the Code defines a PFIC as a corporation that is not formed in the United States and, 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 value (or, if the company is a controlled foreign corporation or makes an election, adjusted tax basis), of its assets that produce or are held for the production of "passive income" is 50% or more.  For taxable years of US persons beginning after December 31, 1997, and for tax years of foreign corporations ending with or within such tax years, the Taxpayer Relief Act of 1997 provides that publicly traded corporations must apply this test on a fair market value basis only.  The Registrant believes that it is a PFIC.

As a PFIC, each US Holder must determine under which of the alternative tax methods it wishes to be taxed.  Under one method, a US Holder who elects in a timely manner to treat the Registrant as a Qualified Electing Fund ("QEF"), as defined in the Code, (an "Electing US Holder") will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year in which we qualify as a PFIC on his pro-rata share of our (i) "net capital gain" (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain to the Electing US Holder and (ii) "ordinary earnings" (the excess of earnings and profits over net capital gain), which will be taxed as







38





ordinary income to the Electing US Holder, in each case, for the US Holder's taxable year in which (or with which) our taxable year ends, regardless of whether such amounts are actually distributed.  Such an election, once made shall apply to all subsequent years unless revoked with the consent of the IRS.

A QEF election also allows the Electing US Holder to (i) generally treat any gain realized on the disposition of his common shares (or deemed to be realized on the pledge of his common shares) as capital gain; (ii) treat his share of our 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 (see discussion of interest charge below), or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of our annual realized net capital gain and ordinary earnings subject, however, to an interest charge.  If the Electing US Holder is an individual, such an interest charge would be not deductible.

The procedure a US Holder must comply with in making a timely QEF election will depend on whether the year of the election is the first year in the US Holder's holding period in which we are a PFIC.  If the US Holder makes a QEF election in such first year, (sometimes referred to as a "Pedigreed QEF Election"), then the US Holder may make the QEF election by simply filing the appropriate documents at the time the US Holder files its tax return for such first year.  If, however, we qualified as a PFIC in a prior year, then the US Holder may make an "Unpedigreed QEF Election" by recognizing as an "excess distribution" (i) under the rules of Section 1291 (discussed below), any gain that he would otherwise recognize if the US Holder sold his stock on the qualification date (Deemed Sale Election) or (ii) if we are a controlled foreign corporation ("CFC"), the Holder's pro rata share of the
corporation's earnings and profits (Deemed Dividend Election) (But see "Elimination of Overlap Between Subpart F Rules and PFIC Provisions").  The effect of either the deemed sale election or the deemed dividend election is to pay all prior deferred tax, to pay interest on the tax deferral and to be treated thereafter as a Pedigreed QEF as discussed in the prior paragraph.  With respect to a situation in which a Pedigreed QEF election is made, if we no longer qualify as a PFIC in a subsequent year, normal Code rules and not the PFIC rules will apply.

If a US Holder has not made a QEF Election at any time (a "Non-electing US Holder"), then special taxation rules under Section 1291 of the Code will apply to (i) gains realized on the disposition (or deemed to be realized by reason of a pledge) of his common shares and (ii) certain "excess distributions", as specially defined, by our company.  An "excess distribution" is any current-year distribution in respect of PFIC stock that represents a rateable portion of the total distributions in respect of the stock during the year that exceed 125 percent of the average amount of distributions in respect of the stock during the three preceding years.

A Non-electing US Holder generally would be required to pro-rate all gains realized on the disposition of his common shares and all excess distributions over the entire holding period for the common shares.  All gains or excess distributions allocated to prior years of the US Holder (other than years prior to our first taxable year during such US Holder's holding period and beginning after January, 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 US Holder also would be liable for interest on the deferred 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 US Holder that is an individual is not allowed a deduction for interest on the deferred tax liability.  The portions of gains and distributions that are not
characterized as "excess distributions" are subject to tax in the current year under the normal tax rules of the Internal Revenue Code.

If we are a PFIC for any taxable year during which a Non-electing US Holder holds common shares, then we will continue to be treated as a PFIC with respect to such common Shares, even if it is no







39





longer by definition a PFIC.  A Non-electing US Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-Electing US Holders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC.

Under Section 1291(f) of the Code, the Department of the Treasury has issued proposed regulations that would treat as taxable certain transfers of PFIC stock by Non-electing US Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  If a US Holder makes a QEF Election that is not a Pedigreed Election (i.e., it is made after the first year during which we are a PFIC and the US Holder holds our shares) (a "Unpedigreed Election"), the QEF rules apply prospectively but do not apply to years prior to the year in which the QEF first becomes effective.  US Holders should consult their tax advisors regarding the specific consequences of making a Non-Pedigreed QEF Election.

Certain special, generally adverse, rules will apply with respect to the common shares while we are a PFIC whether or not it is treated as a QEF.  For example under Section 1297(b)(6) of the Code (as in effect prior to the Taxpayer Relief Act of 1997), a US 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 stock.

The foregoing discussion is based on currently effective provisions of the Code, existing and proposed regulations thereunder, and current administrative rulings and court decisions, all of which are subject to change.  Any such change could affect the validity of this discussion.  In addition, the implementation of certain aspects of the PFIC rules requires the issuance of regulations which in many instances have not been promulgated and which may have retroactive effect.  There can be no assurance that any of these proposals will be enacted or promulgated, and if so, the form they will take or the effect that they may have on this discussion.  Accordingly, and due to the complexity of the PFIC rules, US Holders of the Registrant are strongly urged to consult their own tax advisors concerning the impact of these rules on their investment in our company.  For a discussion of the impact of
the Taxpayer Relief Act of 1997 on a US Holder of a PFIC, see "Mark-to-Market Election For PFIC Stock Under the Taxpayer Relief Act of 1997" and "Elimination of Overlap Between Subpart F Rules and PFIC Provisions" below.

Mark-to-Market Election for PFIC Stock Under the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 provides that a US Holder of a PFIC may make a mark-to-market election with respect to the stock of the PFIC if such stock is marketable as defined below.  This provision is designed to provide a current inclusion provision for persons that are Non-Electing Holders.  Under the election, any excess of the fair market value of the PFIC stock at the close of the tax year over the Holder's adjusted basis in the stock is included in the Holder's income.  The Holder may deduct any excess of the adjusted basis of the PFIC stock over its fair market value at the close of the tax year.  However, deductions are limited to the net mark-to-market gains on the stock that the Holder included in income in prior tax years, or so called "unreversed inclusions." For purposes of the election, PFIC stock is marketable if it is regularly traded on (1) a national securities
exchange that is registered with the SEC, (2) the national market system established under Section II A of the Securities Exchange Act of 1934, or (3) an exchange or market that the IRS determines has rules sufficient to ensure that the market price represents legitimate and sound fair market value.

A Holder's adjusted basis of PFIC stock is increased by the income recognized under the mark-to-market election and decreased by the deductions allowed under the election.  If a US Holder owns PFIC stock indirectly through a foreign entity, the basis adjustments apply to the basis of the PFIC stock in the hands of the foreign entity for the purpose of applying the PFIC rules to the tax treatment of the US







40





owner.  Similar basis adjustments are made to the basis of the property through which the US persons hold the PFIC stock.

Income recognized under the mark-to-market election and gain on the sale of PFIC stock with respect to which an election is made is treated as ordinary income.  Deductions allowed under the election and loss on the sale of PFIC with respect to which an election is made, to the extent that the amount of loss does not exceed the net mark-to-market gains previously included, are treated as ordinary losses.  The US or foreign source of any income or losses is determined as if the amount were a gain or loss from the sale of stock in the PFIC.

If PFIC stock is owned by a CFC (discussed below), the CFC is treated as a US person that may make the mark-to-market election.  Amounts includible in the CFC's income under the election are treated as foreign personal holding company income, and deductions are allocable to foreign personal holding company income.

The above provisions apply to tax years of US persons beginning after December 31, 1997, and to tax years of foreign corporations ending with or within such tax years of US persons.

The rules of Code Section 1291 applicable to nonqualified funds as discussed above generally do not apply to a US Holder for tax years for which a mark-to-market election is in effect.  If Code Section 1291 is applied and a mark-to-market election was in effect for any prior tax year, the US Holder's holding period for the PFIC stock is treated as beginning immediately after the last tax year of the election.  However, if a taxpayer makes a mark-to-market election for PFIC stock that is a nonqualified fund after the beginning of a taxpayer's holding period for such stock, a co-ordination rule applies to ensure that the taxpayer does not avoid the interest charge with respect to amounts attributable to periods before the election.

Controlled Foreign Corporation Status

If more than 50% of the voting power of all classes of stock or the total value of the stock of our company is owned, directly or indirectly, by US Holders, each of whom own after applying rules of attribution 10% or more of the total combined voting power of all classes of stock of our company, we would be treated as a "controlled foreign corporation" or "CFC" under Subpart F of the Code.  This classification would bring into effect many complex results including the required inclusion by such 10% US Holders in income of their pro rata shares of "Subpart F income" (as defined by the Code) of our company and our earnings invested in "US property" (as defined by Section 956 of the Code).  In addition, under Section 1248 of the Code if we are considered a CFC at any time during the five year period ending with the sale or exchange of its stock, gain from the sale or exchange of common shares
of our company by such a 10% US Holder of our common stock at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of our earnings and profits attributable to the stock sold or exchanged.  Because of the complexity of Subpart F, and because we may never be a CFC, a more detailed review of these rules is beyond of the scope of this discussion.

Elimination of Overlap Between Subpart F Rules and PFIC Provisions

Under the Taxpayer Relief Act of 1997, a PFIC that is also a CFC will not be treated as a PFIC with respect to certain 10% US Holders.  For the exception to apply, (i) the corporation must be a CFC within the meaning of section 957(a) of the Code and (ii) the US Holder must be subject to the current inclusion rules of Subpart F with respect to such corporation (i.e., the US Holder is a "United States Shareholder," see "Controlled Foreign Corporation," above).  The exception only applies to that portion







41





of a US Holder's holding period beginning after December 31, 1997.  For that portion of a United States Holder before January 1, 1998, the ordinary PFIC and QEF rules continue to apply.

As a result of this new provision, if we were ever to become a CFC, US Holders who are currently taxed on their pro rata shares of Subpart F income of a PFIC which is also a CFC will not be subject to the PFIC provisions with respect to the same stock if they have previously made a Pedigreed QEF Election.  The PFIC provisions will however continue to apply to U.S Holders for any periods in which Subpart F does not apply (for example he is no longer a 10% Holder or we are no longer a CFC) and to US Holders that did not make a Pedigreed QEF Election unless the US Holder elects to recognize gain on the PFIC shares held in our company as if those shares had been sold.

ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES OF OUR COMPANY.


H.
        Documents on DisplayThe documents concerning our company may be viewed at the offices of our corporate solicitor, Clark Wilson LLP, Suite 800 - 885 West Georgia Street, Vancouver, British Columbia  V6C 3H1, during normal business hours.


I.
        Subsidiary InformationAs at the date of this annual report, we have one wholly-owned subsidiary, Green River Petroleum (USA) Inc.  Green River Petroleum (USA) Inc., incorporated on October 13, 1997, under the laws of the State of Wyoming, was dissolved by the State of Wyoming during 2002.  We reincorporated Green River Petroleum (USA) Inc. on November 22, 2004, under the laws of the State of Wyoming.


ITEM 11
        Quantitative and Qualitative Disclosures About Market RiskNot applicable.ITEM 12
        Description of Securities Other Than Equity SecuritiesOn July 7, 2005, the Company issued a three year 15% convertible debenture for the aggregate gross proceeds of $1,000,000.  The debentures have a term of three years and carry interest at 15% per annum, payable quarterly, in arrears.  All and any portion of the outstanding principal sum and accrued interest of each debenture is convertible into units (the debenture units) in the capital of the Company at a price of $0.55 if converted during the first two years of the debenture, or at a price of $0.61 if converted during the third year of the debenture.  The Company will grant the debentureholders a floating charge general security subordinated to existing security agreements in regards to collateral.

Each debenture unit consists of one common share in the capital of the Company and one non-transferable share purchase warrant (each, a debenture warrant).  Each debenture warrant is exercisable for two years at a price of $0.55 per share and at a price of $0.61 per share in the third year from the date of issuance of the debenture.







42





PART II


ITEM 13
        Defaults, Dividend Arrearages and DelinquenciesNot applicable.ITEM 14
        Material Modifications to the Rights of Security Holders and Use of ProceedsNot applicable.


ITEM 15
        Controls and ProceduresAs required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by the annual report, being December 31, 2004, we have carried out an evaluation of the effectiveness of the design and operation of our companys disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our companys management, including our companys Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our companys Chief Executive Officer and Chief Financial Officer concluded that our companys disclosure controls and procedures are effective as at the end of the period covered by this report.  There have been no significant changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect our internal controls over financial reporting.

Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commissions rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our president and secretary as appropriate, to allow timely decisions regarding required disclosure.


ITEM 16
        ReservedITEM 16A
        Audit Committee Financial ExpertOur board of directors has determined that it does not have a member of its audit committee that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B, and is "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.

We believe that the members of our board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.  In addition, we believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have only generated modest revenues to date.









43








ITEM 16B
        Code of EthicsCode of Ethics

Effective June 30, 2004, our company's board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company's president (being our principal executive officer) and our company's secretary, and the companys chief financial officer (being our principal financial and accounting officer and controller), as well as persons performing similar functions.  As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

(1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

(2) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

(3) compliance with applicable governmental laws, rules and regulations;

(4) the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and

(5) accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our company's personnel shall be accorded full access to our president and secretary and chief financial officer with respect to any matter which may arise relating to the Code of Business Conduct and Ethics.  Further, all of our company's personnel are to be accorded full access to our company's board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president or secretary or chief financial officer.

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company's president or secretary.  If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president or secretary or financial officer, the incident must be reported to any member of our board of directors.  Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe
disciplinary matter.  It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics was filed with the Securities and Exchange Commission as Exhibit 11.1 to our annual report on July 15, 2004.  We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request.  Requests can be sent to:  Netco Energy Inc., Suite 1100-609 West Hastings Street, Vancouver, British Columbia, Canada, V6B 4W4.







44








ITEM 16C
        Principal Accountant Fees and ServicesAudit Fees

Our board of directors appointed Ellis Foster as independent auditors to audit our financial statements for the fiscal year ended December 31, 2004.  The aggregate fees billed by Ellis Foster for professional services rendered for the audit of our annual financial statements included in this Annual Report for the fiscal year ended December 31, 2004 were accrued at $16,000 and for the fiscal year ended 2003 were $11,900.

Audit Related Fees

For the fiscal years ended December 31, 2004 and 2003, the aggregate fees billed for assurance and related services by Ellis Foster relating to our quarterly financial statements which are not reported under the caption "Audit Fees" above, were $Nil and $Nil.

Tax Fees

For the fiscal years ended December 31, 2004 and 2003, the aggregate fees billed for tax compliance, tax advice and tax planning by Ellis Foster were $2,090 and $1,100

All Other Fees

For the fiscal years ended December 31, 2004 and 2003, the aggregate fees billed by Ellis Foster for other non-audit professional services, other than those services listed above, totalled $6,250 and $Nil.

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before Ellis Foster is engaged by us or our subsidiaries to render any auditing or permitted non-audit related service, the engagement be:

- approved by our audit committee; or

- entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

The audit committee pre-approves all services provided by our independent auditors.  The pre-approval process has just been implemented in response to the new rules.  Therefore, the audit committee does not have records of what percentage of the above fees were pre-approved.  However, all of the above services and fees were reviewed and approved by the audit committee either before or after the respective services were rendered.

The audit committee has considered the nature and amount of the fees billed by Ellis Foster, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining Ellis Fosters independence.


ITEM 16D.
        Exemption from the Listing Standards for Audit CommitteesNot Applicable.







45








ITEM 16E
        Purchases of Equity Securities the Company and Affiliated PurchasersNot Applicable.PART III


ITEM 17
        Financial StatementsRefer to Item 18 - Financial Statements


ITEM 18
        Financial StatementsFinancial Statements Filed as Part of the Annual Report:Financial Statements of Netco Energy Inc. for the Years Ended December 31, 2004 and 2003 (audited), reported on by Ellis Foster, Chartered Accountants:

Auditor's Report dated April 27, 2005 as to disclosure changes for generally accepted accounting principles in the United States

Consolidated Balance Sheets as at December 31, 2004 and 2003

Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003

Notes to Consolidated Financial Statements










46





NETCO ENERGY INC.



Consolidated Financial Statements

December 31, 2004, 2003 and 2002



Index

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income and Retained Earnings

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements










47

MOORE STEPHENS

ELLIS FOSTER LTD.


CHARTERED ACCOUNTANTS

1650 West 1stAvenue


Vancouver, BC  Canada
        V6J 1G1Telephone:  (604) 734-1112  Facsimile: (604) 714-5916E-Mail: generaldelivery@ellisfoster.com







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of



NETCO ENERGY INC.



We have audited the consolidated balance sheets ofNetco Energy Inc.(the Company) as at December 31, 2004 and 2003 and the consolidated statements of income and retained earnings and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  The consolidated financial statements as at December 31, 2002 and for the year ended December 31, 2002 were audited by other auditors who expressed an opinion without reservation on those financial statements in their report dated April 25, 2003.

We conducted our audits in accordance with generally accepted auditing standards in Canada and the standards of the Public Company Accounting Oversight Board (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.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of the company as at December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Differences between Canadian and United States generally accepted accounting principles for the years ended December 31, 2004, 2003 and 2002 are summarized in note 10.


Vancouver, CanadaApril 27, 2005 except as to note 10
        MOORE STEPHENS ELLIS FOSTER LTD.which is as of July 14, 2005
        Chartered Accountants





MS
        An independently owned and operated member of Moore Stephens North America Inc.,  Members in principal cities throughout North AmericaMoore Stephens North America, Inc. is a member of Moore Stephens International Limited, members in principal cities throughout the world.

48








NETCO ENERGY INC.Consolidated Balance SheetsDecember 31, 2004 and 2003(In Canadian Dollars)2004
        
        2003ASSETSCurrentCash and cash equivalents
        
        $
        3,489,284
        $
        23,194Accounts receivable
        
        
        236,241
        
        538,010Prepaid expenses
        
        
        65,851
        
        191,5253,791,376
        
        752,729Petroleum and natural gas interests(note 3)
        
        2,697,702
        
        3,774,192$
        6,489,078
        $
        4,526,921LIABILITIESCurrentAccounts payable and accrued liabilities
        $
        322,668
        $
        206,424Convertible debentures(note 4)
        
        1,000,000
        
        1,000,0001,322,668
        
        1,206,424SHAREHOLDERS' EQUITYShare capital(note 5)
        
        
        12,728,307
        
        10,024,234Contributed surplus
        
        
        96,196
        
        3,900Deficit
        
        
        (7,658,093)
        
        (6,707,637)5,166,410
        
        3,320,497$
        6,489,078
        $
        4,526,921The accompanying notes form an integral part of these financial statements.Approved by the Directors:
        David Finn
        
        Gordon NielsenDavid Finn
        
        Gordon Nielsen





49








NETCO ENERGY INC.Consolidated Statements of Income and Retained EarningsYears Ended December 31, 2004, 2003 and 2002(In Canadian Dollars)2004
        
        2003
        
        2002RevenuePetroleum and natural gas interests
        $
        2,787,153
        $
        3,409,365
        $
        1,281,645Royalties
        
        695,086
        
        862,286
        
        208,1542,092,067
        
        2,547,079
        
        1,073,491Direct operating expenses
        
        1,455,212
        
        2,007,298
        
        473,732Operating income
        
        636,855
        
        539,781
        
        599,759General and administrative expenses
        
        603,417
        
        368,388
        
        201,245Income before other items
        
        33,438
        
        171,393
        
        398,514Other itemsForeign exchange gain (loss)
        
        -
        
        (368)
        
        28,833Gain from disposition of petroleum andnatural gas interests (note 5(b))
        
        
        
        -
        
        443,079Interest income
        
        35,541
        
        5,003
        
        7,699Writedown of equipment
        
        -
        
        (1,732)
        
        -Writedown of petroleum and natural gasinterests
        
        (1,019,435)
        
        -
        
        -Net income for the year
        
        (950,456)
        
        174,296
        
        878,125Deficit,beginning of year
        
        (6,707,637)
        
        (6,881,933)
        
        (7,760,058)Deficit,end of year
        $
        (7,658,093)
        $
        (6,707,637)
        $
        (6,881,933)Earnings per share- basic
        $
        (0.07)
        $
        0.03
        $
        0.14- diluted
        $
        (0.06)
        $
        0.02
        $
        0.13Weighted average number ofcommon shares outstanding:- basic
        
        14,369,706
        
        6,717,206
        
        6,462,000- diluted
        
        15,965,974
        
        7,472,068
        
        6,805,000The accompanying notes form an integral part of these financial statements.







50








NETCO ENERGY INC.Consolidated Statements of Cash FlowsYears Ended December 31, 2004, 2003 and 2002(In Canadian Dollars)2004
        
        2003
        
        2002Cash flows from (used in) operating activitiesNet income (loss) for the year
        $
        (950,456)
        $
        174,296
        $
        878,125Adjustment for items not involving cash:Accrued interest on debenture
        
        24,292
        
        -
        
        -Depletion and amortization
        
        1,077,056
        
        1,526,893
        
        311,000Foreign exchange (gain) loss
        
        -
        
        -
        
        (28,833)Gain from disposition of petroleum andnatural gas interests
        
        -
        
        -
        
        (443,079)Stock-based compensation
        
        92,296
        
        3,900
        
        -Writedown of equipment
        
        -
        
        1,732
        
        -Writedown of petroleum and natural gas interests
        
        1,019,435
        
        -
        
        -1,262,623
        
        1,706,821
        
        717,213Changes in non-cash working capital:Decrease (increase) in accounts receivable
        
        301,769
        
        (117,029)
        
        (366,574)Decrease (increase) in prepaid expensesand deposits
        
        125,674
        
        8,580
        
        (195,917)Increase in accounts payableand accrued liabilities
        
        116,244
        
        85,709
        
        82,2031,806,310
        
        1,684,081
        
        236,925Cash flows used in investing activitiesDecrease in deposit received
        
        -
        
        -
        
        (25,000)Acquisition of petroleum and natural gas interests
        
        (1,020,000)
        
        (3,172,972)
        
        (552,452)(1,020,000)
        
        (3,172,972)
        
        (577,452)Cash flows from (used in) financing activitiesIncrease in share subscriptionsreceived in advance
        
        -
        
        -
        
        (185,250)Issuance of common shares
        
        1,679,780
        
        389,750
        
        385,250Issuance of convertible debenture
        
        1,000,000
        
        1,000,000
        
        -2,679,780
        
        1,389,750
        
        200,000Increase (decrease) in cashcash equivalents
        
        3,466,090
        
        (99,141)
        
        (140,527)Cash and cash equivalents,beginning of year
        
        23,194
        
        122,335
        
        262,862Cash and cash equivalents,end of year
        $
        3,489,284
        $
        23,194
        $
        122,335Supplemental Information:Interest paid in cash
        $
        73,151
        $
        125,049
        $
        -Income taxes paid in cash
        $
        -
        $
        -
        $
        -Shares issued for conversion of debenturesand accrued interest
        $
        1,024,293
        $
        -
        $
        -The accompanying notes form an integral part of these financial statements.







51

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








1.
        Continued OperationsThe Company was incorporated under the laws of the Province of Alberta on May 21, 1993 under the name of Green River Holdings Inc.  On July 28, 2000, the Company changed its name to Netco Energy Inc.  The Companys principal business activity is the exploration, development and production of petroleum and natural gas reserves located in Canada.


2.
        Significant Accounting PoliciesThe consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:


(a)
        Basis of ConsolidationThe consolidated financial statements of the Company include its wholly-owned subsidiary, Green River Petroleum USA Inc., incorporated in the State of Wyoming.  The subsidiary was inactive throughout the year and all inter-company transactions and balances have been eliminated on consolidation.


(b)
        Use of EstimatesThe preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period.  Actual results may differ from those estimates.


(c)
        Income TaxesThe Company has adopted the provision of CICA Handbook Section 3465, Income Taxes.  Under this standard, current income taxes are recognized for the estimated income taxes payable for the current period.

Future taxes are recognized for the tax consequences of temporary differences by applying enacted or substantively enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.  In addition, Section 3465 requires the recognition of future tax benefits to the extent that realization of such benefits is more likely than not.









52

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








2.
        Significant Accounting Policies(continued)(d)
        Petroleum and Natural Gas InterestsThe Company follows the full cost method of accounting for petroleum and natural gas interests whereby all costs of exploration for and development of, petroleum and natural gas reserves are capitalized.  These costs include lease acquisition costs, geological and geophysical expenses, drilling costs of successful as well as unsuccessful wells and overhead charges related directly to the exploration.  The carrying value of petroleum and natural gas interests are not intended to report replacement or current market values.

Depletion of exploration and development costs is provided using the unit of production method based on estimated proven petroleum and natural gas reserves.

If the interests are sold or abandoned, the proceeds will be applied against capitalized costs unless such sale significantly impacts the rate of depletion.

Costs associated with unproven reserves are reviewed by management to determine whether or not they have become impaired.  If impairment occurs, the carrying value of the related interest will be reduced to reflect the estimated net realizable value.  The estimate will be based on the then current conditions and it is possible that changes could occur which would adversely affect managements estimates resulting in further write downs of the carrying value of the interest.


(e)
        Cash EquivalentsCash equivalents usually consist of highly liquid investments, which are readily convertible into cash with maturities of three months or less when purchased.  The Company has no cash equivalents as at December 31, 2004 and 2003.


(f)
        Earnings Per ShareBasic earnings per share is computed using the weighted average number of common shares outstanding during the year.  Diluted earnings per share amounts are calculated giving effect to the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted to common shares using the treasury stock method.  The treasury stock method assumes that proceeds received from the exercise of stock options and warrants are used to repurchase common shares at the prevailing market rate.









53

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








2.
        Significant Accounting Policies(continued)(g)
        Property Option AgreementsFrom time to time, the Company may acquire or dispose of an interest pursuant to the terms of an option agreement.  Due to the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded.  Option payments are recorded as property costs or recoveries when the payments are made or received.


(h)
        Stock-based CompensationThe Company adopted Section 3870,Stock-Based Compensation and Other Stock-Based Paymentsusing the fair value method for all direct awards of stocks and applies the fair value method.  The fair value of stock options is determined by theBlack-Scholes Option Pricing Modelwith assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Companys common shares and an expected life of the options.  The fair value of direct awards of stocks is determined by the quoted market price of the Companys stock.


(i)
        Long-lived Assets ImpairmentLong-lived assets of the Company are reviewed when changes in circumstances suggest their carrying value has become impaired.  Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges).  If impairment is deemed to exist, the assets will be written down to their fair value.


(j)
        Asset Retirement ObligationsThe fair value of a liability for an asset retirement obligation is recognized when a reasonable estimate of fair value can be made.  The asset retirement obligation is recorded as a liability with a corresponding increase to the carrying amount of the related long-lived asset.  Subsequently, the asset retirement cost is charged to earnings using a systematic and rational method and is adjusted to reflect period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flow.  As at December 31, 2004, the Company does not have any asset retirement obligations.









54

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








2.
        Significant Accounting Policies(continued)(k)
        Foreign Currency TranslationsAssets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items.  Revenues and expenses are translated at the average exchange rates prevailing during the year except for amorization, which is translated at historical exchange rates.  Gain and losses on translations are included as income for the year.


3.
        Petroleum and Natural Gas InterestsAs at December 31, 2004, the Companys petroleum and natural gas interests include the following acquisition costs and accumulated depletion:


Cost
        Accumulated Depletion
        Total
2004
        Total
2003Petroleum and Natural Gas Interests:Canadian Properties
        $        5,607,049
        $ 2,909,347
        $  2,697,702
        $ 3,774,192


(l)
        Canadian Properties(i)
        On January 29, 2003, the Company entered into a Farmout agreement with Warrior Energy Inc. (Warrior) in which the Company  has the option to pay 100% of the costs to drill, test, cap, complete or abandon one well in the Greencourt area of Alberta in order to earn a 60% working interest in the well and one Section and a 20% working interest in an adjoining Section comprising the Farmin lands.On December 12, 2003, the Farmout agreement was amended wherein the Company and Warrior agreed to waive the requirement to complete and test the well to earn a 60% interest in the well and one Section in favour of the Company earning a 50% earned working interest in the test well, one Section and a 20% working interest in an adjoining Section comprising the Farmin lands.

On February 19, 2003 the Company entered into a Participation agreement with Warrior in which the Company has the option to pay 40% of the recompletion costs in two wells in the Morningside area of Alberta, to earn a 40% BPO and 12% APO working interest in the wells and Participation lands.









55

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








3.
        Petroleum and Natural Gas Interests(continued)(a)
        Canadian Properties (continued)(i)
        (continued)On April 21, 2003, the Company entered into a Farmin agreement dated April 21, 2003 with Warrior in which the Company has the option to pay 20% of the costs to drill, test, cap, complete or abandon one well in the Niton area of Alberta in order to earn a 12% working interest in the well and Farmin lands.

On January 5, 2004, the Company entered into a Farmout Agreement with Chirripo Resources Inc. (Chirripo) in which Chirripo has the right to earn 100% of Netcos interest in the Greencourt 04-20-60-09W5M well and well spacing unit subject to a 5% overriding royalty in favour of the Company, convertible to a 20% working interest in favour of the Company after payout.  To earn the interest Chirripo must pay for all well completion and development costs through production.

Cumulative costs to date are $1,001,569 (2003 - $933,602).


(ii)
        On May 1, 2003, the Company entered into a Participation Agreement with Makah Energy Corporation (Makah) in which the Company can participate in an undivided 50% interest in joint oil and gas exploration and development activities within an Area of Mutual interest in the Provost area of Alberta.Cumulative costs to date are $nil (2003 - $207,260).


(iii)
        On November 26, 2002, the Company entered into a Farmout and Participation Agreement with Mustang Resources Inc. (Mustang) in which the Company has the option to pay 60% of the costs to drill to casing point or abandon one well in the Sylvan Lake area of Alberta in order to earn a 30% working interest in the well and Farmout lands.Cumulative costs to date are $575,367 (2003 - $767,443).


(iv)
        On November 26, 2002, the Company entered into a Farmout Agreement with Zorin Exploration. (Zorin) in which the Company has the option to pay 55.5% of the costs to drill and complete two wells in the Granlea area of Alberta for the right to earn a 27.75% working interest in the wells and Farmout lands.Cumulative costs to date are $159,055 (2003 - $159,055).









56

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








3.
        Petroleum and Natural Gas Interests(continued)(a)
        Canadian Properties (continued)(v)
        On October 18, 2001, the Company amended a Farmout Agreement, originally entered into on September 14, 2001 with Result Energy Inc. (Result) in which the Company agreed to 100% of the cost to re-enter a test well.Cumulative costs to date are $685,286 (2003 - $680,971).


(vi)
        On August 2, 2001 and on September 21, 2001, the Company entered into Farmout Agreements Moxie Exploration Ltd. (Moxie) in which the Company has the option to pay 75% of the cost to drill and complete four wells in the Jumpbush area of Alberta, to earn a 37.5% working interest.On October 10, 2001, the Company entered into a Participation Agreement with Moxie in which the Company has the option to participate in an undivided 50% interest in a test well in the Eyremore area of Alberta.

On January 15, 2003, the Company entered into a Participation Agreement with Moxie in which the Company has the option to pay 70% of the cost to drill and complete three test wells in the West Jumpbush area of Alberta, to earn a 35% working interest in the wells and Farmout lands.

Cumulative costs to date are $3,185,772 (2003 - $2,858,152).


(m)
        US PropertiesThe Company entered into a formal agreement dated August 7, 2001 with Patriot Petroleum Corp. (Patriot) to dispose of all of its US oil and gas properties, located in Louisiana and Wyoming.  Patriot, a public company with common directors and officers, is listed on the Canadian Venture Exchange (CDNX) and was classified as a Capital Pool Company as defined by the policies of the CDNX.  The sale price was US $644,419, subject to adjustment for revenues received by the Company from May 1, 2001 until closing of the transaction in March 2003.  The company received a non-refundable deposit of $25,000.  This agreement was subject to certain conditions precedent including receipt of regulatory and non-interested director and shareholder approvals.

Ownership in petroleum and natural gas interests involve certain inherent risks due to the difficulties in determining the validity of certain interests as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many petroleum and natural gas interests.  The Company has investigated the ownership of its interests and, to the best of its knowledge, they are in good standing.







57

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)





4.    Convertible Debentures


2004
        2003Convertible debentures payable, bearing interest at the rate of 15% per annum, payable quarterly, in arrears
        $1,000,000
        $1,000,000


(a)
        On April 22, 2003, the Company completed a non-brokered private placement with certain investors by issuing 100 convertible debentures at $10,000 per issued debenture, bearing interest at the rate of 15% per annum for gross proceeds of $1,000,000.The debentures shall have a term of three years and any portion of the outstanding principal sum and accrued interest of each debenture is convertible into units in the capital of the Company at a price of $0.30 if converted during the first two years of the debenture or at a price of $0.33 if converted during the third year of the debenture.

Each unit consists of one common share in the capital of the Company and one non-transferable share purchase warrant.  Each warrant entitles the holder to purchase one additional common share at a price of $0.30 per share if the debenture is converted after the date of issuance and on or before one year following the date of issuance of the debenture; $0.40 per share if the debenture is converted after the first anniversary of the issuance and on or before two years following the date of issuance; and $0.50 per share if the debenture is converted after the second anniversary of the issuance and on or before the due date of the debenture.

As at December 31, 2003, the present value of the convertible debenture was $1,014,617 after applying a discount rate of 15% and accruing interest at 15%.  The Company adopted the residual approach and reported 100% of the debenture as a liability.

The convertible debenture holders exercised their options to convert the principal and accrued interest resulting in the issuance of 3,414,473 common shares and 3,414,473 share purchase warrants.  Each warrant entitles the holder to purchase a further common share at a price of $0.30 per share on or before March 16, 2006.









58

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








4.
        Convertible Debentures(continued)(b)
        On July 7, 2004, the Company completed a non-brokered private placement with certain investors of 15% Convertible Debentures for aggregate gross proceeds of up to $1,000,000.  The Debentures shall have a term of three years and carry interest at 15% per annum, payable quarterly, in arrears.  All or any portion of the outstanding principal sum and accrued interest of each Debenture is convertible into units in the capital of the Company at a price of $0.55 if converted during the first two years of the debenture, or at a price of $0.61 if converted during the third year of the debenture.  The Company will grant the debentureholders a floating charge general security subordinated to existing security agreements in regards to collateral.  Each debenture unit consists of one common share in the capital
of the Company and one non-transferable share purchase warrant.  Each warrant entitles the holder to purchase one additional common share at a price of $0.55 per  warrant.  The warrants shall expire on the earlier of: (a) the due date of the debenture or (b) two years from the issuance of the warrants upon conversion of the debenture.(n)
        On July 7, 2004, the Company completed a private placement of 2,000,000 flow through units at a price of $0.44 per flow-through unit, for additional gross proceeds of $880,000.  Each flow-through unit consists of one common share in the capital of the Company and one non-transferable share purchase warrant.  Each flow-through warrant entitles the holder to purchase one additional common flow-through share at a price of $0.55 per flow-through warrant.  The flow-through warrants shall expire five years from the issuance of the flow-through units.5.
        Share Capital(a)
        Authorized:
        Unlimited number of common shares without par valueUnlimited number of preferred shares without par value.(b)
        Issued:2004
        
        2003Number of Shares
        Amount
        
        Number of  Shares
        AmountCommon shares:Balance, beginning of year
        8,149,329
        $10,024,234
        
        6,461,829
        $ 9,634,484Shares issued for cash:- private placement
        2,000,000
        880,000
        
        -
        -- conversion of debentures
        3,414,473
        1,024,293
        
        -
        -- exercise of stock options
        100,000
        22,325
        
        187,500
        44,750- exercise of warrants
        2,824,849
        777,455
        
        1,500,000
        345,000Balance, end of year
        16,488,651
        $12,728,307
        
        8,149,329
        $10,024,234







59

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








5.
        Share Capital(continued)(c)
        WarrantsAs at December 31, 2004 the Company has outstanding share purchase warrants entitling the holders to acquire additional common shares, as follows:


Number of Shares
        Exercise Price
        Expiry1,486,100
        $0.30
        March 16, 2006103,524
        $0.30
        March 29, 20062,000,000
        $0.55
        July 7, 20093,589,624(d)
        Stock OptionsAs at December 31, 2004, the Company has outstanding directors and employees incentive stock options enabling the holders to acquire additional common shares as follows:


Number of Shares
        Exercise Price
        Expiry Date23,500
        $0.27
        February 20, 2008210,000
        $0.53
        January 26, 2009100,000
        $0.60
        March 2, 200970,000
        $0.52
        June 17, 2009403,500

During the year, the Company granted 390,000 (2003 - 30,000) stock options to employees and directors with an exercise price of $0.52 to $0.60 per share

(2003 - $0.27).  For the year ended December 31, 2004, the Company recorded stock-based compensation expense totalling $92,296 (2003 - $3,900).









60

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








5.
        Share Capital(continued)(d)
        Stock Options (continued)A summary of the stock option activity for the current year is as follows:


Number
        Weighted Average Exercise
PriceBalance at December 31, 2002
        $  331,000
        $   0.25Granted
        30,000
        0.27Exercised
        (187,500)
        0.24Forfeited / Cancelled
        (50,000)
        0.33Balance at December 31, 2003
        123,500
        0.23Granted
        390,000
        0.55Exercised
        (100,000)
        0.23Forefeited/Cancelled
        (10,000)
        0.55Balance at December 31, 2004
        $  403,500
        $  0.53

The weighted average fair value of stock options granted during the year ended December 31, 2004 was $0.55 per share (2003 - $0.27) (2002  nil) based on the Black-Scholes model.  Assumptions used were as follows:  risk-free interest rate of 4.5%, dividend yield 0%; volatility of 109% and expected lives of approximately five years.

The Companys Board of Directors approved the adoption of a stock incentive plan (the 2002 Stock Option Plan) dated June 27, 2002 in accordance with the policies of the TSX Venture Exchange.  The Board of Directors is authorized to grant options to directors, officers, consultants or employees.  The exercise price of options granted under the 2002 Stock Option Plan shall be as determined by the Board of Directors when such options are granted, subject to any limitations imposed by any relevant stock exchange or regulatory authority.  The maximum number of options that may be granted to any one person must not exceed 5% of the common shares outstanding at the time of the grant.  Any options granted under the 2002 Stock Option Plan shall vest in the Optionee as follows:  33.33% six months from date of grant, 33.33% twelve months from date of grant and the
remaining 33.33% eighteen months from the date of grant.









61

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








5.
        Share Capital(continued)(d)
        Stock Options (continued)Range of
Exercise
Prices
        Number
Outstanding
        Number
Exercisable
        Average
Remaining
Contractual
Life (year)
        Weighted
Average
Exercise
Price on
Outstanding
Options
        Weighted
Average
Exercise
Price on
Exercisable
Option$0.27 - $0.60
        403,500
        403,500
        3.10
        $0.53
        $0.536.
        Financial InstrumentsFair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments.  As these estimates are subjective in nature, involving uncertainties and matters of significant judgement, they cannot be determined with precision.  Changes in assumptions can significantly affect estimated fair values.

The carrying value of cash and cash equivalents and accounts payable and accrued liabilities approximate their fair value because of the short-term nature of those instruments.


7.
        Related Party TransactionsThe aggregate amount of expenditures made to parties not at arms length to the Company include:


2004
        
        2003
        
        2002Management fees paid to a former director
        $
        -
        $
        50,000
        $
        60,000Administrative and consulting fees paid to directors
        $
        -
        $
        29,000
        $
        -Consulting fees paid to a director of the Company
        $
        12,618
        $
        -
        $
        -Administrative and consulting fees paid to a company owned by a  former director
        $
        108,000
        $
        29,000
        $
        -Interest paid on convertible debentures held by shareholders of the Company
        $
        73,150
        $
        -
        $
        -







62

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








7.
        Related Party Transactions(continued)

The Company entered into a purchase agreement with Patriot Petroleum Corp. (Patriot) to sell the companys interest in its oil and gas properties located in Wyoming and Louisiana.  Patriot has directors and officers in common with the Company.  Refer to Note 3.

The convertible debentures (note 4) issued are held by certain shareholders of the Company.

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties, unless otherwise noted.


8.
        Income TaxesThe components of the Companys future tax assets and liabilities are as follows:


2004
        
        2003
        
        2002Future tax assets (liabilities):Non-capital loss carryforwards
        $
        -
        $
        -
        $
        2,000Timing difference re: petroleum and natural gas interests
        
        720,000
        
        340,000
        
        -Total future tax assets
        
        720,000
        
        340,000
        
        2,000Valuation allowance
        
        (720,000)
        
        (340,000)
        
        (2,000)Net future tax assets
        $
        -
        $
        -
        $
        -

In assessing the reliability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  The amount of the future tax asset considered realizable could change materially in the near term based on future taxable income during the carry forward period.  A valuation allowance has been provided against all net future tax assets, as realization of such net assets is uncertain.

The Companys unused Canadian exploration and development expenses, totalling approximately $4,500,000, are available to reduce Canadian taxable income earned in future years.  These unused expenses can be carried forward indefinitely.









63

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








8.
        Income Taxes(continued)A reconciliation of the statutory tax rate to the average effective rate for the Company is as follows:


2004
        2003
        2002%
        %
        %Statutory income tax rate
        36
        40
        40Resource deductions utilized
        (36)
        (40)
        (40)Average effective tax rate
        -
        -
        -9.
        Subsequent EventsOn January 27, 2005, the Company announced it had entered into a farm-in agreement with Nation Energy Inc. (Nation) to earn 60% of Nations interest in two sections of land in the Bolton area of Alberta.  Under the terms of the agreement, the Company will pay 100% of Nations costs relating to Nations 15% working interest in the drilling and development of an exploratory well.  The Company will earn 9% interest, after payout.


10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)These consolidated financial statements and the selected financial data have been prepared under Canadian Generally Accepted Accounting Principles (Canadian GAAP).

For each year of presentation, the modifications necessary in order for these consolidated financial statements to conform to U.S. GAAP have been suitably provided as follows:


(a)
        Reconciliation of Consolidated Balance Sheet Items:Reconciliation of Deficit Under U.S. GAAP


2004
        
        2003
        
        2002Deficit, end of year, Canadian GAAP
        $
        (7,658,093)
        $
        (6,707,637)
        $
        (6,881,933)Beneficial conversion expense [note 10(h)]
        
        (701,447)
        
        (341,447)
        
        -Deficit, end of year, U.S. GAAP
        $
        (8,359,540)
        $
        (7,049,084)
        $
        (6,881,933)









64

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian And United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(b)
        Reconciliation of Consolidated Income Items:i)
        Reconciliation of Net Loss Under U.S. GAAP2004
        
        2003
        
        2002Net income (loss) for the year per Canadian GAAP
        $
        (950,456)
        $
        174,296
        $
        878,125Beneficial conversion expense
        
        (360,000)
        
        (341,447)
        
        -Net income (loss) for the year per U.S. GAAP
        $
        (1,310,456)
        $
        (167,151)
        $
        878,125


ii)
        Income (Loss) Per Share U.S. GAAP2004
        
        2003
        
        2002Earnings (loss) per share- basic
        $
        (0.09)
        $
        (0.03)
        $
        0.14- diluted
        
        (0.08)
        
        (0.03)
        
        0.13












65

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian And United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(c)
        Supplemental Financial Information  Comprehensive IncomeStatement of Financial Accounting Standards No. 130 requires the reporting of comprehensive income in addition to net earnings.  Comprehensive income includes net income plus other comprehensive income; specifically, all changes in equity of a company during a period arising from non-owner sources.

Consolidated Statement of Changes in Shareholders Equity


Share Capital
        Additional
        Compre-
hensive
        Retained
        Accumulated
Other
Compre-
hensive
        Total
Share-Number of Shares
        Amount
        Paid In
Capital
        Income
(Loss)
        Earnings
(Deficit)
        Income
(Loss)
        holders EquityBalance, December 31, 2001
        4,749,329
        $ 9,249,234
        $              -
        
        $(7,760,058)
        $           -
        $1,489,176Issuance of shares (see Note 5)
        1,712,500
        385,250
        -
        
        -
        -
        385,250Components of Comprehensive income:- net income (loss)
        -
        -
        -
        $  878,125
        878,125
        -
        878,125$  878,125Balance, December 31, 2002
        6,461,829
        9,634,484
        -
        
        (6,881,933)
        -
        2,752,551Issuance of shares (see Note 5)
        1,687,500
        389,750
        -
        -
        -
        -
        389,750Stock based compensation
        -
        -
        3,900
        -
        -
        -
        3,900Components of comprehensive income:- net income (loss)
        -
        -
        -
        $  174,296
        174,296
        -
        174,296$        174,296Balance, December 31, 2003
        8,149,329
        $10,024,234
        $       3,900
        
        $(6,707,637)
        $           -
        $3,320,497









66

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian And United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(c)
        Supplemental Financial Information  Comprehensive Income (continued)Consolidated Statement of Changes in Shareholders Equity (continued)




Share Capital
        Additional
        Compre-
hensive
        Retained
        Accumulated
Other
Compre-
Hensive
        Total
Share-Number of Shares
        Amount
        Paid In
Capital
        Income
(Loss)
        Earnings
(Deficit)
        Income
(Loss)
        holders EquityBalance forward, December 31, 2003
        8,149,329
        $ 10,024,234
        $      3,900
        
        $(6,707,637)
        $            -
        $3,320,497Issuance of shares (see Note 5)
        8,339,322
        2,704,073
        
        
        
        
        2,704,073Stock based compensation
        -
        -
        92,296
        
        -
        -
        92,296Components of comprehensive income:- net loss
        -
        -
        -
        $     (950,456)
        (950,456)
        -
        (950,456)- foreign currency gain (loss)
        -
        -
        -$   (950,456)Balance, December 31, 2004
        16,488,651
        $ 12,728,307
        $    96,196
        
        $(7,658,093)
        $            -
        $5,166,410








67

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(d)
        Recent account pronouncementsTwo Class Method under SFAS No. 128, Earnings per Share, which addressed a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. It requires that undistributed earnings for the period be allocated to a participating security based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed in calculating earnings per share. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 15, 2004. It requires that prior period earnings per share amounts be restated to ensure comparability year over year. The adoption of EITF
Issue No. 03-06 did not have an impact on the Companys financial statements.

In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43, Chapter 4, which is the result of the FASBs project to reduce differences between U.S. and international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. SFAS No 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of SFAS No. 151 will not have a material impact on the Companys financial statements.


In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(SFAS 123R). SFAS 123R supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees,and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF
Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.SFAS 123R is effective for interim reporting period that begins after December 15, 2005. The adoption of SFAS 123R will not have any impact on its financial position, results of operations, or cash flows.








68

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(d)
        Recent account pronouncements (continued)In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. This Statement eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substancethat is, transactions that are not expected to result in significant changes
in the cash flows of the reporting entity. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, applied prospectively. The adoption of SFAS No. 153 will not have any impact on the Companys financial statements.


(e)
        Petroleum and Natural Gas InterestUnder Canadian GAAP, reclamation costs, are not included in the costs subject to amortization.  Also, future net revenues are not discounted for the purpose of calculating any required ceiling test write-down.  However, they are reduced for estimated future general and administrative expenses and interest.  Ceiling test write-downs are included as additional depletion in the year of recognition.  Under U.S. GAAP, estimated dismantlement and abandonment costs, net of estimated salvage values are to be included in costs subject to amortization.  Management has determined that dismantlement costs are not material and therefore do not effect U.S. GAAP amortization.  The Company is required to discount future net revenues at 10% for purposes of calculating any required ceiling test write-down.  Had there been a need for a Ceiling test write-down it would have been separately
disclosed from depletion.  The Companys last ceiling test was effective December 31, 2003.  It is managements opinion that the carrying value of the petroleum and natural gas interests would not be materially different had these financial statements been reported in accordance with U.S. GAAP.

None of the capitalized costs relate to unproven properties.









69

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(f)
        Stock OptionsThe Company has granted stock options to certain directors and employees.  These options are granted for services provided to the Company.  For U.S. GAAP purposes, Statement of Financial Accounting Standards No. 123 (:FAS 123) requires that an enterprise recognize, or at its option, disclose the impact of the fair value of stock options and other forms of stock-based compensation in the determination of income.  The Company has elected under FAS 123 to continue to measure compensation cost on the intrinsic value basis set out in APB Opinion No. 25.  As stock options are granted at exercise prices based on the market price of the Companys shares at the date of grant, no compensation cost is recognized.  However, under SFAS 123, the impact on net income and income per share of the fair value must be measured and disclosed on a fair value based method on a
pro forma basis.

The fair value of the employees purchase rights, pursuant to stock options, under SFAS 123, was estimated using the Black-Scholes model with the following assumptions:  risk free interest rate was 5%, expected volatility of 70% to 80% an expected option life of two years to five years and no expected dividends.

If compensation expense had been determined pursuant to SFAS 123, the Companys net loss and net loss per share for fiscal 2002 would have been as follows:


2002Net income (loss) for the year:As reported, under Canadian and U.S. GAAP
        $    878,125Pro forma
        878,125Basic earnings (loss) per shareAs reported, under Canadian and U.S. GAAP
        $            0.14Pro forma
        0.14Diluted earnings (loss) per shareAs reported, under Canadian and U.S. GAAP
        $            0.13Pro forma
        0.13

For the years 2004 and 2003, there were no reportable differences between the reported amounts and the pro-forma fair value method.









70

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(f)
        Stock Options (continued)In March 2000 the Financial Accounting Standards Board issued Interpretation #44, Accounting For Certain Transactions Involving Stock Compensation among other issues, this interpretation clarifies:


(i)
        The definition of employee for purposes of applying opinion 25.(ii)
        The criteria for determining whether a plan qualifies as a non-compensatory plan.(iii)
        The accounting consequence of various modifications of the terms of a previously fixed stock option or award, and(iv)
        The accounting for an exchange of stock compensation awards in a business combination.In relation to (iii) the interpretation states, if the exercise price of a fixed stock option award is reduced, the award shall be accounted for as a variable from the date of the modification to the date the award is exercised, is forfeited, or expires unexercised, the exercise price of an option award has been reduced if the fair value of the consideration required to be remitted pursuant to the awards original terms.


(g)
        Beneficial Conversion ExpenseUnder U.S. GAAP a beneficial conversion expense in respect of the convertible debentures in the amount of $0.10 per share would have been included in the operating activities in the 2004 year (note 4).


(h)
        Significant Accounting PoliciesUnder U.S. GAAP the Companys accounting policy with respect to advertising and promotion expenses would be disclosed as follows:

The Company expenses advertising and promotion costs as incurred.









71

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(i)
        Additional Disclosure Required by U.S. GAAP(i)
        Concentrations of Credit RiskAt December 31, 2004, 2003 and 2002, the Company had approximately $3,309,284, $nil and $nil, respectively, in cash balances at financial institutions which were in excess of the insured limits.


(ii)
        Operationsin a Foreign Country

The Company is subject to numerous factors relating to conducting business in a foreign country (including, without limitation, economic, political and currency risk), any of which could have a significant impact on the Companys operation.

The Companys U.S. subsidiary, Green River Petroleum USA Inc. is subject to U.S. corporation tax on profits.


(iii)
        BeneficialConversion

Subsequent to December 31, 2003, a number of warrant holders exercised their warrants at a price of $0.23 per share.  As a result, a beneficial conversion expense of $360,000 will be recorded in fiscal 2004 (Note 11(b).)


(iv)
        Effective January 1, 2003, U.S. GAAP requires the Companys adoption of SFAS No. 143, which recognizes that the fair value of a liability for an asset retirement obligation be recognized in the period in which it occurred if a reasonable estimate of fair value can be made.  The associate asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  Canadian GAAP was aligned with U.S. GAAP effective January 1, 2004.  The Company does not have material future site restoration and abandonment obligations.









72

NETCO ENERGY INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

(In Canadian Dollars)








10.
        Differences Between Canadian and United States Generally Accepted Accounting Principles (Canadian GAAP and U.S. GAAP)(continued)(j)
        Additional Disclosure Required by SECThe SEC requires that related party transactions be disclosed as a separate line in the financial statements.  Under this requirement, the following related party transactions would have been shown separately as related party balances in the financial statements:


(i)
        Administrative and consulting fees of $108,000 (2003 - $29,000;2002 - $nil) were paid to a director.


(ii)
        Consulting fees of $12,618 (2003 - $nil; 2002 - $nil) were paid to a director.(iii)
        Management fees of $nil (2003 - $50,000; 2002 - $60,000) were paid to a former director.(iv)
        Gain from disposition of petroleum and natural gas interest of $nil(2003 - $nil; 2002 - $443,079).






73


ITEM 19
        ExhibitsExhibits Required by Form 20-F

Exhibit Number / Description


(1)
        Articles of Incorporation and By-laws:1.1        Articles of Incorporation, effective May 21, 1993 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.2        By-Laws, effective May 21, 1993 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.3        Articles of Amendment, dated July 6, 1999 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.4        Articles of Amendment, dated October 1995 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.5        Certificate of Change of Name, dated July 20, 1999 (British Columbia) (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.6        Certificate of Amendment (Articles), dated July 6, 1999 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)

1.7        Certificate of Amendment (Articles), dated July 28, 2000 (incorporated by reference from our Form 20-F Registration Statement, effective February 26, 2001)


(2)
        Instruments Defining Rights of Holders of Equity Securities Being Registered2.1
        See Exhibits 1.1 and 1.2 above(4)
        Material Contracts4.1        Amendment Agreement (Office Space and Support Services Agreement) with First Merit Group Ltd. and Armada Ventures Inc., dated February 1, 2001 (incorporated by reference from our Form 20-F Annual Report, filed on June 29, 2001)

4.2        Letter Agreement, dated September 14, 2001 with Daybreak Energy Inc. (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.3        Amended Letter Agreement, dated October 18, 2001 with Daybreak Energy Inc. (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.4        Letter Agreement, dated August 2, 2001 with Moxie Exploration Ltd.  (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.5        Letter Agreement, dated September 21, 2001 with Moxie Exploration Ltd. (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.6        Letter Agreement, dated October 10, 2001 with Moxie Exploration Ltd. (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.7        Area of Mutual Interest Agreement, dated October 9, 2001 with Moxie Exploration Ltd. (incorporated by reference from our Form 20-F Annual Report, filed on June 28, 2002)

4.8        Floating Charge Demand Debenture, dated January 31, 2003, with National Bank of Canada (incorporated by reference from our Form 20-F Annual Report, filed on July 2, 2003)

4.9        Form of Convertible Debenture (incorporated by reference from our Form 20-F Annual Report, filed on July 2, 2003)

4.10      Letter Agreement, dated January 15, 2003 with Moxie Exploration Ltd. (incorporated by reference from our Form 20-F Annual Report filed on July 15, 2004)


4.11**
        Farm-in agreement dated January 1, 2005 with Nation Energy Corp.(5)
        SubsidiariesGreen River Petroleum (USA) Ltd.


(11)
        Code of Ethics11.1      Code of Ethics (incorporated by reference from our Form 20-F Annual Report filed on July 15, 2004)


(12)
        302 Certification12.1**
        Section 302 Certification under Sarbanes-Oxley Act of 2002 for Gordon Nielsen12.2**
        Section 302 Certification under Sarbanes-Oxley Act of 2002 for Dan Weisbeck(13)
        906 Certification13.1**
        Section 906 Certification under Sarbanes-Oxley Act of 2002** Filed herewith.



74


SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, hereunto duly authorized.

Dated: July 15, 2004

Netco Energy Inc.

Per:/s/ Gordon Nielsen

Gordon Nielsen, President

(Chief Executive Officer)