**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-KSB/A**









(Mark
      One)


x
            ANNUAL
                REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934. For the fiscal year ended**May
                31, 2004.**




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




Commission
      file number 0-27063




**AQUATIC
                CELLULOSE INTERNATIONAL CORP.**(Name
                of small business issuer in its
                charter)




Nevada
            
            82-0381904(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)




2504
                  - 43rdStreet, Suite 5, Vernon, British Columbia, Canada
              
              VIT
                  6L1(Address
                  of principal executive offices)
              
              (Zip
                  Code)




Registrant’s
      Telephone
      number, including area code: (250) 558-4216




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




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




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes
o   No
x




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation
      S-B is not contained herein, and will not be contained, to the best of
      Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. o




The
      issuer had net earnings from its working interest in the Hamill lease of $33,053
      for the fiscal year ended May 31, 2004.




The
      aggregate market value of the voting stock held by non-affiliates on May 31,
      2004 was approximately $350,260 based on the average of the bid and asked prices
      of the issuer’s common stock in the over-the-counter market on such date as
      reported by the OTC Bulletin Board. As of September 29, 2004, 100,000,000 shares
      of the issuer’s common stock were outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE









**EXPLANATORY
        NOTE**
  **This
        Annual Report on Form 10-KSB/A has been refiled in its entirety for the purpose
        of including certain additional explanations of financial disclosures, as
        well
        as to include certain agreements as exhibits that occurred during the period
        of
        this report and are herein referred to.**
  **Changes
                  made to this document are as follows;**
 ·
                **Table
                    of Contractual Obligations, Commitments and Off balance Sheet
                    Arrangements**
                **-
                    page 11**·
                **Item****8A Controls and Procedures**
                **-
                    page 17**·
                **Item
                    13 Exhibits, Lists and Reports in Form 8-K**
                **-
                    page 22**·
                **Signatures**
                **-
                    page 25**·
                **Notes
                    to Consolidated Financial Statements - Reclassifications**
                **-
                    page F-10**·
                **Consent
                    of****WJ&A
                    LLLP****(Consent to refile document)**
                **(Exhibit
                    23.1)**·
                **Certifications
                    of Chief Executive Officer and Chief Financial Officer**
                **(Exhibit
                    31.1 & 32.1)**·
                **$900,000
                    Convertible Debenture Agreements**
                **(Exhibit
                    10.5 - 10.19)**·
                **Purchase
                    and Sale and Operating Agreement-**
                **(Exhibit
                    10.20 & 10.21)**




**PART
        I**
  **ITEM
        1.**  **DESCRIPTION
        OF BUSINESS**
  *AQUATIC
        CELLULOSE INTERNATIONAL CORP. (*“ Aquatic”)
        is a Nevada
        Corporation originally organized as Aquatic Cellulose Ltd. (“ACL”) and was
        incorporated in March of 1996. Aquatic is an independent oil and gas investment,
        development and production company, engaged in the acquisition and development
        of crude oil and natural gas reserves and production principally in the state
        of
        Texas of the United States.
  Located
        in Vernon, British Columbia, Canada, Aquatic Cellulose International was
        originally organized as a forest-based company focusing on accessing and
        recovering submerged timber. Aquatic’s principal activity was the procurement of
        contracts for the salvage and harvest of submerged timber and the sale of
        lumber
        derived from such timber. In March of 2003, new management decided on the
        new
        business direction in Oil and Gas due to continued losses from operations
        and
        lack of progress in underwater wood project development.
  Aquatic
        plans to grow its business by investing in acquisitions, development, and
        production and sale of natural gas and crude oil. Aquatic plans to further
        expand its investments and cash flow by capitalizing on modern technological
        developments in the area of oil and gas production development. New technology
        since the development of the computer industry has allowed for better
        identification of by-passed reserves in previously discovered oil and gas
        fields. Geological analysis using “Direct Hydrocarbon Indicator” (DHI) tools and
        methods, as well as improved 3D seismic data processing have been successfully
        used to enhance and revitalize previously developed and currently developed
        oil
        and gas producing sites.
  Aquatic’s
        overall goal is to maximize corporate value through profitable growth in
        our oil
        and gas reserves. This will be achieved through balanced portfolio consisting
        of;
  ·
              Development
                  of existing production wells.
 ·
              Application
                  of new technology to historically producing reservoirs targeting
                  significant by-passed reserves.
 ·
              Acquisitions
                  of producing reserves.
 ·
              Acquisitions
                  of working production interests and royalties.
  **Property
        Interests**
  *-
        Hamill Lease*
  In
        March
        of 2004, Aquatic acquired a 20 percent ownership position and a 16 percent
        net
        revenue interest in the Hamill Lease, a natural gas producing property located
        in Matagorda County Texas and operated by Century Resources Inc. of Houston
        Texas. The purchase was made on the basis of the property having existing
        production and revenues as compared to an exploration property with no
        production. Thus, the Company agreed to assume an increased percentage of
        the
        costs for a lesser percentage of the revenue on a 1/3 to 1/4 ratio, resulting
        in
        the 20 percent ownership stake and 16 percent net revenue interest before
        royalty expense. The agreement also includes an exclusive, optional, “New
        Project and Exploration Drilling Participation’ agreement with Century, which
        has three successive one-year terms, with the Company holding the exclusive
        option on each year. The 3645-acre property lease is secured by the property’s
        natural gas production from three of the seven existing wells. With a regulatory
        well spacing requirement of 40 acres per well the property has approximately
        300
        developed acres with the remaining 3,345 acres undeveloped. The property
        has
        historically produced natural gas from multiple stacked pay sands supported
        by a
        10 square mile area of mutual interest.
  *-
        Prado Field*
 (Subsequent
        Events - See Note 20 - Notes to Consolidated Financial Statements)
  In
        August, 2004, the Company’s, through its New Project Joint Participation
        agreement with Century Resources Inc. of Houston Texas, acquired a 50 percent
        interest in a 1,400-acre property lease in the Prado oil field, and located
        in
        Jim Hogg County Texas, with the remaining 50 percent owned by Century. This
        lease has 20 existing wells that were originally produced in the 1960’s. The
        Prado Field produces oil and gas from the down dip margin of the Jackson-Yegua
        barrier/sandplain sandstone play. Although most Jackson fields were discovered
        in the 1920’s and 1930’s Prado Field was discovered in 1956, late in the
        exploration history of the Jackson group. The field has had extensive
        development, producing from the late 1950’s and early 1960’s a cumulative 23
        million barrels of oil and greater than 32 billion cubic feet of natural
        gas.
        The Company has detailed studies pertaining to this field that show strong
        potential for development of significant by-passed reserves of both oil and
        natural gas.


**Risk
      Factors of the Oil and Gas Industry**




Volatile
      Oil and Gas Prices Can Materially Affect The Company.




The
      Company’s future financial condition and results of operations will depend upon
      the prices received for the Company’s oil and natural gas production and the
      costs of acquiring, finding, developing and producing reserves. Prices for
      oil
      and natural gas are subject to fluctuations in response to relatively minor
      changes in supply, market uncertainty and a variety of additional factors that
      are beyond the control of the Company. These factors include worldwide political
      instability (especially in the Middle East and other oil-producing regions),
      the
      foreign supply of oil and gas, the price of foreign imports, the level of
      drilling activity, the level of consumer product demand, government regulations
      and taxes, the price and availability of alternative fuels and the overall
      economic environment. A substantial or extended decline in oil and gas prices
      would have a material adverse effect on the Company’s financial position,
      results of operations, quantities of oil and gas that may be economically
      produced, and access to capital. Oil and natural gas prices have historically
      been and are likely to continue to be volatile. This volatility makes it
      difficult to estimate with precision the value of producing properties in
      acquisitions and to budget and project the return on development projects
      involving the Company’s oil and gas properties. In addition, unusually volatile
      prices often disrupt the market for oil and gas properties, as buyers and
      sellers have more difficulty agreeing on the purchase price of
      properties.




Uncertainty
      in Calculating Reserves; Rates of Production; Development Expenditures; Cash
      Flows:




There
      are
      numerous uncertainties inherent in estimating quantities of oil and natural
      gas
      reserves of any category and in projecting future rates of production and timing
      of development expenditures, which underlie the reserve estimates, including
      many factors beyond the Company’s control. Reserve data represent only
      estimates. In addition, the estimates of future net cash flows from the
      Company’s proved reserves and their present value are based upon various
      assumptions about future production levels, prices and costs that may prove
      to
      be incorrect over time. Any significant variance from the assumptions could
      result in the actual quantity of the Company’s reserves and future net cash
      flows from them being materially different from the estimates. In addition,
      the
      Company’s estimated reserves may be subject to downward or upward revision based
      upon production history, results of future development, prevailing oil and
      gas
      prices, operating and development costs and other factors.




Oil
      and
      Gas Operations Involve Substantial Costs and Are Subject to Various Economic
      Risks:




The
      oil
      and gas operations of the Company are subject to the economic risks typically
      associated with development and production activities, including the necessity
      of significant expenditures to locate and acquire producing properties and
      to
      drill exploratory wells. In conducting development activities, the presence
      of
      unanticipated pressure or irregularities in formations, miscalculations or
      accidents may cause the Company’s development and production activities to be
      unsuccessful. This could result in a total loss of the Company’s investment. In
      addition, the cost and timing of drilling, completing and operating wells is
      often uncertain.




Significant
      Capital Requirements:




The
      Company must make a substantial amount of capital expenditures for the
      acquisition, and development of oil and gas reserves. To date, the Company
      has
      paid for acquisitions and expenditures with cash from the issuance of debt,
      convertible notes and operating activities. The Company’s revenues or cash flows
      could be reduced because of lower oil and gas prices or for some other reason.
      If the Company’s revenues or cash flows decrease, it may not have the funds
      available to replace its reserves or to maintain production at current levels.
      If this occurs, it would reduce production over time. Other sources of financing
      may not be available if the Company’s cash flows from operations are not
      sufficient to fund its capital expenditure requirements. Where the Company
      is
      not the majority owner or operator of an oil and gas project, it may have no
      control over the timing or amount of capital expenditures associated with the
      particular project. If the Company cannot fund its capital expenditures, its
      interests in some projects may be reduced or forfeited.




Costs
      Incurred To Conform to Government Regulation of the Oil and Gas
      Industry.




Costs
      incurred due to changes at the federal or state level of the oil and natural
      gas
      regulatory environment could adversely affect the Company’s ability to conduct
      business.




2


Costs
      Incurred Related to Environmental Matters.




The
      Company, as a part owner or lessee of oil and gas properties, is subject to
      various federal, state and local laws and regulations relating to discharge
      of
      materials into, and protection of, the environment. These laws and regulations
      may, among other things, impose liability on the lessee under an oil and gas
      lease for the cost of pollution clean-up resulting from operations, subject
      the
      lessee to liability for pollution damages, and require suspension or cessation
      of operations in affected areas.




The
      Company is not aware of any environmental claims existing as of September 29,
      2004, which would have a material impact upon the Company’s financial position
      or results of operations.




Development
      hazards:




Production
      development of oil and natural gas can be hazardous, involving unforeseen
      occurrences such as blowouts, cratering, fires and loss of well control, which
      can result in damage to or destruction of wells or equipment, injury to persons,
      loss of life, or damage to property or the environment.




General
      Economic Conditions:




Virtually
      all of the Company’s operations are subject to the risks and uncertainties of
      adverse changes in general economic conditions, the outcome of pending and/or
      potential legal or regulatory proceedings, changes in environmental, tax, labor
      and other laws and regulations to which the Company is subject, and the
      condition of the capital markets utilized by the Company to finance its
      operations.




**Seasonality
      of Business**




Weather
      conditions affect the demand for and prices of natural gas and can also delay
      drilling activities, disrupting our overall business plans. Demand for natural
      gas is typically higher in the second and third quarters due to increased
      heating demands resulting in higher natural gas prices. Due to these seasonal
      fluctuations, results of operations for individual quarterly periods may not
      be
      indicative of results that would be realized on an annual basis.




**Competitive
      Conditions in the Business**




The
      petroleum and natural gas industry is highly competitive and we compete with
      a
      substantial number of other companies that have greater resources, such as,
      GulfWest Energy Inc. and TransTexas Gas Corp. Many such companies, not only
      explore, produce and market petroleum and natural gas but also carry on refining
      operations and market the resultant products on a worldwide basis. There is
      also
      competition between petroleum and natural gas producers and other industries
      producing energy and fuel. Furthermore, competitive conditions may be
      substantially affected by various forms of energy legislation and/or regulation
      considered from time to time by the governments (and/or agencies thereof) of
      the
      United States and Canada; however, it is not possible to predict the nature
      of
      any such legislation and/or regulation which may ultimately be adopted or its
      effects upon our future operations. Such laws and regulations may, however,
      substantially increase the costs of exploring for, developing or producing
      oil
      and gas and may prevent or delay the commencement or continuation of a given
      operation. The exact effect of these risk factors cannot be accurately
      predicted.




**Distribution**




Aquatic
      sells its production through contracts with existing pipeline operating
      companies and crude oil brokers. Due to the consistent demand for domestic
      energy as well as the maturity of the industry, Aquatic is able to achieve
      100
      percent sales of its production and have little to no difficulty in renewing
      distribution contracts as required.





3


**Important
      Events**




·
            On
                February 28th,
                2003 AQCI cancelled the arrangement regarding the planned purchase
                of the
                fleet of Boats owned by Raymond Lefebvre. The Company has had difficulty
                in retrieving the original restricted share certificates due to the
                death
                of Mr. Raymond Lefebvre. As of May 31, 2004, the Company has received
                from
                the executor of Mr. Lefebvre’s estate a letter informing the Company that
                they are unable to return the original stock certificates due to
                their
                being lost or destroyed and instructions to the Company’s transfer agent
                to cancel the certificates. The Company is moving ahead with the
                cancellation of the original stock certificates with the transfer
                agent.




·
            On
                March 26th,
                2003 Gary J. Ackles resigned as Director, President and CEO of AQCI
                and
                was succeeded by Sheridan B. Westgarde, a C.A.S. Tech. graduate of
                UCC
                British Columbia and a well recognized technology specialist in the
                robotics and automation industry.




·
            During
                October 2002, the Company entered into an agreement with Gary Ackles
                to
                sell the equipment located in Brazil with a net book value of $4,275
                in
                addition to a prototype machine with a net book value of $-0- located
                on
                the Tucurui reservoir. Under the terms of the agreement, the proceeds
                of
                sale were $70,000 resulting in a pre-tax gain of approximately $65,700.
                The Company applied the value of the machine as an offset to the
                unpaid
                license fee owed to Legacy Systems Corp. (Notes 9 and 17).




·
            On
                April 1st,
                2003 AQCI acquired a loan in the amount of $44,000 from Legacy Systems
                Corporation owned by Mr. Ackles. As security for this loan AQCI pledged
                the ATH-120 mechanical assembly constructed and stored at Beaver
                Manufacturing in Kamloops British Columbia.




·
            On
                May 31st,
                2003 AQCI’s activities in Brazil, including personnel and maintenance of
                the timber harvesting leases was terminated.




·
            On
                May 31st2003 all manufacturing and licensing agreements with Gary J. Ackles,
                owner
                of the ATH robotic technology were also cancelled.




·
            On
                September 5th,
                2003 AQCI signed an initial Memorandum of Understanding followed
                by a
                Letter Of Intent (LOI) with Century Resources Inc. (“Century”) of Houston
                Texas, owned by Edward R. DeStefano, for the acquisition of Century
                by
                AQCI. In March 2004, this agreement was terminated in favor of the
                acquisition of a 20 percent ownership position in Hamill Lease.




·
            During
                December 2003, the Company entered into an agreement whereby, the
                repayment of the outstanding debentures is intended to be made by
                an
                Equity Line of Credit instrument negotiated between the convertible
                debenture holders and the Company. Based on this arrangement, the
                Company
                and the convertible debenture holders further agreed to an additional
                funding of $900,000. While these new funds are secured as a convertible
                debt, the repayment is intended to be managed through the Equity
                Line of
                Credit. The Company signed a $100,000 convertible promissory note
                as an
                advance on the $900,000 and paid $80,000 as a deposit to acquire
                the
                Hamill Lease and Options.




·
            Effective
                March 1, 2004, the Company acquired a 20 percent ownership position
                with
                16 percent net revenue interest in the Hamill Lease, a 3,645 acre
                natural
                gas producing property located in Matagorda County, Texas, pursuant
                to an
                agreement with Century Resources Inc. (“Century”). Century, a privately
                held Texas corporation, has an interest in various oil and natural
                gas
                properties. Under the agreement, the Company will receive 16 percent
                of
                net revenue before royalty expense. The agreement also includes an
                exclusive, optional, “New Project and Exploration Drilling Participation’
                agreement with Century. The agreement is for three successive one-year
                terms, with the Company holding the exclusive option on each year.
                (See
                Note 1 - Notes to Consolidated Financial Statements)




·
            Effective
                March 1, 2004, the Company has a Lease Operating Agreement in place
                with
                Century Resources Inc. of Houston Texas. The operating agreement
                outlines
                the various responsibilities of both the Company and Century in regards
                to
                the management and operations of Hamill Lease. (See Note 14 - Notes
                To
                Consolidated Financial Statements)





4


·
            During
                March 2004, the Company entered into a consulting agreement with
                Harvey
                Smith to provide oil and gas expertise. The consulting agreement,
                effective February 1, 2004, is for one year and provides for consulting
                fees of $2,000 cash and $2,000 worth of Company common stock. (See
                Note 14
                - Notes to Consolidated Financial Statements)




·
            During
                March 2004, the Company entered into consulting agreement with Lonnie
                Hayward who specializes in assisting publicly held companies to find
                acquisition candidates and who was instrumental in the Company acquiring
                the working interest in the Hamill lease. The consulting agreement,
                effective December 15, 2004, is for one year and provides for consulting
                fees of $3,500 cash and $1,500 worth of Company common stock. (See
                Note 14
                - Notes to Consolidated Financial Statements)




**Subsequent
      Events (after May 31, 2004)**




·
            Beginning
                June 2004, maintenance work was commenced on the Hamill property,
                which
                resulted in 2 additional wells coming into production. These 2 wells
                added
                approximately 250 thousand cubic feet of gas per day to over-all
                lease
                production. Additionally, maintenance work was performed on the original
                producing well, which resulted in that well production rising from
                approximately 700 thousand cubic feet of gas per day to approximately
                1.05
                million cubic feet of gas per day.




·
            During
                July 2004, the Company entered into a agreement to exchange amounts
                due to
                Sheridan Westgarde, as well as stock compensation due Mr. Westgarde
                under
                the current consulting agreement, for a 27 percent common share equity
                position in the Company post-restructuring and pending shareholders
                approval of the Proxy. As a director of the Company, Mr. Westgarde
                shares
                would be affiliate status and bearing all restrictions according
                to
                affiliates as stated in the Securities and Exchange Act of 1933.




·
            During
                July 2004, the Company entered into an agreement with Gary Ackles,
                former
                Company CEO and Legacy Systems, a company controlled by Ackles, to
                settle
                amounts currently owed to both Ackles and Legacy (Note 9). The agreement
                requires the Company to return the Aquatic Timber Harvesting Equipment
                (Note 5) and issue 40,000,000 pre-restructured shares of the Company’s
                common stock in exchange for, forgiveness of the $44,000 borrowed
                from
                Legacy (Note 9) and the $80,000 due Legacy in un-paid licensing fees
                (Note
                9). The remaining amount due G. Ackles of $417,000 will be converted
                into
                13 percent of the issued and outstanding post-restructured shares
                of the
                Company pending shareholder approval of the Proxy. The agreement
                stipulates that Mr. Ackles would be an affiliate of the Company bearing
                all the restrictions of Affiliates according to the Securities and
                Exchange Act of 1933.




·
            During
                July 2004, the Company received short term loans from Sheridan Westgarde,
                the Company’s CEO, Lonnie Hayward, consultant, and Robert Marchand in an
                amount aggregating $42,000 which was used, along with Company’s available
                cash, to fund the purchase of the 50 percent working interest in
                the Prado
                Field lease. The Company agreed to repay the loan amount borrowed
                once
                funding becomes available and agreed to pay an additional 20 percent
                of
                the amount borrowed over the next 12 months. Following the closing
                of the
                $250,000 convertible debentures in August 2004, Mr. Westgarde and
                Mr.
                Hayward were repaid their principal amounts plus 10 percent, while
                Mr.
                Marchand declined repayment in favor of re-investing his principal
                and
                proceeds with the Company. The remaining 10 percent will be paid
                within
                the next 10 months.




·
            During
                July 2004, the Company, together with Century Resources Inc., completed
                an
                acquisition of an approximately 1,400 acre lease in the Prado Oil
                Field
                (Prado), located in Jim Hogg County Texas. The total purchase price
                for
                this acquisition was $140,000, of which the Company’s 50 percent ownership
                position and 45 percent net-revenue interest was $70,000. This lease
                has
                20 existing wells that were originally produced in the 1960’s 2 of which
                are still producing approximately 30 Barrels of oil per day. In
                cooperation with Century Resources Inc., the Company is planning
                to
                develop bypassed oil reserves as well as undeveloped natural gas
                reserves.
                The Company is awaiting the completion of 3D seismic processing that
                will
                be the basis for future development plans.





5




·
            During
                July 2004, the Company entered into a preliminary agreement in principle
                to sell a portion of its working interest in the Prado Field to Titan
                Consolidated Inc., a Nevada based corporation. Should this agreement
                be
                consummated, Titan would be responsible for 40 percent of the development
                and operating costs while receiving 20 percent of the net revenue
                from all
                Prado production. The purchase price is $500,000 of which the Company
                received, in July 2004, $10,000 of a $40,000 non-refundable deposit.
                The
                balance of the deposit is due by September 15, 2004 with the final
                closing
                date and remainder of the purchase price due on November 15, 2004.
                On
                September 15, 2004 the Company granted an extension of the non-refundable
                deposit due date to October 20, 2004 and the final closing date to
                December 1, 2004.




·
            During
                August 2004, the Company issued $250,000 in convertible debentures
                and
                warrants to acquire a working interest in Prado and pay a portion
                of
                outstanding consulting fees as of May 31, 2004.




·
            During
                September 2004, the Company plans to file an amended Preliminary
                14/A
                filing with the Securities and Exchange Commission, wherein, the
                Company
                will announce its intention to seek shareholder approval for an increase
                in the authorized shares to 3,000,000,000 shares. Additionally, the
                Company will seek approval to perform a reverse split on the issued
                and
                outstanding shares of the Company by a maximum factor of 750:1 (see
                Note
                21 - Notes to Consolidated Financial Statements).




**Going
      Concern**




Aquatic
      Cellulose International Corporation has experienced recurring losses, has a
      working capital deficiency of $1,526,189 and an accumulated deficit of
      $7,905,082 as of May 31 st ,
      2004.
      At the end of fiscal year ended May 31 st ,
      2003
      the Company had ceased its underwater timber harvesting operations due to the
      difficulty associated with the investment and operations of the Brazil project.
      These factors, among others, raise substantial doubt as to its ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also discussed in note 2. The consolidated financial statements do not include
      any adjustments that might result from the outcome of this
      uncertainty.




**Employees**




As
      of May
      31 st ,
      2003
      the Company had no employees and two consultants under contract. As of May
      31 st ,
      2004
      the Company is utilizing consultants to manage 100 percent of the administration
      and business development, for which there are three Consultants under
      contract.




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**




As
      of
      August 2003, AQCI’s offices are located at 2504 43 rd Street,
      Suite 5, Vernon, British Columbia, V1T6L1. There is no lease and the rent is
      due
      on a monthly basis at the rate of $280.00.




Prior
      to
      August 2003, AQCI’s offices were located at 3704 32 nd Street,
      Suite 301 Vernon, British Columbia, VIT 5N6. Annual lease payments under this
      lease were $12,370 per year.




**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




AQCI
      is
      not a party to any material pending legal proceedings and, to the best of its
      knowledge, no such action by or against AQCI has been threatened.





6


**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITIES HOLDERS**




The
      Company is currently in process to seek approval from shareholders to amend
      our
      certificate of incorporation to increase the number of authorized Common Stock
      from 100,000,000 to 3,000,000,000 shares, to amend our certificate of
      incorporation to change the Company name to Valor Energy Corporation and to
      amend our certificate of incorporation to provide for a stock combination
      (reverse split) of the Common Stock in an exchange ratio to be approved by
      the
      Board, ranging from one newly issued share for each two outstanding shares
      of
      Common Stock to a maximum of one newly issued share for each seven hundred
      and
      fifty outstanding shares of Common Stock.




The
      increase in authorized shares will allow the Company to facilitate the
      conversion of existing convertible debt as well as amounts due to related
      parties. The change of our Company name will better identify the Company in
      the
      new business. The stock combination or reverse split will allow the Company
      to
      facilitate the issuance of common shares in connection with the purchase of
      the
      Hamill Natural Gas Lease, meet obligations to industry professionals as well
      as
      to facilitate the conversion of existing convertible debt.




The
      Company plans to convert existing convertible debt to reducing the amount
      outstanding and then perform a combination of the stock. The Company plan to
      allocate shares of the post-consolidated company to key individuals pending
      approval of shareholders (see Note 21 - Notes to Consolidated Financial
      Statements).




**PART
      II**




**ITEM
      5.  MARKET FOR COMMON
      EQUITY AND RELATED SHAREHOLDER MATTERS**




Our
      common stock currently trades on the Pink Sheets, under the trading symbol
      “AQCI”. The following table set forth the quarterly high and low bid prices per
      share for our common stock. The bid prices reflect inter-dealer prices, without
      retail markup, markdown, or commission and may not represent actual
      transactions.





**High
                Bid**
            
            **Low
                Bid**Fiscal
                2002First
                Quarter 2002
            
            
            .07
            
            
            .02Second
                Quarter 2002
            
            
            .05
            
            
            .01Third
                Quarter 2002
            
            
            .05
            
            
            .01Fourth
                Quarter 2002 (5/31/02)
            
            
            .14
            
            
            .06Fiscal
                2003First
                Quarter 2003
            
            
            .09
            
            
            .018Second
                Quarter 2003
            
            
            .033
            
            
            .014Third
                Quarter 2003
            
            
            .014
            
            
            .004Fourth
                Quarter (5/31/03)
            
            
            .008
            
            
            .002Fiscal
                2004First
                Quarter 2004
            
            
            .004
            
            
            .004Second
                Quarter 2004
            
            
            .006
            
            
            .004Third
                Quarter 2004
            
            
            .006
            
            
            .006Fourth
                Quarter (5/31/04)
            
            
            .007
            
            
            .004




To
      date,
      AQCI has not declared or paid dividends on its common stock.




As
      of May
      31 st ,
      2004,
      there were approximately 361shareholders of record (that are not in street
      name)
      of AQCI’s Common Stock.




7


**Recent
      Sales of Unregistered Securities**




During
      the quarter ended August 31 st ,
      2002,
      the Company issued an aggregate of 900,000 shares of restricted stock at $0.029
      per share for director fees (price reflected market price) for a total value
      of
      $26,100.




At
      various times during the fiscal year ended May 31 st ,
      2003,
      the Company issued an aggregate of 3,868,880 shares of restricted stock to
      various investors at $0.05 per share for cash pursuant to various subscription
      agreements for a total value of $42,500.




At
      various times during the fiscal year ended May 31 st ,
      2003,
      the Company issued an aggregate of 4,189,412 shares of restricted stock at
      a
      price ranging from $0.0091 to $0.01 per share for conversion of debentures
      (price reflected market price) for a total value of $40,000.




At
      various times during the fiscal year ended May 31 st ,
      2003,
      the Company issued an aggregate of 16,010,100 shares of restricted stock at
      a
      price ranging from $0.027 to $0.04 per share for services rendered (price
      reflected market price) for a total value of $482,679.




During
      the fiscal year ended May 31 st ,
      2003,
      the Company’s former CEO surrendered 3,620,107 shares of common stock for the
      purposes of compensating professionals providing services to the Company. The
      shares at date of cancellation had an estimated value of $144,804.




During
      the fiscal year ended May 31 st ,
      2003,
      Sheridan Westgarde, the Company’s current CEO surrendered 1,000,000 shares of
      common stock for the purposes of compensating professionals providing services
      to the Company. The shares at date of cancellation had an estimated value of
      $46,360.




During
      the fiscal year ended May 31 st ,
      2003,
      William Stephaniuk surrendered 791,209 shares of common stock for the purposes
      of compensating professionals providing services to the Company. The shares
      at
      date of cancellation had an estimated value of $31,648.




**Convertible
      Notes issued (The investors of the securities were accredited
      investors).**




On
      March
      4 th ,
      2001
      Aquatic issued two convertible debentures of $100,000 in cash each for an
      aggregate of $200,000 in accordance with § 4(2) and Rule 506 under the
      Securities Act of 1933, as amended. The investors of these securities were
      accredited investors.




On
      March
      22 th ,
      2004
      Aquatic issued three convertible debentures of $433,333, $433,334 and $33,333
      respectively, in cash each for an aggregate of $900,000 in accordance with
§
4(2) and Rule 506 under the Securities Act of 1933, as amended. The investors
      of
      these securities were accredited investors.




**Warrants
      and options issued (The investors of the securities were accredited
      investors).**




During
      March 2001, Aquatic issued common stock purchase warrants for the right to
      purchase 100,000 shares of Common Stock of AQCI at $.35 per share and expire
      March 14, 2003. These warrants were issued in accordance with § 4(2) and Rule
      506 under the Securities Act of 1933, as amended. The investors of these
      securities were accredited investors. During fiscal year ending May 31, 2004
      these warrants have expired.




During
      September 2001, Aquatic issued common stock purchase warrants for the right
      to
      purchase 250,000 shares of Common Stock of AQCI at $.69 per share and expire
      September 29, 2003. These warrants were issued in accordance with § 4(2) and
      Rule 506 under the Securities Act of 1933, as amended. The investors of these
      securities were accredited investors. During fiscal year ending May 31, 2004
      these warrants have expired.




8


On
      March
      22 nd ,
      2004,
      Aquatic issued common stock purchase warrants for the right to purchase 900,000
      shares of Common Stock of AQCI at $.0004 per share and expire March
      22 nd ,
      2006.
      These warrants were issued in accordance with § 4(2) and Rule 506 under the
      Securities Act of 1933, as amended. The investors of these securities were
      accredited investors.




**Transfer
      Agent and Registrar**




The
      Company’s transfer agent is Oxford Transfer & Registrar located at 317
      Southwest Alder, Suite 1120, Portland, Oregon, 92704.




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




**Plan
      of Operations**




The
      Company has reorganized its core business, shifting from the underwater wood
      business to that of investment and development of oil and natural gas. On March
      22,  2004,
      the
      Company acquired from Century Resources Inc., retroactive to March 1, 2004,
      a 20
      percent ownership position and a 16 percent net revenue interest in the Hamill
      Lease, a 3,645 acre natural gas producing property located in Matagorda County,
      Texas. The purchase was made on the basis of the property having existing
      production and revenues as compared to an exploration property with no
      production. Thus, the Company agreed to assume an increased percentage of the
      costs for a lesser percentage of the revenue on a 1/3 to 1/4 ratio, resulting
      in
      the 20 percent ownership stake and 16 percent net revenue interest before
      royalty expense. The company’s original plan to acquire Century, a Texas based
      oil and gas Company, was replaced with this new acquisition agreement which
      includes an exclusive, optional, “New Project and Exploration Drilling
      Participation” agreement with Century. This aspect of the agreement has three
      successive one-year terms, with the Company holding the exclusive option on
      each
      year. (See Note 1 - Notes to the Consolidated Financial Statements)




*HAMILL
      & PRADO PRODUCTION*




Beginning
      June 2004, maintenance work was commenced on the Hamill property, which resulted
      in 2 additional wells coming into production. These 2 wells added approximately
      250 thousand cubic feet of gas per day to over-all lease production.
      Additionally, maintenance work was performed on the original producing well,
      which resulted in that well production rising from approximately 700 thousand
      cubic feet of gas per day to approximately 1.05 million cubic feet of gas per
      day resulting in a total lease production of approximately 40 million cubic
      feet
      of gas per month commencing July 10, 2004, an overall increase of 15.5 million
      cubic feet of gas over previously reported numbers.




Currently
      the Prado Field is producing approximately 900 barrels of oil per month from
      2
      of the 20 existing wells. The Company is currently waiting on the completion
      of
      detailed evaluation of 3D seismic and other site engineering data, for both
      Hamill and Prado, that will further define the reserve potential, as well as
      future development costs.




As
      previously reported, the Company has in the past been seeking to acquire the
      Tiger•LynkTM large scale manipulator technology, formerly known as the ATH
      technology, as a wholly owned subsidiary. To this effect, in June 2003, the
      Company signed a Memorandum of Understanding with Legacy Systems Corp.
      (“Legacy”) to merge the public Company with the Tiger•LynkTM robotic technology
      patented and owned by Gary Ackles, former CEO of the Company. During July 2004,
      the Company entered into a agreement with Gary Ackles, former Company CEO,
      to
      cancel all plans to merge. The agreement to part ways involves the note the
      Company currently has with Legacy Systems, the ATH-120 manipulator arm
      components currently stored at a manufacturing facility in Kamloops, British
      Columbia as well as settlement of amounts currently owed to Legacy Systems
      and
      Mr. Ackles (see Note 5, 9 & 20 - Notes to Consolidated Financial Statements)




The
      short-term objectives of Aquatic are to achieve growth of both oil and natural
      gas reserves and revenue by pursuing the following:




1)
            Development
                of its current working interest in the Hamill & Prado Leases in
                Matagorda County and Jim Hogg County, Texas respectively.




9


2)
            Completing
                the acquisition and development of other property and working interest
                opportunities with proven reserve potential, made known to the Company
                through its “New Project and Exploration Drilling Participation” agreement
                with Century.




Aquatic’s
      long-term objectives are as follows:




Invest
      in
      new oil and gas properties, combined with balanced development of drilling
      and
      exploitation of current reserves. The company has several exclusive
      opportunities, available to it through its “New Project and Exploration Drilling
      Participation” agreement with Century, to acquire both oil and gas property
      interests and development drilling interests.




Over
      the
      next twelve months, management is confident that sufficient working capital
      will
      be obtained from a combination of revenues and external financing to meet the
      Company’s liabilities and commitments as they become payable (See Notes 2 &
11 - Notes to Consolidated Financial Statements). The Company has in the past
      successfully relied on private placements of common stock, bank financing,
      loans
      from private investors and the exercise of common stock warrants, in order
      to
      sustain operations. The Company plans to obtain the approval of its shareholders
      to increase the total number of authorized shares as well as perform a reverse
      split of the issued and outstanding shares to provide for the conversion of
      debentures for equity, use equity positions as incentive for attracting
      professionals, payment of professionals, sell additional shares for cash and
      use
      equity as payment for mergers and acquisitions.




By
      selling the equipment located in Brazil and the settlement agreement with Mr.
      Ackles (see Note 5, 9 & 20 Notes to Consolidated Financial Statements) the
      Company currently does not own any significant equipment. (See Note 4- Notes
      to
      the Consolidated Financial Statements) As of May 31 st ,
      2004
      the Company is utilizing consultants to manage 100 percent of the administration
      and business development, for which there are three Consultants under
      contract.




**Results
      of Operations**




**Year
      Ended May 31****st****,
      2004 Compared to Year Ended May 31****st****,
      2003**




The
      company earned revenue of $33,053 for the year ended May 31 st ,
      2004,
      compared with $nil for fiscal 2003 for a increase of $33,053. The increase
      was
      attributable to the acquisition of the Hamill lease natural gas producing
      property.




Operating
      costs and expenses for the year ended May 31 st ,
      2004,
      were $782,964 and $1,333,314 for the year ended May 31 st ,
      2003
      for a decrease of $550,350. This was mainly attributable to the decrease in
      selling, general and administrative expenses in 2004 of $301,930, down from
      $1,184,582 in 2003. This decrease is attributable to a decrease in legal and
      accounting of $92,845, investor relations of $192,580, licensing fees of
      $80,000, director fees of $26,100, and a decrease in travel, auto, meals,
      telephone and office supplies of $81,246. Offset by an increase in financing
      fees from $147,569 in 2003 to $473,676 in 2004, which is attributable to the
      new
      convertible notes issued in March of 2004 in the amount of $900,000.




The
      Company incurred a loss in fiscal 2004 of $749,911 compared with a loss of
      $1,247,850 in fiscal 2003.




**Liquidity
      and Capital Resources**




Net
      cash
      used in operating activities in fiscal 2004 amounted to $264,583 compared to
      $765,151 in fiscal 2003 for a decrease use of cash of $500,568. The use of
      cash
      is attributable to a net loss of $749,911 offset by $7,358 in depreciation,
      $27,395 in amortization of deferred financing costs, $274,243 in amortization
      of
      beneficial conversion feature, $195,163 in accounts payable and accrued
      liabilities less $18,671 in un-paid equity of Hamill lease and $160 of prepaid
      expenses. The Company has the following contractual obligations:




10




**CONTRACTUAL
      OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET
      ARRANGEMENTS**




The
      Company has various contractual obligations which are recorded as liabilities
      in
      the consolidated financial statements. Other items, such as certain lease
      agreements and executive contracts are not recognized as liabilities in our
      consolidated financial statements but are required to be disclosed. For example,
      the Company is contractually committed to make certain minimum lease payments
      to
      New Century Resources, Inc. under lease operating expense agreements.




The
      following table summarizes our significant contractual obligations on an
      undiscounted basis as of May 31, 2004 and the future periods in which such
      obligations are expected to be settled in cash or converted into the Company’s
      common stock. In addition, the table reflects the timing of principal and
      interest payments on outstanding borrowings. Additional details regarding these
      obligations are provided in footnotes to the consolidated financial statements,
      as referenced in the table:


Payments
                  Due by PeriodConvertibleLess
                    than
                
                
                
                
                
                More
                    than
                
                to
                    commonTotal
                
                1
                    year
                
                2
                    years
                
                3
                    years
                
                3
                    years
                
                stockAccrued
                    liabilities (Notes 8 & 21)
                
                $
                500,759
                
                $
                95,946
                
                
                
                
                
                
                
                
                
                
                $
                404,813Amounts
                    due related parties (Notes 9 & 21)
                
                
                741,174
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                741,174Convertible
                    debentures (1) (Notes 10 & 21)
                
                
                2,586,800
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,586,800Notes
                    payable (Notes 11 & 21)
                
                
                53,000
                
                
                8,300
                
                
                8,300
                
                
                8,400
                
                
                
                
                
                28,0003,881,733
                
                
                104,246
                
                
                8,300
                
                
                8,400
                
                
                -
                
                
                3,760,787Other
                    (2)
                
                
                326,476
                
                
                137,576
                
                
                64,580
                
                
                14,580
                
                
                43,740
                
                
                66,000Total
                    contractual obligations (3)
                
                $
                4,208,209
                
                $
                241,822
                
                $
                72,880
                
                $
                22,980
                
                $
                43,740
                
                $
                3,826,787
  (1)
                    Amounts include interest expense based upon contractual terms
                    through May
                    2006.(2)
                    Other commitments primarily comprise employment agreements with
                    officers
                    and operating lease agreeement with New Century
                    Resources (through May 2010)
  (3)
                    Comprised of the following:Liabilities
                    recorded on the balance sheet
                
                
                
                $
                2,975,733Commitments
                    not recorded on the balance sheet
                
                
                
                
                1,232,476$
                4,208,209




Financing
      activities generated net cash of $947,044 in fiscal 2004 compared with $828,614
      in fiscal 2003. The cash from financing activities for fiscal year 2004 was
      generated from issuance of notes of $53,000 and convertible debenture of
      $900,000 and un-paid fees and expenses due to stockholders of 101,777 less
      deferred financing costs.




11




At
      May
      31 st ,
      2004
      the Company had cash of $58,252 for total current assets of $156,333.




Over
      the
      next twelve months, management is confident that sufficient working capital
      will
      be obtained from a combination of revenues and external financing to meet the
      Company’s liabilities and commitments as they become payable (See Notes 2 &
11 - Notes to Consolidated Financial Statements). The Company has in the past
      successfully relied on private placements of common stock, bank financing,
      loans
      from private investors and the exercise of common stock warrants, in order
      to
      sustain operations. The Company plans to obtain the approval of its shareholders
      to increase the total number of authorized shares as well as perform a reverse
      split of the issued and outstanding shares to provide for the conversion of
      debentures for equity, use equity positions as incentive for attracting
      professionals, payment of professionals, sell additional shares for cash and
      use
      equity as payment for mergers and acquisitions.




**Critical
      Accounting Policies and Estimates**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these financial statements requires us to make
      estimates and judgments that affect the reported amounts of assets liabilities,
      revenues and expenses and related disclosures of contingent assets and
      liabilities. On an ongoing basis, we evaluate our estimates, including those
      related to impairment of long-lived assets. We base our estimates on historical
      experience and on various other assumptions that we believe to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying value of assets and liabilities that are not
      readily apparent from other sources. Significant estimates include DD&A of
      oil and gas properties. Oil and gas reserve estimates, which are the basis
      for
      unit of production DD&A and the impairment analysis, are inherently
      imprecise and are expected to change as future information becomes available.
      In
      addition, alternatives may exist among various accounting methods. In such
      cases, the choice of accounting method mau also have a significant impact on
      reporting amounts. Actual results may differ from these estimates under
      different assumptions or conditions; however, we believe that our estimates
      are
      reasonable.




There
      are
      numerous uncertainties inherent in estimating quantities of oil and natural
      gas
      reserves of any category and in projecting future rates of production and timing
      of development expenditures, which underlie the reserve estimates, including
      many factors beyond the Company’s control. Reserve data represent only
      estimates. In addition, the estimates of future net cash flows from the
      Company’s proved reserves and their present value are based upon various
      assumptions about future production levels, prices and costs that may prove
      to
      be incorrect over time. Any significant variance from the assumptions could
      result in the actual quantity of the Company’s reserves and future net cash
      flows from them being materially different from the estimates. In addition,
      the
      Company’s estimated reserves may be subject to downward or upward revision based
      upon production history, results of future development, prevailing oil and
      gas
      prices, operating and development costs and other factors.




Oil
      and
      Gas Property Accounting




Oil
      and
      gas companies may elect to account for their property costs using either the
      “successful efforts” or “full cost” accounting method. Under the success efforts
      method, lease acquisition costs and intangible development costs on successful
      wells and development dry holes are capitalized. Selection of the oil and gas
      accounting method can have a significant impact on a company’s financial
      results. We use the successful efforts method of accounting and generally pursue
      investments and development of proved reserves as opposed to exploration
      activities.




Capitalized
      costs relating to producing properties are depleted on the units-of-production
      method. Proved developed reserves are used in computing unit rates for drilling
      and development costs and total reserves for depletion rates of leasehold,
      platform and pipeline costs. Expenditures for geological and geophysical testing
      costs are generally changed to expense unless the costs can be specially
      attributed to determining the placement for a future developmental well
      location. Expenditures for repairs and maintenance are charged to expense as
      incurred, renewals and betterments are capitalized. The costs and related
      accumulated depreciation, depletion and amortization of properties sold or
      otherwise retired are eliminated from the accounts, and gains or losses on
      disposition are reflected in the statements of operation.




Costs
      directly associated with the acquisition and evaluation of unproved properties
      are excluded from the amortization base until the related properties are
      evaluated. Unproved properties are periodically assessed and any impairment
      in
      value is charged to impairment expense. The costs of unproved properties which
      are determined to be productive are transferred to proved oil and gas properties
      and amortized on a unit of production.




12




Oil
      and
      Gas Reserves




The
      process of estimating quantities of natural gas and crude oil reserves is very
      complex, requiring significant decisions in the evaluation of all available
      geological, geophysical, engineering and economic data. The data for a given
      field may also change substantially over time as a result of numerous factors
      including, but not limited to, additional development activity, evolving
      production history and continual reassessment of the viability of production
      under varying economic conditions. As a result, material revisions to existing
      reserve estimates may occur from time to time. Although every reasonable effort
      is made to ensure that reserve estimates reported represent the most accurate
      assessments possible, the subjective decisions and variances in available data
      for various fields make these estimates generally less precise than other
      estimates included in the financial statement disclosures. We use the
      units-of-production method to amortize our oil and gas properties. This method
      requires us to amortize the capitalized costs incurred in developing a property
      in proportion to the amount of oil and gas produced as a percentage of the
      amount of proved reserves contained in the property. Accordingly, changes in
      reserves estimates as described above will cause corresponding changes in
      depletion expense recognized in periods subsequent to the reserve estimate
      revision.















13




**Recent
      Accounting Pronouncements**




In
      July
      2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business
      Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS
      No. 141 requires the use of the purchase method of accounting and prohibits
      the
      use of the pooling of interests method of accounting for business combinations
      initiated after June 30, 2001. SFAS No. 141 also requires that the Company
      recognize acquired intangible assets apart from goodwill if the acquired
      intangible assets meet certain criteria. SFAS No. 141 applies to all business
      combinations initiated after June 30, 2001, and for purchase business
      combinations completed on or after July 1, 2001. Upon adoption of SFAS No.
      142,
      it also requires that the Company reclassify, if necessary, the carrying amounts
      of intangible assets and goodwill, based on the criteria in SFAS No. 141. SFAS
      No. 142 requires, among other things, that companies no longer amortize
      goodwill, but instead test goodwill for impairment, at least annually. In
      addition, SFAS No. 142 requires that the Company identify reporting units for
      the purpose of assessing potential future impairments of goodwill, reassess
      the
      useful lives of other existing recognized intangible assets, and cease
      amortization of intangible assets with an indefinite useful life. Adoption
      of
      this statement is not expected to be material.




In
      August
      2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal
      of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” in
      that it removes goodwill from its impairment scope and allows for different
      approaches in cash flow estimation. However, SFAS No. 144 retains the
      fundamental provisions of SFAS No. 121 for (a) recognition and measurement
      of
      long-lived assets to be held and used and (b) measurement of long-lived assets
      to be disposed of. SFAS No. 144 also supersedes the business segment concept
      in
      APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects
      of Disposal of a Segment of a Business, and Extraordinary, Unusual and
      Infrequently Occurring Events and Transactions,” in that it permits presentation
      of a component of an entity, whether classified as held for sale or disposed
      of,
      as a discontinued operation. However, SFAS No. 144 retains the requirement
      of
      APB Opinion No. 30 to report discontinued operations separately from continuing
      operations. The provisions of this Statement are effective for financial
      statements issued for fiscal years beginning after December 15, 2001 with
      earlier application encouraged. Company management has determined that
      implementation of SFAS No. 144 will not have a material effect on the Company’s
      results of operations or financial position.




On
      April
      30, 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4,
      44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS
      145 rescinds SFAS No. 4, which required all gains and losses from
      extinguishments of debt to be aggregated and, if material, classified as an
      extraordinary item, net of related income tax effect. Early application of
      the
      provisions of SFAS No. 145 may be as of the beginning of the fiscal year or
      as
      of the beginning of the interim period in which SFAS No. 145 is issued. Company
      management has determined that implementation of SFAS No. 145 will not have
      a
      material effect on the Company’s results of operations or financial
      position.




In
      July
      2002, the Financial Accounting Standards Board issued SFAS, “Accounting for
      Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a
      liability for costs associated with an exit or disposal activity be recognized
      and measured initially at fair value only when the liability is incurred. SFAS
      No.146 is effective for exit or disposal activities that are initiated after
      December 31, 2002. Company management has determined that implementation of
      SFAS
      No. 146 will not have a material effect on the Company’s results of operations
      or financial position.




In
      April
      2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities”, which amends SFAS No. 133 for certain
      decisions made by the FASB Derivatives Implementation Group. In particular,
      SFAS
      No. 149: (1) clarifies under what circumstances a contract with an initial
      net
      investment meets the characteristic of a derivative, (2) clarifies when a
      derivative contains a financing component, (3) amends the definition of an
      underlying instrument to conform it to language used in FASB Interpretation
      No.
      45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain
      other existing pronouncements. This Statement is effective for contracts entered
      into or modified after June 30, 2003, and for hedging relationships designated
      after June 30, 2003. In addition, most provisions of SFAS No. 149 are to be
      applied prospectively. As we have no such instruments, the adoption of this
      issue did not have an impact on our statement of financial position or results
      of operations.




Emerging
      Issues Task Force (“EITF”) Issue No. 02-03, “Recognition and Reporting of Gains
      and Losses on Energy Trading Contracts” under EITF Issues No. 98-10, “Accounting
      for Contracts Involved in Energy Trading and Risk Management Activities” was
      issued in June 2002. EITF Issue No. 02-03 addresses certain issues related
      to
      energy trading activities, including (a) gross versus net presentation in the
      income statement, (b) whether the initial fair value of an energy trading
      contract can be other than the price at which it was exchanged, and (c)
      accounting for inventory utilized in energy trading activities. As we have
      no
      such instruments, the adoption of this issue did not have an impact on our
      statement of financial position or results of operations.





14


In
      May
      2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity”. This statement
      establishes standards for how an issuer classifies and measures in its statement
      of financial position certain financial instruments with characteristics of
      both
      liabilities and equity. In accordance with the standard, financial instruments
      that embody obligations for the issuer are required to be classified as
      liabilities. This statement was effective for financial instruments entered
      into
      or modified after May 31, 2003.




**ITEM
      7.**  **FINANCIAL
      STATEMENTS**




Please
      refer to pages beginning with F-1.




**ITEM
              8.******
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND****FINANCIAL
                DISCLOSURE**




1.
                A
                    Form 8-K was filed on February 28th,
                    2002, reporting a change in accounting firms.




KPMG
      LLP
      was previously the independent auditors for Aquatic Cellulose International
      Corporation (the “Registrant”). On February 28 th ,
      2002,
      the Registrant terminated KPMG for financial reasons and engaged Merdinger,
      Fruchter, Rosen & Corso, P.C., to serve as the Company’s independent public
      accountants and to be the principal accountants to conduct the audit of the
      Company’s financial statements for the fiscal year ending May 31 st ,
      2002.
      The decision to change was based on financial considerations and was approved
      by
      the audit committee and the full Board of Directors of the
      Registrant.




The
      audit
      reports of KPMG LLP on the financial statements of Aquatic Cellulose
      International Corporation as of and for the fiscal years ended May
      31 st ,
      2001
      and 2000 did not contain an adverse opinion or disclaimer of opinion and were
      not qualified or modified as to uncertainty, audit scope or accounting
      principles, except as follows:




KPMG
      LLP’s report on the consolidated financial statements of Aquatic Cellulose
      International Corporation for the years ended May 31 st ,
      2001
      and 2000, contained a separate paragraph stating “As discussed in note 1(a) to
      the consolidated financial statements, the Company has a working capital
      deficiency of $467,287 as at May 31, 2001 and has suffered recurring losses
      from
      operations that raise substantial doubt about its ability to continue as a
      going
      concern. Management’s plans in regard to these matters are also discussed in
      note 1(a). The consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.”




During
      the Registrant’s fiscal years ended May 31 st ,
      1997
      through May 31 st ,
      2001,
      and the subsequent interim period ending February 28, 2001, there were no
      disagreements between the Registrant and KPMG LLP on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      and
      procedures, which if not resolved to their satisfaction of KPMG LLP would have
      caused KPMG LLP to make reference to the matter in their report. The Company
      has
      requested KPMG LLP to furnish it a letter addressed to the Commission stating
      whether it agrees with the above statements. A copy of that letter, dated March
      26 th ,
      2002,
      is filed as Exhibit 16 to this Form 8-K.




There
      were no other “reportable events” as that term is described in Item 304(a)(1)(v)
      of Regulation S-K occurring within the Registrant’s two most recent fiscal years
      and the subsequent interim period ending February 28, 2002.




During
      the Registrant’s two most recent fiscal years ended May 31 st ,
      2001
      and the subsequent interim period through February 28 th ,
      2002,
      the Registrant did not consult with Merdinger, Fruchter, Rosen & Corso, P.C.
      regarding any of the matters or events set forth in Item 304 (a)(2)(i) and
      (ii)
      of Regulations S-K




2.
            A
                Form 8-K was filed on January 10th,
                2003, reporting a change in accounting firms.




On
      December 18 th ,
      2002
      Merdinger, Fruchter , Rosen and Company, P.C. (the “Former Accountants”)
      informed Aquatic Cellulose International Corporation (the “Company”) they have
      decided to cease auditing publicly traded companies and have resigned as the
      company’s principal accountants.





15


The
      ‘Former Accountants’ reports on the financial statements for the fiscal years
      ended May 31 st ,
      2001
      and 2000 did not contain an adverse opinion or disclaimer of opinion and were
      not qualified or modified as to uncertainty, audit scope or accounting
      principles.




The
      Company’s Board of Directors has approved the resignation of the Former
      Accountants.




During
      the last two fiscal years preceding the Former Accountants’ resignation, and for
      the interim period from June 1 st ,
      2002
      through January 8 th ,
      2003,
      there were no disagreements with the Former Accountants, whether or not
      resolved, on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure, which disagreements,
      if
      not resolved to the satisfaction of the Former Accountants, would have caused
      it
      to make reference to the subject matter of the disagreements in connection
      with
      its reports.




During
      the last two fiscal years preceding the ‘Former Accountants’ resignation, and
      for the interim period from June 1 st ,
      2002
      through January 8 th ,
      2003,
      there were no “reportable events” as defined by Regulation S-K, Item
      304(a)(1)(v)(A) through (D).




On
      January 8 th ,
      2003,
      the Company engaged Stonefield Josephson, Inc., (the “New Accountants”) as our
      principal accountants to audit our financial statements. The engagement of
      the
      new Accountants was approved by the Company’s Board of Directors.




A
      letter
      from the Former Accountants addressed to the Securities and Exchange Commission
      stating the Former Accountants agree with the statements made by the Company
      in
      this report has been filed as an exhibit to this report.




3.
            A
                Form 8-K was filed on February 23rd,
                2004, reporting a change in accounting
                firms.




Stonefield
      Josephson, Inc. (the “Former Accountants”) was previously the independent
      auditors for Aquatic Cellulose International Corporation (“AQCI”). On or about
      May 30 th ,
      2003,
      Aquatic Cellulose International Corporation and Stonefield Josephson, Inc.,
      mutually parted ways. AQCI officially engaged Wong Johnson & Associates on
      February 16, 2004, to serve as the Company’s independent public accountants and
      to be the principal accountants to conduct the audit of the Company’s financial
      statements for the fiscal year ending May 31 st ,
      2002
      and May 31 st ,
      2003.
      The decision to change was based on financial considerations and was approved
      by
      the audit committee. There were no disagreements with the Former Accountants,
      whether or not resolved, on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to the satisfaction of the Former Accountants,
      would have caused it to make reference to the subject matter of the
      disagreements in connection with the AQCI’s reports.




AQCI’s
      Board of Directors has approved the change in Certifying Accountants from the
      Former Accountants to Wong Johnson & Associates.




The
      Former Accountants’ performed interim reviews of the Form 10QSB’s and did not
      participate in auditing AQCI’s financial statements for any fiscal year and
      therefore could not extend an opinion of any nature on AQCI. During the most
      recent two years ended May 31 st ,
      2003
      and 2002 and until the engagement of Wong Johnson & Associates, the
      Registrant has not consulted with Wong Johnson & Associates regarding either
      (i) the application of accounting principles to a specified transaction, either
      completed or proposed; or the type of audit opinion that might be rendered
      on
      the Registrant’s financial statements, and neither a written report was provided
      to the Registrant nor oral advice was provided that Wong Johnson &
Associates concluded was an important factor considered by the Registrant in
      reaching a decision as to the accounting, auditing or financial reporting issue;
      or (ii) any matter that was the subject of a disagreement, as the term is
      defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions
      to
      Item 304 of Regulation S-B.




Fiscal
      year 2002 was originally audited by Merdinger, Fruchter , Rosen and Company,
      P.C. who decided to cease auditing publicly traded companies and informed ACQI
      of their decision on December 18 th ,
      2002
      (see Form 8-K filed January 10 th ,
      2003).
      Fiscal year 2001 was audited by KPMG LLP. AQCI’s decision to change auditors at
      this time was based on financial considerations (see Form 8-K filed March
      27 th ,
      2002.
      As reported in the referenced Form 8-K’s filed, there were no disagreements with
      the former accountants, whether or not resolved, on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to the satisfaction of the
      former accountants, would have caused it to make reference to the subject matter
      of the disagreements in connection with its reports.




16




As
      a
      result of Merdinger, Fruchter , Rosen and Company, P.C. decision to cease
      auditing publicly traded companies, Wong Johnson & Associates will be
      auditing fiscal year 2002 again and an amended Form 10KSB will be filed shortly.
      Subsequently the Form 10KSB for fiscal year 2003 and all interim reports will
      be
      filed.




A
      letter
      from the Former Accountants addressed to the Securities and Exchange Commission
      stating the Former Accountants agree with the statements made by the Company
      in
      this report has been filed as an exhibit to this report.    4.
      A Form
      8-K/A was filed on April 1 st ,
      2004,
      correcting the previously filed Form 8-K filed on February 24 th ,
      2004
      and reporting a change in accounting firms.




Stonefield
      Josephson, Inc. (the “Former Accountants”) was previously the independent
      auditors for Aquatic Cellulose International Corporation (“AQCI”). On or about
      July 3, 2003, Aquatic Cellulose International Corporation dismissed Stonefield
      Josephson, Inc., however they were not informed of such until management engaged
      the new accountants. AQCI officially engaged Wong Johnson & Associates on
      February 16, 2004, to serve as the Company’s independent public accountants and
      to be the principal accountants to conduct the audit of the Company’s financial
      statements for the fiscal year ending May 31, 2002 and May 31, 2003. All filing
      stopped until Wong Johnson and Associated were retained. At that time all 10KSB’
and 10QSB’s were brought current with Wong Johnson during the audits and
      reviews. The decision to change was based on financial considerations and was
      approved by the audit committee. There were no disagreements with the Former
      Accountants, whether or not resolved, on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      which
      disagreements, if not resolved to the satisfaction of the Former Accountants,
      would have caused it to make reference to the subject matter of the
      disagreements in connection with the AQCI’s reports.




AQCI’s
      Board of Directors has approved the change in Certifying Accountants from the
      Former Accountants to Wong Johnson & Associates.




The
      former accounts performed interim reviews for the November 2002 and February
      2003 10QSB’s and did not participate in auditing AQCI’s financial statements for
      any fiscal year and therefore could not extend an opinion of any nature on
      AQCI.
      During the most recent two years ended May 31, 2003 and 2002 and until the
      engagement of Wong Johnson & Associates, the Registrant has not consulted
      with Wong Johnson & Associates regarding either (i) the application of
      accounting principles to a specified transaction, either completed or proposed;
      or the type of audit opinion that might be rendered on the Registrant’s
      financial statements, and neither a written report was provided to the
      Registrant nor oral advice was provided that Wong Johnson & Associates
      concluded was an important factor considered by the Registrant in reaching
      a
      decision as to the accounting, auditing or financial reporting issue; or (ii)
      any matter that was the subject of a disagreement, as the term is defined in
      Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304
      of
      Regulation S-B.




Fiscal
      year 2002 was originally audited by Merdinger, Fruchter , Rosen and Company,
      P.C. who decided to cease auditing publicly traded companies and informed ACQI
      of their decision on December 18, 2002 (see Form 8-K filed January 10, 2003).
      Fiscal year 2001 was audited by KPMG LLP. AQCI’s decision to change auditors at
      this time was based on financial considerations (see Form 8-K filed March 27,
      2002. As reported in the referenced Form 8-K’s filed, there were no
      disagreements with the former accountants, whether or not resolved, on any
      matter of accounting principles or practices, financial statement disclosure,
      or
      auditing scope or procedure, which disagreements, if not resolved to the
      satisfaction of the former accountants, would have caused it to make reference
      to the subject matter of the disagreements in connection with its reports.




As
      a
      result of Merdinger, Fruchter , Rosen and Company, P.C. decision to cease
      auditing publicly traded companies, Wong Johnson & Associates will be
      auditing fiscal year 2002 again and an amended Form 10KSB will be filed shortly.
      Subsequently the Form 10KSB for fiscal year 2003 and all interim reports will
      be
      filed.




A
      letter
      from the Former Accountants addressed to the Securities and Exchange Commission
      stating the Former Accountants agree with the statements made by the Company
      in
      this report has been filed as an exhibit to this report.





17


**ITEM
      8A.**  **CONTROL
      AND PROCEDURES**




**Evaluation
      of disclosure controls and procedures**




Mr.
      Sheridan B. Westgarde, our principal executive officer and principal financial
      officer, conducted an evaluation of our disclosure controls and procedures,
      as
      such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under
      the Securities Exchange Act of 1934, as amended (Exchange Act), as of September
      30, 2006. Based on this evaluation, Mr. Westgarde concluded that during the
      period covered by this annual report our disclosure controls and procedures
      were
      not effective to ensure that information required to be disclosed by us in
      the
      reports we file or submit under the Exchange Act is recorded, processed,
      summarized, and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms and that our disclosure and controls are
      designed to ensure that information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is accumulated and
      communicated to our management, including our principal executive and principal
      financial officer, or persons performing similar functions, as appropriate
      to
      allow timely decisions regarding required disclosure.




Mr.
      Westgarde became aware of potential problems in our disclosure controls and
      procedures in connection with the filing of a Proxy statement on Schedule 14/A
      (“Schedule 14/A”) on November 8, 2005, and in the customary course of the
      Commission’s review of the Schedule 14/A and other Company filings, during which
      time the Commission issued a comment letter (the “Comment Letter”) to the
      Company dated December 8, 2005. The Comment Letter included comments indicating
      a number of deficiencies in the Company’s filings. These deficiencies included
      such items as the omission of certain agreements that the Company has entered
      into as exhibits to the Company’s quarterly and annual reports, filed with the
      commission, and as required by Item 601 of Regulation S-B. Additionally, the
      Comment Letter indicated that certain Company quarterly and annual reports
      filed
      with the commission contained certifications that did not conform to the format
      provided in Item 601 (b)(31) of Regulation S-B. As a result of the deficiencies
      in the Company certain quarterly and annual reports the Company has not filed
      its subsequent quarterly and annual reports in a timely fashion.




As
      a
      result of Mr. Westgarde’s review of our disclosure controls and procedures, it
      was determined that during the preparation certain quarterly and annual reports
      of the Company’s, the Company lacked the proper communication and input from its
      SEC Attorney to correctly address deficiencies.




As
      a
      result of the Comment Letter and the review of our disclosure controls and
      procedures, we have decided to embark on a process to address and correct the
      deficiencies in certain of our filings done with the commission, as well as
      complete and file our outstanding quarterly and annual reports. This process
      will include the re-filing of certain quarterly and annual reports to include
      the missing exhibits and correct certification format.




We
      believe that during the fiscal year ending May 31, 2007, the Company will be
      able to implement changes in our controls and procedures to prevent deficiencies
      in our disclosures. This will be done by working with securities attorneys
      and
      engaging outside advisors to provide advice and assistance with implementing
      internal procedures to ensure that controls and procedures are adequate and
      effective.




**Changes
      in internal controls**




There
      were no changes (including corrective actions with regard to significant
      deficiencies or material weaknesses) in our internal controls over financial
      reporting that occurred during our most recent fiscal quarter ended May 31,
      2004
      that has materially affected, or is reasonably likely to materially affect,
      our
      internal control over financial reporting.




PART
      III




**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE****WITH
                SECTION 16(A) OF THE EXCHANGE ACT**




**Executive
      Officers and Directors**








Name
            
            Age
            
            PositionSheridan
                B. Westgarde
            
            35
            
            Director
                & PresidentGary
                J. Ackles * 1
            
            50
            
            Director
                & PresidentShane
                Kerpan *1
            
            33
            
            Secretary
                & TreasurerClaus
                Wagner-Bartak *2
            
            65
            
            Director





*1
            Resigned
                in 2003




*2
            Resigned
                in 2004




18




The
      officers and Directors of Aquatic will devote only such time as they deem
      appropriate in the business affairs of our Company. It is, however, expected
      that the officers will devote the time deemed necessary to perform their duties
      for the business of our Company. The amount devoted by each director is
      discussed below.




The
      directors of Aquatic are elected to hold office until the next annual meeting
      of
      shareholders and until their respective successors have been elected and
      qualified.




**Biographies
      of Our Executive Officers and Directors**




Sheridan
        B. Westgarde: Mr. Westgarde was appointed to the Board of directors March
        27 th 2003. As
        a C.A.S. Tech. graduate of UCC British Columbia and a recognized specialist
        in
        the robotics and automation industry, Mr. Westgarde has been extensively
        involved in the design and development of the Tiger•LynkTM manipulator
        technology. In addition, Mr. Westgarde has valuable knowledge and experience
        in
        the Oil and Gas industry, providing his technical expertise in down-hole
        tool
        management and implementation.
  Mr.
        Westgarde does not sit on the Board of any other public company. Mr. Westgarde
        dedicates approximately 90% of his time to Aquatic.




Gary
      J.
      Ackles: Mr. Ackles was appointed to the Board of Directors on July 1 st ,
      1997,
      to fill a vacancy. Mr. Ackles was President and founder of Aquatic Cellulose
      Ltd., and creator of the Aquatic Timber Harvester System. Mr. Ackles has over
      25
      years experience in industries that manufacture and sell equipment, with
      extensive international and domestic experience. Mr. Ackles is recognized as
      a
      creator of aquatic technologies, and has been involved with numerous equipment
      based industries including oil and mineral exploration, heavy construction,
      and
      aquatic environmental management. Mr. Ackles has introduced and sold equipment
      in Canada, USA, Middle East, Africa, and South America. Mr. Ackles resigned
      as
      Director, President and CEO on March 26 th ,
      2003.





















19




Shane
      Kerpan: Mr. Kerpan earned a degree in Business Administration from Simon Fraser
      University and has worked in a variety of staff management positions in both
      the
      private and non-profit sectors. Mr. Kerpan also possesses experience in project
      management and evaluation plus has provided the Company with assistance in
      project research, development of multi-media presentations and public relations.
      Mr. Shane Kerpan resigned as the Secretary and Treasurer on December
      20 th ,
      2003.




Claus
      Wagner-Bartak--Dr. Claus Wagner-Bartak was appointed to the Board of Directors
      in July, 1997, to fill a vacancy. Dr. Wagner-Bartak was the founder of
      Spar-Aerospace, the corporation contracted to develop and build the robotic
      arm
      that is presently used on the NASA Space Shuttle, that arm being named the
      “Canada-arm”. Mr. Bartak resigned as the Director on February 24 th ,
      2004.




**Compliance
      with Section 16(a) of the Securities Exchange Act of
      1934**




Section
      16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
      and executive officers, and persons who own more than 10% of a registered class
      of the Company’s equity securities to file with the Securities and Exchange
      Commission initial reports of ownership and reports of changes in ownership
      of
      Common Stock and other equity securities of the Company. Officers, directors
      and
      greater than 10% shareholders are required by SEC regulations to furnish the
      Company with copies of all Section 16(a) forms they file.




To
      the
      Company’s knowledge, based solely on its review of the copies of such reports
      furnished to the company and written representations that no other reports
      were
      required during the fiscal year ended May 31 st ,
      2003,
      all Section 16(a) filing requirements applicable to its officers, directors
      and
      greater than 10% beneficial owners were complied with.




**Code
      of Ethics for Chief Executive Officer and Senior Financial
      Officers**




On
      May
      20, 2004, the Board of Directors of the Company adopted the Code of Ethics
      for
      Chief Executive Officer and Senior Financial Officers, which is included in
      Item
      13 as an exhibit 99.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**




The
      following table sets forth certain summary information regarding compensation
      paid by the Company for services rendered during the fiscal year ended May
      31 st ,
      2004 to
      the Company’s Chief Executive Officer, Secretary and Director during such
      period.




**CHART
      - EXECUTIVE COMPENSATION**




**Payouts**
                
                **Annual
                    Compensation**
                
                **Long
                    Term Compensation Awards****(a)**
                
                **(b)**
                
                **(c)**
                
                **(d)**
                
                **(e)**
                
                **(f)**
                
                **(g)**
                
                **(h)**
                
                **(i)****Name
                    and Principal****Positio****n**
                
                **Year**
                
                **Salary**
                
                **Bonus**
                
                **Other**
                  **Annual
                    Compensation ($)**
                
                **Restricted
                    Stock Awards ($)**
                
                **Securities
                    Underlying**
                  **Options/SAR 
                    (#)**
                
                **LTIP
                    Payouts ($)**
                
                **All
                    Other Compensation($)**Sheridan
                    B. Westgarde
                
                2004
                
                
                82.5K
                
                
                
                
                
                
                
                
                
                
                
                0President/CEO
                
                2003
                
                
                15K
                
                
                
                
                
                
                
                
                
                
                
                02002
                
                
                N/AGary
                    Ackles President/CEO
                
                2004
                
                
                49.5K
                
                
                
                
                
                
                
                
                
                
                
                0*1
                
                2003
                
                
                100K
                
                
                
                
                
                
                
                
                
                
                
                02002
                
                
                107K
                
                
                
                
                
                
                
                
                
                
                
                1,202,500Shane
                    Kerpan
                
                2004
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                0Secretary
                    *1
                
                2003
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                02002
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                117,500Claus
                    Wagner-Bartak
                
                2004
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                0Director
                    *2
                
                2003
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                02002
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                105,250




*1
            Resigned
                in 2003




*2
            Resigned
                in 2004





20


**Chief
      Executive Officer Compensation:**




Mr.
      Westgarde has a three year consulting agreement commencing April 1, 2003,
      providing for an annual compensation of $90,000. In addition, the Board of
      Directors has committed to make Mr. Westgarde a significant shareholder in
      the
      Company with a share position of 5% of the authorized share volume of the
      Company issued over the course of three years. To the date of this filing these
      shares have not been issued. Effective, March 1, 2004, the agreement for Mr.
      Westgarde was modified to reduce the cash portion of the consulting fee to
      $5,000 per month and include $1,500 per month in stock compensation.
      Additionally, during July 2004, the Company entered into an agreement to
      exchange the 5 percent of the new authorized share volume, post-proxy, owed
      to
      Mr. Westgarde for a 27 percent common share equity position in the Company
      post
      restructuring **** and
      pending and pending shareholders approval of the Proxy. As a director of the
      Company, Mr. Westgarde shares would be affiliate status and bearing all
      restrictions according to affiliates as stated in the Securities and Exchange
      Act of 1933.




Former
      Director and President Gary J. Ackles had a three-year employment agreement
      that
      commenced November 1, 2000 and provided for an annual salary of $107,134, plus
      certain benefits. The agreement called for a minimum increase in salary of
      10%
      per annum, as well as a severance package that was exercised upon his
      resignation.




(1)
            Long
                Term Incentive Plans (Options)




There
      are
      no long- term incentive plans currently in effect. However, the Board of
      Directors has granted the directors and officers of the Company stock options
      that are intended to place each director and officer in an equity position
      in
      our Company that roughly equates to their original percentage of shares owned
      in
      our Company. These options were issued on February 22, 2000 and are exercisable
      in whole or in part for five years from the date of issue at an exercise price
      of $0.52. Closing market price of Aquatic’s common stock as quoted on the OTC:BB
      on February 22 nd ,
      2000
      was $.5156. The number of above options issued were 1,425,250 and are as
      follows:





1.
              Gary
                  Ackles -
              1,202,5002.
              Clause
                  Wagner-Bartuk -
              117,5003.
              Shane
                  Kerpan -
              105,250





To
      the
      date of this filing these options have not been exercised.




**Compensation
      of Directors**




Mr.
      Westgarde, the Company’s President and Chief Executive Officer, is currently the
      sole director of the company with his compensation as detailed above. The
      Company is committed to make Mr. Lonnie Hayward a director pending shareholder
      approval of the Proxy. (see Note 14 & 21 - Notes to Consolidated Financial
      Statements).




**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table sets forth information as of the date of this Registration
      Statement regarding certain Ownership of our Company’s outstanding Common Stock
      by all officers and directors individually, all officers and directors as a
      group, and all beneficial owners of more than five percent of the common
      stock.




**Name
                  and Address**
              
              **Shares
                    Owned**
                    **Beneficially(1)**
              
              **Percent
                    of**
                    **Class**Sheridan
                  B. Westgarde
              
              
              2,500,000
              
              
              2.5
              %2504
                  27thAve.Vernon,
                  BC. V1T 1T1Gary
                  J. Ackles3498
                  Salmon River Bench Rd
              
              
              0
              
              
              0
              %Vernon,
                  B.C. V1T 8Z7Claus
                  Wagner-Bartak
              
              
              0
              
              
              0
              %4092
                  Lee HighwayArlington,
                  VA 22207Shane
                  Kerpan
              
              
              0
              
              
              0
              %816
                  George Ann StreetKamloops,
                  B.C. V2C 1L5Officer/Director
                  as a Group
              
              
              2,500,000
              
              
              2.5
              %





(1)
            A
                person is deemed to be the beneficial owner of securities that can
                be
                acquired by such person within 60 days from the date of the registration
                statement upon the exercise of options or warrants. Each beneficial
                owner’s percentage ownership is determined by assuming that options or
                warrants that are held by such person and which are exercisable within
                60
                days of the date of this registration statement have been exercised.
                Unless otherwise indicated, the company believes that all persons
                named in
                the table have voting and investment power with respect to all shares
                of
                common stock beneficially owned by them.




21




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTION**




On
      February 22, 2000, the Board of Directors authorized and granted the issuance
      of
      stock options to certain officers and directors of our Company. The options
      were
      vested immediately and will be exercisable in whole or in part for five years
      from the date of issue. The exercise price was pegged at market price on the
      date the options were granted. The options granted on February 22, 2000 (at
      $0.52 per share) are as follows: 1) 1,202,500 shares of common stock to Gary
      Ackles, 2) 105,250 shares of common stock to Shane Kerpan, and 3) 117,500 shares
      of common stock to Claus Wagner- Bartak. To the date of this filing these
      options have not been exercised.




In
      January 2002, Aquatic issued 7,245,000 shares of restricted stock at $.014
      per
      share to Gary Ackles as per his employment agreement, pursuant to the exemption
      provided for under Section 4(2) of the Securities Act of 1933 as amended, as
      a
“transaction not involving a public offering.”




The
      Company service agreement with Kathy Ackles, wife of the former president,
      for
      bookkeeping and administrative services for $36,000 per annum expired as of
      June
      1 st ,
      2003.




The
      Company has an employment agreement with Gary Ackles, the Company’s former
      president, providing for an annual salary of $107,134 and severance benefits.
      As
      of March 26 th 2003 Mr.
      Ackles resigned from the Company and exercised his severance
      package.




Effective,
      March 1, 2004, the agreement for Mr. Westgarde, the Company’s Director and
      President, was modified to reduce the cash portion of the consulting fee to
      $5,000 per month and include $1,500 per month in stock compensation.
      Additionally, during July 2004, the Company entered into an agreement to
      exchange the 5 percent of the new authorized share volume, post-proxy, owed
      to
      Mr. Westgarde for a 27 percent common share equity position in the Company
      post-restructuring **** and
      pending shareholder approval of the Proxy. As a director of the Company, Mr.
      Westgarde shares would be affiliate status and bearing all restrictions
      according to affiliates as stated in the Securities and Exchange Act of
      1933.




As
      of
      April 1 st ,
      2003,
      the Company has a short-term consulting agreement with former president Gary
      J.
      Ackles to act in an advisory capacity to the Company during the transition
      to
      the new management. This agreement provide for an annual compensation of
      $60,000.




The
      Company had a license agreement with the Company’s former President for the use
      of his Patented Robotic Technology. On May 31 st 2003 all
      manufacturing and licensing agreements with Gary J. Ackles, owner of the ATH
      robotic technology were cancelled.




The
      Company borrowed $44,000 from Legacy Systems Corporation, owned by Gary Ackles.
      The security for the loan was the ATH-120 mechanical assembly constructed and
      stored at Beaver Manufacturing in Kamloops British Columbia.




22


During
      July 2004, the Company entered into an agreement with Gary Ackles, former
      Company CEO and Legacy Systems, a company controlled by Ackles, to settle
      amounts currently owed to both Ackles and Legacy (see Note 9 - Notes to
      Consolidated Financial Statements). The agreement requires the Company to return
      the Aquatic Timber Harvesting Equipment (see Note 5 - Notes to Consolidated
      Financial Statements) and issue 40,000,000 pre-restructured shares of the
      Company’s common stock in exchange for, forgiveness of the $44,000 borrowed from
      Legacy and the $80,000 due Legacy in un-paid licensing fees. The remaining
      amount due G. Ackles of $417,000 will be converted into 13 percent of the issued
      and outstanding post-restructured shares of the Company pending shareholder
      approval of the Proxy. The agreement stipulates that Mr. Ackles would be an
      affiliate of the Company bearing all the restrictions of Affiliates according
      to
      the Securities and Exchange Act of 1933.





During
      October 2002, the Company entered into an agreement with Gary Ackles, former
      CEO, to sell the equipment located in Brazil with a net book value of $4,275
      in
      addition to a prototype machine with a net book value of $-0- located on the
      Tucurui reservoir. Under the terms of the agreement, the proceeds of sale were
      $70,000 resulting in a pre-tax gain of approximately $65,700. The Company
      applied the value of the machine as an offset to the unpaid license fee owed
      to
      Legacy Systems Corp. (see Notes 9 & 17 - Notes to Consolidated Financial
      Statements).




During
      the fiscal year ended May 31, 2003, approximately $100,000 of loans made to
      a
      Director for the exercise of Company stock options was called by the Company.
      The balance owed to the Company was used as an offset against unpaid wages
      due
      to Gary Ackles (see Note 12 - Notes to Consolidated Financial Statements).
      The
      remaining loans were forgiven to the two other Directors during January
      2003.




**ITEM
      13.**   **EXHIBITS,
      LIST AND REPORTS IN FORM 8-K**




**(a)
      Exhibits**




**Exhibit**
                **Number**
            ****
            **Description**3.1
            
            Articles
                of Incorporation of the Company filed February 28th,
                1997. (1)3.2
            
            Certificate
                Amending Articles of Incorporation filed November 19th,
                1997. (1)3.3
            
            Bylaws
                of the Company. (1)4.1
            
            Form
                of Common Stock Certificate. (2)4.2
            
            Form
                of Warrant Agreement with Form of Warrant Election to Purchase.
                (2)6.1
            
            Lease
                for the Premises dated November 1st,
                1996. (1)10.1
            
            Form
                of Secured Convertible Debenture Purchase Agreement.
                (2)10.2
            
            Form
                of Registration Rights Agreement. (2)10.3
            
            Form
                of 12% Convertible Debenture. (2)10.4
            
            Form
                of Security Agreement. (2)10.5
            
            Cross-Receipt10.6
            
            Secretary
                and Officers Certificates10.7
            
            Amendment
                Agreement10.8
            
            Escrow
                Agreement10.9
            
            Guaranty
                and Pledge Agreement10.10
            
            Intellectual
                Property Security Agreement10.11
            
            Security
                Agreement10.12
            
            Registration
                Rights Agreement10.13
            
            Stock
                Purchase Warrant10.14
            
            Stock
                Purchase Warrant10.15
            
            Stock
                Purchase Warrant10.16
            
            Secured
                Convertible Debenture10.17
            
            Secured
                Convertible Debenture10.18
            
            Secured
                Convertible Debenture10.19
            
            Securities
                Purchase Agreement10.20
            
            New
                Purchase & Sale and Exploration Agreement10.21
            
            Operating
                Agreement14
            
            Code
                of Ethics for Chief Executive Officer and Senior Financial
                Officers23.1
            
            Consent
                of Wong Johnson & Associates A Professional
                Corporation31.1
            
            Certification
                of the Chief Executive Officer And Chief Financial Officer Pursuant
                to 18
                U.S.C. Section 1350,
                As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


32.1
            
            Certification
                of the Chief Executive Officer And Chief Financial Officer Pursuant
                to 18
                U.S.C. Section 1350





23




(1) Previously
        filed with the Commission on August 16 th ,
        1999 as
        part of Aquatic Cellulose International Corp.’s Registration Statement (File
        N0.000-27063) on Form 10SB12G and incorporated by reference herein.
  (2) Previously
        filed with the Commission on August 21 st ,
        2000 as
        part of Aquatic Cellulose International Corp.’s Registration (File NO:
        333-44184) on Form SB-2 filed on August 21 st ,
        2000
        and incorporated by reference herein.
  **(b)** **Reports
        on Form 8-K:**
  1.
        Form
        8-K dated January 10 th ,
        2003
        reported that on December 18 th ,
        2002
        Merdinger, Fruchter , Rosen and Company, P.C. informed Aquatic Cellulose
        International Corporation they have decided to cease auditing publicly traded
        companies and have resigned as the company’s principal accountants. On January
        8 th ,
        2003,
        AQCI engaged Stonefield Josephson, Inc., as our principal accountants to
        audit
        our financial statements. Stonefield Josephson, Inc.’s accountants’ performed
        interim reviews of the Form 10QSB’s and did not participate in auditing AQCI’s
        financial statements for any fiscal year.
  2.
        Form
        8-K dated March 31 st ,
        2003
        reported Gary Ackles has resigned as Chairman of Board of Directors and CEO
        of
        Aquatic Cellulose International Corporation effective March 26 th ,
        2003 to
        dedicate his time to his technology and corporate development for personal
        reasons.
  3.
        Form
        8-K dated February 23 rd ,
        2004
        reported that on or about May 30 th ,
        2003,
        Aquatic Cellulose International Corporation and Stonefield Josephson, Inc.,
        mutually parted ways. AQCI officially engaged Wong Johnson & Associates, A
        Professional Corporation, on February 16 th ,
        2004,
        to serve as the Company’s independent public accountants and to be the principal
        accountants to conduct the audit of the Company’s financial statements for the
        fiscal year ending May 31 st ,
        2002
        and May 31 st ,
        2003.
        The decision to change was based on financial considerations and was approved
        by
        the Board of Directors.
  4.
        Form
        8-K/A dated April 1 st ,
        2004
        was a correction of the previously filed Form 8-K and reported that on or
        about
        July 3, 2003, Aquatic Cellulose International Corporation dismissed Stonefield
        Josephson, Inc., however they were not informed of such until management
        engaged
        the new accountants. AQCI officially engaged Wong Johnson & Associates on
        February 16, 2004, to serve as the Company’s independent public accountants and
        to be the principal accountants to conduct the audit of the Company’s financial
        statements for the fiscal year ending May 31, 2002 and May 31, 2003. All
        filing
        stopped until Wong Johnson and Associated were retained. At that time all
        10KSB’
and 10QSB’s were brought current with Wong Johnson during the audits and
        reviews. The decision to change was based on financial considerations and
        was
        approved by the Board of Directors.
  5.
        Form
        8-K dated April 13 th ,
        2004
        reported that on March 22, 2004 Aquatic Cellulose International Corporation
        (“AQCI”) completed a $900,000 financing with a New York based investor group.
        The financing has been structured as a convertible debenture. On March 22,
        2004
        Aquatic Cellulose International Corporation (“AQCI”) completed a purchase and
        sale agreement with Century Resource Inc. of Houston Texas, for the acquisition
        of a 20% working interest and 16% net revenue interest in the 3,645 acre
        Hamill
        Lease natural gas property in Matagorda County, Texas. This agreement, with
        three successive one year terms and an exclusive renewal option on each year,
        provides Aquatic the exclusive option to participate in purchase or exploration
        of any and all future projects by Century. The cost of this acquisition and
        exclusive optional participation agreement was $580,000 dollars and a 15%
        ownership stake in the company. The decision to approve the terms of the
        financing and subsequent working interest acquisition was approved by the
        Board
        of Directors.
  **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
  **1)
        Audit Fees & Audit-Related Fees**
  During
        fiscal year 2002, the Company’s principal accountant billed $39,322 in fees that
        were directly associated with the preparation of annual audit reports, quarterly
        reports, review and preparation regarding SEC comment letters pertaining
        to a
        Form SB-2 filing and review and discussion regarding 8K and newly appointed
        auditors.
  During
        fiscal year 2003, the Company’s principal accountant billed $36,825 in fees that
        were directly associated with the preparation
        of annual audit reports and quarterly reports.


24
  During
        fiscal year 2004, the Company’s principal accountant billed $83,000 in fees that
        were directly associated with the preparation of annual audit reports, quarterly
        reports, examination of revenue and direct operating expenses of the Hamill
        Lease, read and provide suggestions for pro-forma statements, as well as,
        Preliminary Proxy 14/A filing.
  **2)
        Tax Fees**
  During
        fiscal year 2002, there were no fees billed associated with the preparation
        of
        tax filings.
  During
        fiscal year 2003, there were no fees billed associated with the preparation
        of
        tax filings.
  During
        fiscal year 2004, there were no fees billed associated with the preparation
        of
        tax filings.
  **3)
        All Other Fees**
  During
        fiscal year 2002, there were no other fees billed by the Company’s principal
        accountant for services other than those reported for audit and audit related
        fees.
  During
        fiscal year 2003, there were no other fees billed by the Company’s principal
        accountant for services other than those reported for audit and audit related
        fees.
  During
        fiscal year 2004, there were no other fees billed by the Company’s principal
        accountant for services other than those reported for audit and audit related
        fees.
  **Audit
        committee’s pre-approval policies and procedures**
  Due
        to
        the fact that Sheridan B. Westgarde is the Company’s only active Officer and
        Director the company does not have an audit committee at this time.
  **Percentage
        of hours expended**
  The
        amount of hours expended on the principal accountant’s engagement to audit the
        registrant’s financial statements for the most recent fiscal year that were
        attributed to work performed by persons other than the principal accountant’s
        full-time, permanent employees was less than 50%.
  25




**SIGNATURES**
  Pursuant
        to the requirements the Securities Exchange Act of 1934, the Registrant has
        duly
        caused this report to be signed on its behalf by the undersigned.
  *Dated: February
                15, 2007*
              *By:*
              */s/ Sheridan
                B. Westgarde*Cheif
                Executive Officer
  26




Consolidated
      Financial Statements of




**AQUATIC** **CELLULOSE**


**INTERNATIONAL
      CORP.**


May
      31,
      2004 and 2003




Page**Index
                To Audited Financial Statements**Independent
                Auditors’ Report
            F-5Consolidated
                Balance Sheet as of May 31, 2004 and
                2003
            F-6Consolidated
                Statement of Operations for the years ended May
                31, 2004 and 2003
            F-7Consolidated
                Statement of Comprehensive Loss for the years
                ended May 31, 2004 and 2003
            F-8Consolidated
                Statement of Stockholders’ (Deficiency) Equity
                for
                the years ended May 31, 2004 and 2003
            F-9Consolidated
                Statement of Cash Flows for the years ended May
                31, 2004 and 2003
            F-10Notes
                to Consolidated Financial
                Statements
            F-12




F-4





**REPORTOF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**




To
      the
      Board of Directors and Shareholders


Aquatic
      Cellulose International Corp.


Vernon,
      British Columbia, Canada




We
      have
      audited the accompanying consolidated balance sheets of Aquatic Cellulose
      International Corporation as of May 31, 2004 and 2003, and the related
      consolidated statements of operations, of comprehensive loss, of stockholders’
deficiency and of cash flows for each of the two fiscal years ended May 31,
      2004. These consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. 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 audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Aquatic Cellulose
      International Corporation, as of May 31, 2004 and 2003, and the results of
      its
      operations and its cash flows for each of the two fiscal years in the period
      ended May 31, 2004, in conformity with United States generally accepted
      accounting principles.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      financial statements, the Company has incurred significant losses from
      operations, has negative working capital and stockholders’ deficit. These
      factors raise substantive doubt about its ability to continue as a going
      concern. Management’s plans in regard to these matters is also disclosed in Note
      2. The consolidated financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.




WONG
      JOHNSON & ASSOCIATES


A
      Professional Corporation


Temecula,
      California


March
      11,
      2005




F-5




AQUATIC
        CELLULOSE INTERNATIONAL
        CORP.
  **Consolidated
        Balance Sheet**
  **May
                    31,**
                
                **2004**
                
                **2003****Assets**Current
                    AssetsCash
                
                $
                58,252
                
                $
                13,204Prepaid
                    expenses and other current assets
                
                
                450
                
                
                290Deferred
                    financing costs, net of accumulatedamortization
                    of $10,102
                
                
                97,631
                
                
                —Total
                    current assets
                
                
                156,333
                
                
                13,494Property
                    and equipment, less accumulateddepreciation
                    of $11,404 and $10,787
                
                
                2,638
                
                
                2,566Investment
                    in Hamill lease
                
                
                591,930
                
                
                —Advance
                    on equipment purchase
                
                
                100,000
                
                
                100,000Total
                    Assets
                
                $
                850,901
                
                $
                116,060**Liabilities
                    and Stockholders’ Deficit**Current
                    LiabilitiesAccounts
                    payable
                
                $
                87,348
                
                $
                150,290Accrued
                    liabilities
                
                
                500,759
                
                
                242,654Amounts
                    due to related parties
                
                
                741,174
                
                
                639,397Convertible
                    debentures
                
                
                300,241
                
                
                763,507Notes
                    payable
                
                
                53,000
                
                
                —Total
                    current liabilities
                
                
                1,682,522
                
                
                1,795,848Long
                    Term LiabilitiesTotal
                    Liabilities
                
                
                1,682,522
                
                
                1,795,848Stockholders’
                    DeficitPreferred
                    stock,$0.001 par value per share10,000,000
                    shares authorized. No sharesissued
                    and outstanding at May 31, 2004 and 2003, respectively
                
                
                —
                
                
                —Common
                    stock, $0.001 par value, 100,000,000shares
                    authorized, 100,000,000 shares issued andoutstanding
                    at May 31, 2004 and 2003, respectively
                
                
                100,000
                
                
                100,000Advance
                    on deposit of equipment
                
                
                (125,000
                )
                
                (125,000
                )Additional
                    paid in capital
                
                
                7,139,493
                
                
                5,484,691Accumulated
                    deficit
                
                
                (7,905,082
                )
                
                (7,155,171
                )Foreign
                    currency translation adjustment
                
                
                (41,032
                )
                
                15,692Total
                    stockholders’ deficit
                
                
                (831,621
                )
                
                (1,679,788
                )Total
                    Liabilities and Stockholders’ Deficit
                
                $
                850,901
                
                $
                116,060




**See
        accompanying notes.**
  F-6




**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**Consolidated
      Statement of Operations**




**Period
                  from****June
                  1, 2003**
              
              **June
                  1, 2002****To**
              
              **To****May
                  31, 2004**
              
              **May
                  31, 2003**Equity
                  in earnings of Hamill lease
              
              $
              33,053Operating
                  expensesSelling,
                  general and administrative
              
              
              301,930
              
              
              1,184,582Financing
                  fees
              
              
              473,676
              
              
              147,569Depreciation
                  and depletion
              
              
              7,358
              
              
              1,163Total
                  operating expenses
              
              
              782,964
              
              
              1,333,314Loss
                  from operations
              
              
              (749,911
              )
              
              (1,333,314
              )Other
                  income (expense)Gain
                  on disposal of equipment
              
              
              
              
              
              65,725Foreign
                  currency translation
              
              
              
              
              
              19,739Total
                  other income (expense)
              
              
              —
              
              
              85,464Net
                  loss
              
              $
              (749,911
              )
              $
              (1,247,850
              )Weighted
                  Average Shares
              
              
              100,000,000
              
              
              95,758,155Loss
                  Per Common Share
              
              $
              (0.01
              )
              $
              (0.01
              )


**See
      accompanying notes.**




F-7




**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  Consolidated
          Statement of Comprehensive Loss
  **Period
                        from****June
                        1, 2003**
                    
                    **June
                        1, 2002****To**
                    
                    **To****May
                        31, 2004**
                    
                    **May
                        31, 2003**
 Net
                      loss
                  
                  $
                  (749,911
                  )
                  $
                  (1,247,850
                  )Foreign
                      exchange translation adjustment
                  
                  
                  (56,724
                  )
                  
                  (61,097
                  )Comprehensive
                      loss
                  
                  $
                  (806,635
                  )
                  $
                  (1,308,947
                  )


**See
      accompanying notes.**




F-8


**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **Consolidated
          Statement of Stockholders’ Deficit**


**Common**
                **Shares**
              
              **Common**
                **Stock**
              
              **Paid****In**
                **Capital**
              
              **Advance**
                **on**
                **Deposit**
              
              **Foreign**
                **Currency
                  Translation**
              
              **Accumulated**
                **Deficit**
              
              **Total**
                **Stockholders’**
                **Deficit**Balance
                  at May 31,2002
              
              
              78,442,715
              
              $
              78,442
              
              $
              4,942,332
              
              
              
              
              $
              76,789
              
              $
              (5,907,321
              )
              $
              (809,758
              )Issued
                  upon conversionof
                  debentures
              
              
              4,189,412
              
              
              4,190
              
              
              35,810
              
              
              
              
              
              
              
              
              
              
              
              40,000Issued
                  for cash
              
              
              3,868,880
              
              
              3,869
              
              
              38,631
              
              
              
              
              
              
              
              
              
              
              
              42,500Issued
                  for services
              
              
              16,010,100
              
              
              16,010
              
              
              466,669
              
              
              
              
              
              
              
              
              
              
              
              482,679Issued
                  for repayment ofloan
              
              
              2,000,000
              
              
              2,000
              
              
              88,000
              
              
              
              
              
              
              
              
              
              
              
              90,000Issues
                  to boardmembers
                  for service
              
              
              900,000
              
              
              900
              
              
              25,200
              
              
              
              
              
              
              
              
              
              
              
              26,100Notes
                  receivable
              
              
              
              
              
              
              
              
              105,450
              
              
              
              
              
              
              
              
              
              
              
              105,450Shares
                  cancelled
              
              
              (5,411,107
              )
              
              (5,411
              )
              
              (217,401
              )
              
              
              
              
              
              
              
              
              
              
              (222,812
              )Issued
                  as deposit onequipment
              
              
              
              
              
              
              
              
              
              
              $
              (125,000
              )
              
              
              
              
              
              
              
              (125,000
              )Foreign
                  currencytranslationadjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (61,097
              )
              
              
              
              
              (61,097
              )Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,247,850
              )
              
              (1,247,850
              )Balance
                  at May 31,2003
              
              
              100,000,000
              
              
              100,000
              
              
              5,484,691
              
              
              (125,000
              )
              
              15,692
              
              
              (7,155,171
              )
              
              (1,679,788
              )Foreign
                  currencytranslationadjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (56,724
              )
              
              
              
              
              (56,724
              )Beneficial
                  conversionfeatures
              
              
              
              
              
              
              
              
              1,654,802
              
              
              
              
              
              
              
              
              
              
              
              1,654,802Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (749,911
              )
              
              (749,911
              )Balance
                  at May 31,2004
              
              
              100,000,000
              
              $
              100,000
              
              $
              7,139,493
              
              $
              (125,000
              )
              $
              (41,032
              )
              $
              (7,905,082
              )
              $
              (831,621
              )




**See
      accompanying notes.**




F-9


**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **Consolidated
        Statement of Cash Flows**




**Period
                from****June
                1, 2003**
              **To**
              **May
                31, 2004**
            
            **June
                1, 2002**
              **To**
              **May
                31, 2003**Cash
                flows from operating activities:Net
                loss
            
            $
            (749,911
            )
            $
            (1,247,850
            )Adjustments
                to reconcile net loss tonet
                cash used by operating activities:Depreciation
                and depletion
            
            
            7,358
            
            
            1,163Amortization
                of deferred financing costs
            
            
            27,395
            
            
            19,189Amortization
                of beneficial conversion feature
            
            
            274,243
            
            
            58,325Unpaid
                equity in earnings of Hamill lease
            
            
            (18,671
            )Value
                of shares cancelled
            
            
            
            
            
            (222,812
            )Gain
                on sale of equipment
            
            
            
            
            
            (65,725
            )Write
                off loan from directors
            
            
            
            
            
            5,450Services
                paid by issuance of common stock
            
            
            
            
            
            482,679Increase
                (decrease) in liabilitiesPrepaid
                expenses and other current assets
            
            
            (160
            )
            
            16,484Accounts
                payable and accrued liabilities
            
            
            195,163
            
            
            187,946Net
                cash used by operating activities
            
            
            (264,583
            )
            
            (765,151
            )**Cash
                flows from investing activities:**Purchase
                of working interest in Hamill lease
            
            
            (580,000
            )Acquisition
                of equipment
            
            
            (689
            )Net
                cash used by investing activities
            
            
            (580,689
            )
            
            —**Cash
                flows from financing activities:**Proceeds
                from the issuance of notes payable
            
            
            53,000Issuance
                of convertible debenture payable
            
            
            900,000Unpaid
                fees and expenses due to stockholders
            
            
            101,777
            
            
            742,114Sale
                of common stock
            
            
            
            
            
            42,500Proceeds
                from loan from affiliated entity
            
            
            
            
            
            44,000Deferred
                financing costs
            
            
            (107,733
            )Net
                cash provided by financing activities
            
            
            947,044
            
            
            828,614Effect
                of exchange rate on cash balance
            
            
            (56,724
            )
            
            (61,097
            )Net
                increase in cash
            
            
            45,048
            
            
            2,366Cash
                at beginning of period
            
            
            13,204
            
            
            10,838Cash
                at end of period
            
            $
            58,252
            
            $
            13,204SUPPLEMENTAL
                INFORMATION:Interest
                paid
            
            $
            —
            
            $
            —Taxes
                paid
            
            $
            —
            
            $
            —




**See
      accompanying notes**




F-10




SUPPLEMENTAL
                  NON CASH INVESTING AND FINANCING ACTIVITIES:During
                  the year ended May 31, 2003, the Company issued common
                  stock:16,010,100
                  shares, valued at $482,679, for services900,000
                  shares, valued at $26,100, for directors fees4,189,412
                  shares, valued at $ 40,000, for conversion of convertible
                  debentures2,000,000
                  shares, valued at $ 90,000, for repayment of loan$70,000
                  gain on sale of equipment applied against unpaid license
                  feesDuring
                  the fiscal year ended May 31, 2004, the Company
                  recordedbeneficial
                  conversion options of
                  $1,654,802




**See
        accompanying notes.**
  F-11




**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
        31, 2004**
  **NOTE
        1 - ORGANIZATION AND BUSINESS COMBINATION**
  Aquatic
        Cellulose International Corp. (the “Company” or “ACIC”) was incorporated under
        the laws of the State of Nevada in 1996. During the fiscal year ended May
        31,
        2003, the Company ceased its underwater operations and decided to focus on
        a new
        business direction in the oil and gas industry.
  Effective
        March 1, 2004, the Company acquired a 20 percent ownership position and a
        16
        percent net revenue interest in the Hamill lease, a 3,645-acre natural gas
        producing property located in Matagorda County, Texas, pursuant to an agreement
        with Century Resources Inc. (“Century”). The purchase was made on the basis of
        the property having existing production and revenues as compared to an
        exploration property with no production. Thus, the Company agreed to assume
        an
        increased percentage of the costs for a lesser percentage of the revenue
        on a
        1/3 to 1/4 ratio, resulting in the 20 percent ownership stake and 16 percent
        net
        revenue interest before royalty expense. Century, a privately held Texas
        corporation, has an interest in various oil and natural gas properties. The
        agreement also includes an exclusive, optional, “New Project and Exploration
        Drilling Participation’ agreement with Century, which has three successive
        one-year terms, with the Company holding the exclusive option on each year.
        The
        cost of this acquisition and exclusive optional participation agreement was
        $580,000 and a 15 percent ownership stake in the Company. The Company is
        currently in the process of conducting a special meeting of shareholders
        to seek
        proxy approval to meet this 15 percent ownership commitment (Note 21).
  During
        July 2004, the Company completed an acquisition of a 50 percent ownership
        position and a 45 percent net revenue interest of an approximately 1,400-acre
        lease in the Prado Oil Field (Prado), located in Jim Hogg County Texas. The
        Company’s 50 percent portion of the acquisition cost was $70,000 (see Note 20).
  The
        Company plans to pursue growth in the oil and gas sector by two principle
        means:
  1)
              Development
                  of its current ownership positions in the Hamill & Prado
                  leases.
  2)
              Completing
                  the acquisition and development of other property and working interest
                  opportunities with proven reserve potential made known to the Company
                  through its “New Project and Exploration Drilling Participation” with
                  Century.
  As
        previously reported, the Company has been seeking to acquire the Tiger-Lynk
        large-scale manipulator technology, formerly known as the ATH technology,
        as a
        wholly owned subsidiary. The Company would then seek to develop the
        opportunities for the technology in multiple industry sectors. To this effect,
        in June 2003, the Company signed a Memorandum of Understanding with Legacy
        Systems Corp. (“Legacy”) to merge the public Company with Tiger-Lynk robotic
        technology patented and owned by Gary Ackles, former Company CEO. During
        the
        forth quarter of the fiscal year ended May 31, 2004, the Company believes
        that
        the planned acquisition of Tiger-Lynk is likely to be replaced with a negotiated
        settlement. During July 2004, the Company entered into an agreement to return
        the aquatic timber harvesting equipment and settle the amount due G. Ackles
        as
        of May 31, 2004 (Notes 5, 9 and 20).
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, Aquatic Cellulose Ltd. (“ACL”). All significant
        intercompany balances and transactions have been eliminated.
  F-12


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**Business
      Operations**




As
      of May
      31, 2004, the Company operated primarily in the United States and Canada. The
      primary business segments and a description of the business operations of each
      company are as follows:




**Corporate**




ACIC
      provides management services to its wholly owned subsidiary, ACL and its working
      interests in the Hamill lease and Prado properties (Notes 1, 3 and 18).




**ACL**




ACL
      was
      working closely with its manufacturer on the construction of the next generation
      ATH 120 robotic harvester. As of May 2003, the manufacturing and license
      agreements were cancelled. During July 2004, the Company entered into an
      agreement to return the aquatic timber harvesting equipment and settle the
      amount due Legacy Systems as of May 31, 2004 (Notes 5, 9 and 20).




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Reclassifications**




The
      May
      31, 2004 and 2003 statement of cash flows contains a reclassification of unpaid
      fees and expenses due to stockholders that was originally classed as a non-cash
      operating adjustment in the May 31, 2004 Form 10-KSB filed on September 30,
      2004. Management has re-filed these financial statements to include this
      explanatory note regarding the reclassification. This reclassification has
      not
      affected overall cash, net income or stockholders deficit.




**Amount**
                **Previously**
                **Reported**
              ****
              **Reclassification**
              ****
              **Amount**
                **Reported**As
                  of May 31, 2004Net
                  cash used by operating activity
              
              $
              (162,806
              )
              $
              (101,777
              )
              $
              (264,583
              )Net
                  cash provided by financing activity
              
              $
              845,267
              
              $
              101,777
              
              $
              947,044As
                  of May 31, 2003Net
                  cash used by operating activity
              
              $
              (23,037
              )
              $
              (742,114
              )
              $
              (765,151
              )Net
                  cash provided by financing activity
              
              $
              86,500
              
              $
              742,114
              
              $
              828,614


**Basis
          of Presentation**
  Aquatic
          Cellulose International Corporation (the “Company”) has experienced recurring
          losses, has a working capital deficiency of $1,526,189 and an accumulated
          deficit of $7,905,082 as of May 31, 2004 and at the end of fiscal year
          ended May
          31, 2003 had ceased its underwater timber harvesting operations due to
          the
          difficulty associated with the investment and operations of the Brazil
          project.
          Its current investments are limited to its investments in certain oil and
          natural gas producing properties in Texas. At the present time, the Company
          is
          receiving minimal cash flow from its oil and natural gas investments. Future
          realization of the Company’s investment will depend upon obtaining financing to
          engage in drilling of the prospects, of which there can be no assurance.
          The
          Company projects that potential future cash flows related to the prospects
          will
          exceed their carrying value.
  Accordingly,
          the consolidated financial statements do not include any adjustments relating
          to
          the recoverability and classification of recorded asset amounts or the
          amount
          and classification of liabilities or other adjustments that might be necessary
          should the Company be unable to continue as a going concern.
  F-13
 **AQUATIC
          CELLULOSE INTERNATIONAL CORP.**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
          31, 2004**
  **Revenue
          Recognition**
  The
          Company currently has no operating activities but has been acquiring working
          interests in oil and gas producing properties (Notes 3 and 20).
  Previously,
          the Company recognized sales when timber was shipped, and the title, risks
          and
          rewards of ownership had been transferred from the Company to the customer.
          As
          previously noted, during the fiscal year ended May 31, 2003 the Company
          ceased
          its underwater timber harvesting operations due to the difficulty associated
          with the investment and operations of the Brazil project
  **Property
          and Equipment**
  Property
          and equipment are stated at cost. Depreciation is computed using declining
          balance and straight-line methods over the estimated useful lives of the
          depreciable assets. The estimated useful lives used in determining depreciation
          are three to four years for computers and five years for furniture and
          equipment. Leasehold improvements are amortized over the shorter of the
          useful
          life of the asset or the lease term. Management evaluates useful lives
          regularly
          in order to determine recoverability taking into consideration current
          technological conditions. Maintenance and repairs are charged to expense
          as
          incurred; additions and betterments are capitalized. Upon retirement or
          sale,
          the cost and related accumulated depreciation of the disposed assets are
          removed, and any resulting gain or loss is credited or charged to
          operations.
  **Long-Lived
          Assets**
  The
          Company performs a review for impairment of proved natural gas properties
          on a
          depletable unit basis when circumstances suggest there is a need for such
          review
          in accordance with Financial Accounting Standards Board No. 144, *Accounting
          for the Impairment or Disposal of Long-Lived Assets* (SFAS
          No.
          144). To determine if a depletable unit is impaired, the Company compares
          the
          carrying value of the depletable unit to the undiscounted future net cash
          flows
          by applying managements’ estimates of ** future
          natural gas prices to the estimated future production of natural gas reserves
          over the economic life of the property. Future net cash flows are based
          upon
          estimates of proved reserves. In addition, other factors such as probable
          and
          possible reserves are taken into consideration when justified by economic
          conditions and actual or planned drilling or other development activities.
          For a
          property determined to be impaired, an impairment loss equal to the difference
          between the carrying value and the estimated fair value of the impaired
          property
          will be recognized. Fair value, on a depletable unit basis, is estimated
          to the
          present value of the aforementioned expected future net cash flows. Any
          impairment charge incurred is recorded in accumulated depreciation, depletion,
          impairment and amortization to reduce the recorded basis in the asset.
          Each part
          of this calculation is subject to a large degree of judgment, including
          the
          determination of the depletable units’ reserves, future cash flows and fair
          value. For the fiscal year ended May 31, 2004, no impairments have been
          recorded
          on proved properties.
  Unproved
          natural gas properties are periodically assessed and any impairment in
          value is
          charged to impairment expense. The costs of unproved properties, which
          are
          determined to be productive, are transferred to proved natural gas properties
          and amortized on a unit of production basis. For the fiscal year ended
          May 31,
          2004, no impairments have been recorded on unproved properties
  **Investment
          in Hamill Lease**
  The
          Company’s investment in the Hamill lease is recorded using the equity method of
          accounting. Under this method, the investment at cost initially, and the
          investment is adjusted for the Company’s equity in the Hamill lease profit and
          loss. The investment is further adjusted for additional contributions to
          and
          distributions from the Hamill lease.
  The
          Company depletes the acquisition cost of the Hamill lease using the
          units-of-production method as the related gas reserves are produced so
          that each
          unit of gas produced is assigned a pro rata portion of the unamortized
          acquisition cost. The unit cost is computed on the basis of the total estimated
          units of gas reserves.
  The
          Hamill lease has an agreement with Harvest Pipeline Company (“Harvest”) to sell
          100 percent of its natural gas to Harvest at 90 percent of Inside FERC
          of the
          Houston Shipped Channel Price. The agreement is effective through October
          1,
          2004. Because alternate purchasers of natural gas are readily available,
          the
          Company believes that the loss of any purchaser would not have a material
          adverse effect on the financial results of the Company.
 
 F-14


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**Income
      Taxes**




The
      Company utilizes Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” which requires the recognition of deferred tax
      assets and liabilities for the expected future tax consequences of events that
      have been included in the financial statements or tax returns. Under this
      method, deferred tax assets and liabilities are determined based on temporary
      differences between the amount of taxable income and pretax financial income
      and
      between the tax bases of assets and liabilities and their reported amounts
      in
      the financial statements. Deferred tax assets and liabilities are included
      in
      the financial statements at currently enacted income tax rates applicable to
      the
      period in which the deferred tax assets and liabilities are expected to be
      realized or settled. Valuation allowances are established, when necessary,
      to
      reduce deferred tax assets to the amount expected to be realized.




**Stock-Based
      Compensation**




SFAS
      No.
      123, “Accounting for Stock-Based Compensation,” encourages, but does not
      require, companies to record compensation cost for stock-based employee
      compensation plans at fair value. The Company has elected to continue to account
      for employee stock-based compensation using the intrinsic method prescribed
      in
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees,” and related interpretations, as permitted by SFAS No. 123;
      accordingly, compensation expense for stock options is measured as the excess,
      if any, of the quoted market price of the Company’s stock at the date of the
      grant over the amount an employee must pay to acquire the stock.




For
      stock
      options issued to non-employees, the issuance of stock options is accounted
      for
      based on the fair value of the consideration received or the fair value of
      the
      equity instruments issued, whichever is more reliably measurable. Compensation
      expense is recognized in the financial statements for stock options granted
      to
      non-employees in the period in which the consideration is obtained from the
      non-employee.




**Earnings
      Per Share**




SFAS
      No.
      128, “Earnings Per Share,” requires presentation of basic earnings per share
      (“Basic EPS”) and diluted earnings per share (“Diluted EPS”).




Basic
      EPS
      is computed by dividing earnings available to common stockholders by the
      weighted-average number of outstanding common shares during the period. The
      weighted average number of common shares outstanding for computing Basic EPS
      was
      100,000,000 and 95,758,155 for the fiscal years ended May 31, 2004 and 2003,
      respectively.




Diluted
      EPS reflects the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised or converted into common stock.
      The weighted average number of common shares outstanding for computing Diluted
      EPS, including dilutive stock options and warrants, was 100,000,000 and
      97,533,405 for the fiscal years ended May 31, 2004 and 2003, respectively.
      For
      the fiscal years ended May 31, 2003, 1,775,250 shares attributable to the
      exercise of outstanding options and warrants were excluded from the calculation
      of Diluted EPS because the effect was antidilutive. There were no dilutive
      items
      as of May 31, 2004 as the Company had already issued all authorized shares.
      No
      adjustments were made to reported net income in the computation of
      EPS.




**Warrants
      Issued in Conjunction With Convertible Debt**




The
      Company allocates the proceeds received from convertible debt between the
      liability and the warrants issued in conjunction with the debt, based on their
      relative fair values, at the time of issuance. The amount allocated to the
      warrants is recorded as additional paid-in capital and as a discount to the
      related convertible debt. The discount is amortized to interest expense on
      a
      yield basis over the term of the related convertible debt.




F-15




**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**Comprehensive
      Income**




During
      June 1999, the Financial Accounting Standards Board issued SFAS No. 130,
“Reporting Comprehensive Income.” This pronouncement established standards for
      reporting and display of comprehensive income and its components in a full
      set
      of general-purpose financial statements. Comprehensive income consists of net
      income and unrealized gains on available-for-sale securities; foreign currency
      translation adjustments; change in market value of futures contracts that
      qualify as a hedge; and negative equity adjustments recognized in accordance
      with SFAS No. 87. The Company evaluated SFAS No. 130 and determined that the
      Company’s net income and foreign currency translation adjustments were the only
      components of its comprehensive income as of May 31, 2004 and 2003,
      respectively.




**Segment
      and Geographic Information**




The
      Financial Accounting Standards Board issued SFAS No. 131, “Disclosures about
      Segments of an Enterprise and Related Information” effective in 1998. SFAS No.
      131 requires enterprises to report financial information and descriptive
      information about reportable operating segments. It also establishes standards
      for related disclosures about products and services, geographic areas and major
      customers. The Company evaluated SFAS No. 131 and determined that the Company
      operates in multiple segments (Note 18).




**Fair
      Value of Financial Instruments**




The
      fair
      values of the Company’s cash, accounts receivable, accounts payable and accrued
      liabilities approximate their carrying values due to the relatively short
      periods to maturity of these instruments. The fair value of the convertible
      debentures payable approximates their carrying amount due to the fixed interest
      rate of the debentures closely approximating floating rates at the financial
      statement date.




**Translation
      of Foreign Currency**




The
      Company’s functional currency is the United States dollar. The Company’s
      subsidiary, ACL, operates in Canada and its operations are conducted in Canadian
      currency. However, its functional currency has been determined to be the United
      States dollar. The method of translation applied is as follows: i) Monetary
      assets and liabilities are translated at the rate of exchange in effect at
      the
      balance sheet date. ii) Non-monetary assets and liabilities are translated
      at
      the rate of exchange in effect at the date the transactions occurred. iii)
      Revenues and expenses are translated at the rate of exchange in effect at the
      transaction date. iv) The net adjustment arising from the translation is
      included in the consolidated statement of operations. Effective June 1, 2003,
      the Company no longer has revenue or expenses paid in Canadian dollars, thus
      during the fiscal year ended May 31, 2004 the Company reflected no foreign
      currency translation on the Consolidated Statement of Operations.




**Management
      Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities 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 presented. Actual results could differ from those estimates.




The
      collectibility of accounts receivable, the use of estimates for natural gas
      reserve information and deferred taxes are based on management estimates.
      Management reviews its estimates on a quarterly basis and, where necessary,
      makes adjustments prospectively.




**Reclassifications**




The
      Company reclassified several 2003 liability amounts to conform to the 2004
      presentation.




**Recent
      Accounting Pronouncements**




In
      July
      2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business
      Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS
      No. 141 requires the use of the purchase method of accounting and prohibits
      the
      use of the pooling of interests method of accounting for business combinations
      initiated after June 30, 2001. SFAS No. 141 also requires that the Company
      recognize acquired intangible assets apart from goodwill if the acquired
      intangible assets meet certain criteria. SFAS No. 141 applies to all business
      combinations initiated after June 30, 2001, and for purchase business
      combinations completed on or after July 1, 2001. Upon adoption of SFAS No.
      142,
      it also requires that the Company reclassify, if necessary, the carrying amounts
      of intangible assets and goodwill, based on the criteria in SFAS No. 141. SFAS
      No. 142 requires, among other things, that companies no longer amortize
      goodwill, but instead test goodwill for impairment, at least annually. In
      addition, SFAS No. 142 requires that the Company identify reporting units for
      the purpose of assessing potential future impairments of goodwill, reassess
      the
      useful lives of other existing recognized intangible assets, and cease
      amortization of intangible assets with an indefinite useful life. Adoption
      of
      this statement is not expected to be material.





F-16





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




In
      August
      2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal
      of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” in
      that it removes goodwill from its impairment scope and allows for different
      approaches in cash flow estimation. However, SFAS No. 144 retains the
      fundamental provisions of SFAS No. 121 for (a) recognition and measurement
      of
      long-lived assets to be held and used and (b) measurement of long-lived assets
      to be disposed of. SFAS No. 144 also supersedes the business segment concept
      in
      APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects
      of Disposal of a Segment of a Business, and Extraordinary, Unusual and
      Infrequently Occurring Events and Transactions,” in that it permits presentation
      of a component of an entity, whether classified as held for sale or disposed
      of,
      as a discontinued operation. However, SFAS No. 144 retains the requirement
      of
      APB Opinion No. 30 to report discontinued operations separately from continuing
      operations. The provisions of this Statement are effective for financial
      statements issued for fiscal years beginning after December 15, 2001 with
      earlier application encouraged. Company management has determined that
      implementation of SFAS No. 144 will not have a material effect on the Company’s
      results of operations or financial position.




On
      April
      30, 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4,
      44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS
      145 rescinds SFAS No. 4, which required all gains and losses from
      extinguishments of debt to be aggregated and, if material, classified as an
      extraordinary item, net of related income tax effect. Early application of
      the
      provisions of SFAS No. 145 may be as of the beginning of the fiscal year or
      as
      of the beginning of the interim period in which SFAS No. 145 is issued. Company
      management has determined that implementation of SFAS No. 145 will not have
      a
      material effect on the Company’s results of operations or financial
      position.




In
      July
      2002, the Financial Accounting Standards Board issued SFAS, “Accounting for
      Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a
      liability for costs associated with an exit or disposal activity be recognized
      and measured initially at fair value only when the liability is incurred. SFAS
      No.146 is effective for exit or disposal activities that are initiated after
      December 31, 2002. Company management has determined that implementation of
      SFAS
      No. 146 will not have a material effect on the Company’s results of operations
      or financial position.




In
      April
      2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities”, which amends SFAS No. 133 for certain
      decisions made by the FASB Derivatives Implementation Group. In particular,
      SFAS
      No. 149: (1) clarifies under what circumstances a contract with an initial
      net
      investment meets the characteristic of a derivative, (2) clarifies when a
      derivative contains a financing component, (3) amends the definition of an
      underlying instrument to conform it to language used in FASB Interpretation
      No.
      45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain
      other existing pronouncements. This Statement is effective for contracts entered
      into or modified after June 30, 2003, and for hedging relationships designated
      after June 30, 2003. In addition, most provisions of SFAS No. 149 are to be
      applied prospectively. As we have no such instruments, the adoption of this
      issue did not have an impact on our statement of financial position or results
      of operations.




Emerging
      Issues Task Force (“EITF”) Issue No. 02-03, “Recognition and Reporting of Gains
      and Losses on Energy Trading Contracts” under EITF Issues No. 98-10, “Accounting
      for Contracts Involved in Energy Trading and Risk Management Activities” was
      issued in June 2002. EITF Issue No. 02-03 addresses certain issues related
      to
      energy trading activities, including (a) gross versus net presentation in the
      income statement, (b) whether the initial fair value of an energy trading
      contract can be other than the price at which it was exchanged, and (c)
      accounting for inventory utilized in energy trading activities. As we have
      no
      such instruments, the adoption of this issue did not have an impact on our
      statement of financial position or results of operations.




In
      May
      2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity”. This statement
      establishes standards for how an issuer classifies and measures in its statement
      of financial position certain financial instruments with characteristics of
      both
      liabilities and equity. In accordance with the standard, financial instruments
      that embody obligations for the issuer are required to be classified as
      liabilities. This statement was effective for financial instruments entered
      into
      or modified after May 31, 2003.





F-17





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**NOTE
      3 - ACQUISITION OF OWNERSHIP POSITION IN HAMILL LEASE**




The
      acquisition price for the Hamill lease was $580,000 and a 15 percent ownership
      stake in AQCI. The acquisition was accounted for as a step acquisition as
      required by Statement of Financial Standard No. 141, *Business
      Combinations* as the
      date and dollar amount for the issuance of the 15 percent ownership interest
      cannot be determined, pending the approval of a Section 14A proxy statement
      with
      the Securities and Exchange Commission.




**NOTE
      4 - PROPERTY AND EQUIPMENT**




Property
      and equipment is summarized as follows at May 31:




**2004**
              ****
              **2003**Computer
                  equipment
              
              $
              3,931
              
              $
              3,931Furniture
                  and equipment
              
              
              5,258
              
              
              4,569Leasehold
                  improvements
              
              
              4,853
              
              
              4,85314,042
              
              
              13,353Less:
                  accumulated depreciation
              
              
              11,404
              
              
              10,787$
              2,638
              
              $
              2,566




Depreciation
      expense was $617 and $1,163 for the fiscal years ended May 31, 2004 and 2003,
      respectively.




During
      October 2002, the Company entered into an agreement with Gary Ackles, former
      CEO, to sell the equipment located in Brazil with a net book value of $4,275
      in
      addition to a prototype machine with a net book value of $-0- located on the
      Tucurci reservoir. Under the terms of the agreement, the unpaid license fees
      owed to Legacy Systems Corp. were reduced by $70,000 resulting in a pre-tax
      gain
      of approximately $65,700. (Notes 9 and 17).




**NOTE
      5 - ADVANCE ON EQUIPMENT PURCHASES**




Pursuant
      to a manufacturing agreement with a company that is controlled by the Company’s
      former CEO and largest shareholder, the Company is committed to providing the
      financing for the construction and acquisition of an Aquatic Timber Harvesting
      Machine at a cost of $750,000. During the fiscal year ended May 31, 2001, the
      Company had advanced $100,000 towards the purchase of the machine and was
      exploring outside financing opportunities to finance the remaining commitment
      (Notes 14 and 17). As of May 2003, the manufacturing and license agreements
      were
      cancelled.




During
      the fiscal year ended May 31, 2003, the Company was advanced approximately
      $44,000 from the Affiliated Company collateralized by the aquatic timber
      harvesting equipment (Notes 9 and 17).




During
      July 2004, the Company entered into an agreement to return the aquatic timber
      harvesting equipment in exchange for a $100,000 reduction in amounts currently
      owed to both Ackles and Legacy (Note 20).




F-18


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**NOTE
      6- DEFERRED FINANCING COSTS**




In
      connection with the sale of $900,000 convertible debentures on March 22, 2004,
      the Company incurred financing fees in the amount of $107,733. These fees are
      amortized over the 24-month life of debentures. The unamortized balance of
      these
      fees was $97,631 at May 31, 2004.




**NOTE
      7 - INVESTMENT IN HAMILL LEASE**




The
                  investment in Hamill lease consists of the following at May 31,
                  2004:Initial
                  deposit to purchase Century (Notes 1 & 11)
              
              $
              80,000Additional
                  payment to acquire working interest
              
              
              500,000Allocation
                  of natural gas revenues
              
              
              40,665Allocation
                  of lease operating expenses
              
              
              (7,612
              )Receipt
                  of earnings in Hamill lease
              
              
              (14,382
              )Depletion
              
              
              (6,741
              )$
              591,930


The
      Company’s investment in the Hamill lease is recorded using the equity method of
      accounting. Under this method, the investment at cost initially, and the
      investment is adjusted for the Company’s equity in the Hamill lease profit and
      loss. The investment is further adjusted for additional contributions to and
      distributions from the Hamill lease. The Company depletes the acquisition cost
      of the Hamill lease using the units-of-production method.




Beginning
      June 2004, maintenance work was commenced on the Hamill property, which resulted
      in 2 additional wells coming into production. These 2 wells added approximately
      250 thousand cubic feet of gas per day to over-all lease production.
      Additionally, maintenance work was performed on the original producing well,
      which resulted in that well production rising from approximately 700 thousand
      cubic feet of gas per day to approximately 1.05 million cubic feet of gas per
      day.




F-19


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**NOTE
      8 - ACCRUED LIABILITIES**




Accrued
      liabilities consist of the following at May 31:


**2004**
              ****
              **2003**Accrued
                  interest
              
              $
              323,165
              
              $
              158,151Amount
                  due to consultant for commonstock
                  returned to Treasury
              
              
              31,648
              
              
              31,648Accrued
                  accounting and legal fees
              
              
              138,635
              
              
              40,200Other
                  accruals
              
              
              7,311
              
              
              12,655$
              500,759
              
              $
              242,654




During
        August 2004, in connection with the issuance of $250,000 in convertible
        debentures (Notes 10 and 20), the Company remitted payment of approximately
        $31,000 in accrued accounting and legal fees outstanding as of May 31,
        2004.
  F-20


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**NOTE
      9 - AMOUNTS DUE TO RELATED PARTIES**




Amounts
      due to related parties consist of the following at May 31:


**2004**
              ****
              **2003**Due
                  to Gary Ackles for unpaidconsulting
                  fees; severance; andexpenses
                  paid on behalf of Company(Notes
                  14 & 17)
              
              $
              298,233
              
              $
              298,233Due
                  to Gary Ackles for shares returnedto
                  treasury (Note 15)
              
              
              144,804
              
              
              144,804Unpaid
                  license agreement between LegacySystems
                  and Company (Notes 4, 14 & 17)
              
              
              80,000
              
              
              80,000Unpaid
                  consulting fees due to Sheridan Westgardeand
                  Gary Ackles (Note 14)
              
              
              114,527
              
              
              26,000Unpaid
                  consulting fees to Harvey Smithand
                  Lonnie Hayward (Note 14)
              
              
              13,250Due
                  to Sheridan Westgarde for sharesreturned
                  to treasury for professional (Note 15)
              
              
              46,360
              
              
              46,360Funds
                  borrowed from Legacy Systems(Notes
                  5 & 17)
              
              
              44,000
              
              
              44,000$
              741,174
              
              $
              639,397


All
      amounts due to related parties are non-interest bearing and are payable upon
      demand.




During
      July 2004, the Company entered into an agreement to return the remaining aquatic
      timber harvesting equipment and settle the amount due Legacy Systems as of
      May
      31, 2004 (Notes 20 and 21).




During
      July 2004, the Company entered into an agreement to settle all amounts due
      Sheridan Westgarde as of May 31, 2004 (Notes 20 and 21).




During
      July 2004, the Company entered into an agreement to settle all amounts due
      Gary
      Ackles as of May 31, 2004 (Notes 20 and 21).





F-21


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




**NOTE
      10 - CONVERTIBLE NOTES AND WARRANTS**




Convertible
      debentures payable bear interest at 12 percent, due on a quarterly basis, and
      are secured by a first priority interest in the Company’s accounts receivable,
      inventory, fixed assets and general intangibles. Any amount of principal or
      interest due under the debentures, which is not paid when due will bear interest
      at 15 percent per annum from the due date thereof until the amount is paid.
      Debentures aggregating $480,800 at May 31, 2003, are convertible into the
      Company’s common shares at the lesser of $0.60 per share or 70 percent of the
      average of the lowest three inter-day sales prices during the twenty trading
      days immediately preceding the conversion date. The remaining $300,000 of the
      debentures at May 31, 2003 is convertible into common shares at the lesser
      of
      $0.083 per share or 67.67 percent of the average of the lowest three inter-day
      sales prices during the twenty days immediately preceding the conversion date.
      If unpaid when due, $480,800 of the debentures can automatically convert to
      common shares if certain conditions are met. The remaining $300,000 of the
      debentures do not automatically convert to common shares on their due dates.
      $780,800 of the total debentures was in default at May 31, 2003.




During
      December 2003, the Company entered into an amendment to the debentures
      outstanding as of May 31, 2003 to extend maturity until March 2006 and to change
      the conversion price into the Company’s common shares to 40 percent of the
      average of the lowest three inter-day sales prices during the twenty trading
      days immediately preceding the conversion date.




During
      March 2004, the Company issued an additional $900,000 of convertible notes
      and
      warrants. Convertible debentures payable bear interest at 10 percent, due on
      a
      quarterly basis, and are secured by a first priority interest in the Company’s
      accounts receivable, inventory, fixed assets and general intangibles. Any amount
      of principal or interest due under the debentures, which is not paid when due
      will bear interest at 15 percent per annum from the due date thereof until
      the
      amount is paid. The debentures are convertible, at the investors’ sole option,
      into common shares at the lesser of $0.004 per share (fixed conversion price)
      or
      40 percent of the average of the lowest three inter-day sales prices during
      the
      twenty days immediately preceding the conversion date. If, at any time, the
      Company issues or sells any shares of common stock for no or below market
      consideration (dilutive issuance), then immediately upon the dilutive issuance,
      the fixed conversion price will be reduced to the amount of the consideration
      per share received by the Company in such dilutive issuance. The number of
      common shares issuable upon the conversion of the debentures is limited to
      4.9
      percent in beneficial ownership by the debenture holders and its affiliates
      of
      the outstanding shares of common stock. Once the maximum amount of common shares
      has been issued, in lieu of any further right to convert the debentures, the
      Company shall pay to the debenture holder, an amount equal to 130 percent of
      the
      then outstanding principal amount of the debenture plus accrued and unpaid
      interest and other related charges within fifteen business days of the maximum
      conversion date. If the Company exercises its right to prepay the debentures,
      the Company will make payment to the debenture holders in an amount equal to
      150
      percent of the sum of the then outstanding principal amount of the debentures
      plus accrued and unpaid interest on the unpaid principal amount of the debenture
      to the optional prepayment date plus any other related penalties. The debentures
      do not automatically convert to common shares on their due dates.





F-22





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




The
      debentures are due as follows:




**Due
                  Date**
              
              **May
                  31, 2003**
              
              **Issued**
              
              **Converted**
              
              **May
                  31, 2004**September
                  29, 2001
              
              $
              480,800
              
              $
              —
              
              $
              —
              
              $
              480,800March
                  14, 2002
              
              
              100,000
              
              
              —
              
              
              —
              
              
              100,000December
                  4, 2002
              
              
              200,000
              
              
              —
              
              
              —
              
              
              200,000March
                  22, 2006
              
              
              —
              
              
              900,000
              
              
              —
              
              
              900,000$
              780,800
              
              $
              —
              
              $
              
              
              $
              1,680,800Unamortized
                  discount relatedto
                  warrants granted in conjunctionwith
                  the issuance of theconvertible
                  debentures payable
              
              
              (17,293
              )Unamortized
                  discount related tobeneficial
                  conversion options on theconvertible
                  debentures payable
              
              
              —
              
              
              
              
              
              
              
              
              (1,380,559
              )$
              763,507
              
              
              
              
              
              
              
              $
              300,241





In
      conjunction with the above debentures, the Company granted the following common
      share purchase warrants to the debenture holders:




****
              **Exercise**
              
              **Outstanding****Price
                  per**
              
              **May
                  31,**
              
              
              
              
              
              **Outstanding****Expiration
                  Date**
              
              **Share**
              
              **2003**
              
              **Issued**
              
              **Expired**
              
              **May
                  31, 2004**September
                  29, 2003
              
              
              0.69
              
              
              250,000
              
              
              —
              
              
              250,000
              
              
              —March
                  14, 2004
              
              
              0.35
              
              
              100,000
              
              
              —
              
              
              100,000
              
              
              —March
                  22, 2009
              
              
              0.004
              
              
              —
              
              
              900,000
              
              
              —
              
              
              900,000350,000
              
              
              900,000
              
              
              350,000
              
              
              900,000




F-23




**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




The
        March
        2004 convertible debentures contain a beneficial conversion feature as the
        debenture holders are granted common share purchase warrants and the debentures
        are convertible into common shares at prices that are less than the market
        price
        at the date of issuance. The debenture proceeds attributable to the warrants
        was
        estimated to be $nil, as the warrants were valued at market value on the
        date of
        issuance. The intrinsic value of the beneficial conversion option relating
        to
        the debentures being convertible into common shares at prices that are less
        than
        the market price at the date of issuance has been calculated at $900,000
        which
        is recognized in accordance with EITF 98-5, as modified, where applicable,
        by
        EITF 00-27. All debentures and warrants can be exercised anytime after issuance.
        Therefore, a total of $112,500 for beneficial conversion features in connection
        with the March 2004 debentures and warrants have been charged to operations
        during the fiscal year ended May 31, 2004.




Additionally,
      in connection with extending the terms of the convertible debentures outstanding
      as of May 31, 2003, the Company recorded a beneficial conversion feature as
      the
      debentures are convertible into common shares at prices that are less than
      the
      market price at the date of issuance. Therefore, a total of $161,743 for
      beneficial conversion features in connection with the debentures outstanding
      as
      of May 31, 2003 have been charged to operations during the fiscal year ended
      May
      31, 2004.




In
      connection with these convertible debentures, the Company had $323,165 and
      $158,151 of accrued interest at May 31, 2004 and 2003, respectively (Note
      8).




**NOTE
      11 - NOTES PAYABLE**




In
      September 2003, the Company signed an agreement with an investor to provide
      a
      loan of approximately $28,000 that would be exchanged for shares should
      shareholders approve the increase in authorized shares in the forthcoming proxy
      vote. The note is convertible into 200,000 shares of the Company’s common stock.
      The note will be converted following a combination (reverse split) of the issued
      and outstanding shares pending shareholder approval of the proxy (Note
      21).




In
      November 2003, the Company signed a loan agreement with an investor for $25,000,
      to be repaid in three equal payments over the course of sixty months. The
      Company agreed to issue 200,000 shares pending shareholders approval of the
      proxy (Note 21). The Company used $15,000 of these investment proceeds to engage
      First Line Capital LLC of New York to perform legal services in relation to
      future funding and financing of the Company.




In
      December 2003, the Company signed a $100,000 convertible promissory note as
      an
      advance on the $900,000 convertible notes and warrants issued March 22, 2004
      and
      paid $80,000 as a deposit to acquire Century Resources (Notes 1 and
      7).




**NOTE
      12 - NOTES RECEIVABLE**




During
      the year ended May 31, 1999, the Company loaned $105,450 to three Directors
      for
      the exercise of Company stock options. These loans are unsecured, do not bear
      interest and were due on July 24, 2002. The notes receivable were recorded
      as a
      reduction of additional paid-in capital in fiscal 1999.




During
      the fiscal year ended May 31, 2003, the Company called approximately $100,000
      of
      such loans and used the amount due as an offset against unpaid wages due to
      Gary
      Ackles, former Director, CEO and President (Note 9). The remaining loans were
      forgiven to the two other Directors during January 2003.





F-24


**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
        31, 2004**
  **NOTE
        13 - INCOME TAXES**
  The
        components of the provision for taxes based on income for the fiscal years
        ended
        May 31 are as follows:




**2004**
              ****
              ****
              **2003**CurrentFederal
              
              $
              —
              
              $
              —State
              
              
              —
              
              
              —Total
                  Current
              
              
              —
              
              
              —DeferredFederal
              
              
              —
              
              
              —State
              
              
              —
              
              
              —Total
                  Deferred
              
              
              —
              
              
              —Total
                  Tax Provision
              
              $
              —
              
              $
              —




The
        reconciliation of the effective income tax rate to the Federal statutory
        rate is
        as follows for the fiscal years ended May 31:
  **2004**
              
              **2003**Federal
                  Income Tax Rate
              
              
              (34.0
              )%
              
              (34.0
              )%Effect
                  of Valuation Allowance
              
              
              34.0
              %
              
              34.0
              %Effective
                  Income Tax Rate
              
              
              0.0
              %
              
              0.0
              %
  At
        May
        31, 2004, the Company had net carry-forward losses of approximately $3,500,000.
        Because of the current uncertainty of realizing the benefit of the tax
        carry-forwards, a valuation allowance equal to the tax benefit for deferred
        taxes has been established. The full realization of the tax benefit associated
        with the carry-forwards depends predominantly upon the Company’s ability to
        generate taxable income during the carry-forward period.
  F-25




**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
        31, 2004**
  Deferred
        tax assets and liabilities reflect the net tax effect of temporary differences
        between the carrying amount of assets and liabilities for financial reporting
        purposes and amounts used for income tax purposes. Significant components
        of the
        Company’s deferred tax assets and liabilities are as follows:
  Deferred
                  Tax AssetsLoss
                  Carry-forwards
              
              $
              1,408,758Less:
                  Valuation Allowance
              
              
              (
                  1,408,758
              )Net
                  Deferred Tax Asset
              
              $
              —
  Net
        operating loss carry-forwards expire starting in 2012 through 2024. Per year
        availability is subject to change of ownership limitations under Internal
        Revenue Code Section 382.
  **NOTE
        14 - COMMITMENTS AND CONTINGENCIES**
  Operating
        leases
  The
        Company leases certain office equipment for varying periods and expects that
        in
        the normal course of business, leases will be renewed or replaced by other
        leases.
  The
        following is a schedule of future minimum lease payments for operating leases
        that have initial or remaining non-cancelable lease terms in excess of one
        year
        as of May 31, 2004:
 
 
 2005
              
              $
              5,5422006
              
              
              3,433$
              8,975
  The
        Company rents office space on a month-to-month basis for approximately $280
        per
        month.
  Rent
        expense was approximately $3,400 and $6,100 for the fiscal years ended May
        31,
        2004 and 2003, respectively.
  **Service
        and Consulting Agreements**
  The
        Company has entered into various service and consulting agreements as follows:
  -
        A
        five-year consulting agreement for investor relations commencing January
        1,
        2001, providing for annual fees of $36,400, plus 100,000 shares of the Company’s
        common stock, and 2.5% commission on sales of the Company’s common stock. The
        agreement was terminated during February 2003.
  -
        A
        three-year employment agreement with Gary Ackles, the Company’s former
        President, CEO and a Director, commencing November 1, 2000, providing for
        an
        annual salary of $107,134, plus certain benefits. The agreement calls for
        a
        minimum increase in salary of 10% per annum. As of May 31, 2004, approximately
        $298,000 was owed to Mr. Ackles for unpaid consulting fees (Note 9). The
        agreement was terminated effective March 30, 2003.
  -
        During March 2003, Gary Ackles resigned as Director,
        President and CEO of the Company and was succeeded by Sheridan B. Westgarde.
        Both Mr. Ackles and Mr. Westgarde entered into consulting agreements ranging
        from 18 to 36 months commencing
  F-26
 
 **AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
        31, 2004**
  April
        1,
        2003, providing for monthly consulting fees of $5,500 and $7,500, respectively.
        In addition, the Board of Directors has committed to make Mr. Westgarde a
        significant shareholder in the Company with a share position of 5 percent
        of the
        authorized share volume of the Company issued over the course of three years.
        Effective, March 1, 2004, the agreement for Mr. Westgarde was modified to
        reduce
        the cash portion of the consulting fee to $5,000 per month and include $1,500
        per month in stock compensation. The agreement for Mr. Ackles was terminated
        effective March 1, 2004. As of May 31, 2004, approximately $114,500 was owed
        to
        Mr. Westgarde and Mr. Ackles for unpaid consulting fees (Note 9).
  -During
        March 2004, the Company entered into consulting agreement with Harvey Smith
        to
        provide oil and gas expertise. The consulting agreement, effective February
        1,
        2004, is for one year and provides for consulting fees of $2,000 cash and
        $2,000
        worth of Company common stock. The stock will be payable at every six month
        anniversary, for as long as the agreement is in place. The issued stock will
        be
        at a 20 percent discount to the average stock price of the 6 proceeding months
        of consulting services. In addition, the Company has committed to make Mr.
        Smith
        a significant shareholder pending shareholder approval of the proxy (Note
        21).
        The Company has also agreed to compensate Mr. Smith 7 percent on any financings
        that Mr. Smith brings to the Company.
  -During
        March 2004, the Company entered into consulting agreement with Lonnie Hayward
        who specializes in publicly held companies and who was instrumental in the
        Company acquiring the working interest in the Hamill lease. The consulting
        agreement, effective December 15, 2004, is for one year and provides for
        consulting fees of $3,500 cash and $1,500 worth of Company common stock.
        In
        addition, the Company has committed to make Mr. Hayward a significant
        shareholder pending shareholder approval of the proxy (Note 21).
  **Lease
        Operating Agreement**
  The
        Company has a Lease Operating Agreement in place with Century. The agreement
        requires the Company to pay its 20% share of lease operating fees, amounting
        to
        approximately $14,580 annually. The agreement also details the Company’s
        responsibility for 20% of all lease operating expenses, un-scheduled repair,
        maintenance or re-completion of the lease or wells on an as required basis
        and
        of all future development costs. The lease agreement continues for as long
        as
        the Company has a working interest in the Hamill lease.
  **License
        Agreement**
  During
        the year ended May 31, 2001, the Company advanced $100,000 to finance the
        commencement of the construction of the new aquatic timber harvester (Notes
        5
        and 17).
  On
        September 28, 2001, the Company signed an exclusive license agreement with
        the
        Company’s President for the use of his Patented Robotic Technology. The
        technology will remain exclusive to the Company as long as the Company purchases
        one robotic system per year. If such purchase does not occur, an exclusivity
        fee
        of 10% of the market value of one ATH 120 will be paid to the President.
        During
        the fiscal year ended May 31, 2003, the Company recorded an exclusivity fee
        liability of $150,000 as no purchase had been made.
  During
        April 2003, the Company desisted from pursuing operations to recover underwater
        timber and to focus its efforts on 1) pursue the acquisition of a revenue
        generating company or assets in the oil and gas industry and 2) potential
        exploration of the ATH large scale underwater technology.
  As
        of May
        2003, the manufacturing and license agreements were cancelled.
  **NOTE
        15 - COMMON STOCK**
  Common
        Stock
  The
        Company has authorized 100,000,000 shares of $0.001 par common stock. As
        of May
        31, 2004 and 2001, 100,000,000 shares were issued and outstanding. The Company
        plans to obtain the approval of its shareholders to increase the total number
        of
        authorized shares to allow for conversion of debentures, conversion of
        liabilities to equity and sell additional common shares for cash (see Notes
        9,
        10, 14, and 17).
  F-27


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




During
      June 2001, the Company issued 2,500,000 shares of restricted stock at $0.05
      per
      share for deposit on the purchase of equipment (price reflected market price)
      for a total value of $125,000. As of May 31, 2004, the agreement has been
      formally canceled by the seller. Therefore, the value of the shares of $125,000
      has been presented as a contra equity item, as the Company determined that
      the
      amount no longer represents an asset as defined in Statement of Financial
      Accounting Concepts No. 5 “Recognition and Measurement in Financial Statements
      of Business Enterprises”. The Company has had difficulty in retrieving the
      original restricted share certificates due to the death of Mr. Raymond Lefebvre.
      As of May 31, 2004, the Company has received from the executor of Mr. Lefebvre’s
      estate a letter informing the Company that they are unable to return the
      original stock certificates due to their being lost or destroyed and
      instructions to the Company’s transfer agent to cancel the certificates. The
      Company is moving ahead with the cancellation of the original stock certificates
      with the transfer agent. ****




During
      the quarter ended August 31, 2002, the Company issued an aggregate of 900,000
      shares of restricted stock at $0.029 per share for director fees (price
      reflected market price) for a total value of $26,100.




At
      various times during the fiscal year ended May 31, 2003, the Company issued
      an
      aggregate of 3,868,880 shares of restricted stock to various investors at $0.05
      per share for cash pursuant to various subscription agreements for a total
      value
      of $42,500.




At
      various times during the fiscal year ended May 31, 2003, the Company issued
      an
      aggregate of 4,189,412 shares of restricted stock at a price ranging from
      $0.0091 to $0.01 per share for upon conversion of debentures (price reflected
      market price) for a total value of $40,000.




At
      various times during the fiscal year ended May 31, 2003, the Company issued
      an
      aggregate of 16,010,100 shares of restricted stock at a price ranging from
      $0.027 to $0.04 per share for services rendered (price reflected market price)
      for a total value of $482,679.




During
      the fiscal year ended May 31, 2003, the Company’s former CEO surrendered
      3,620,107 shares of common stock for the purposes of compensating professionals
      providing services to the Company. The shares at date of cancellation had an
      estimated value of $144,804. The Company also received 1,791,000 additional
      surrendered shares from a stockholder and consultant for the purpose of
      compensating professionals providing services to the Company. The shares at
      date
      of cancellation had an estimated value of $78,008 (Notes 8 & 9).




In
      accordance with the debenture agreement (Note 10), the Company is required
      to
      during the period the conversion rights exists, the Company will reserve from
      its authorized and unissued common stock a sufficient number of shares to
      provide for the issuance of common stock upon the full conversion of the
      debentures.




Preferred
      Stock




The
      Board
      of Directors has the authority to issue preferred stock and to fix and determine
      its series, relative rights and preferences. As of May 31, 2004 and 2003, no
      classes of preferred stock were authorized, issued or outstanding.




**NOTE
      16 - STOCK OPTIONS**




As
      of
      July 31, 2000, there were a total of 1,425,250 options outstanding to purchase
      the Company’s common stock at an exercise price of $0.52 per share, which was
      the market price of the options on the date of grant. The options expire on
      February 22, 2005. These options were outstanding as of May 31, 2004 and 2003,
      respectively.





F-28





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**MAY
      31, 2004**




The
      following table summarizes the option activity for the fiscal year ended May
      31,
      2004:




**Number
                  of**
                **Shares**
              
              **Exercise
                  Price**
              
              **Weighted-**
                **Average**
                **Exercise
                  Price**
              
              **Weighted-**
                **Average**
                **Value**May
                  31, 2003
              
              
              1,425,250
              
              $
              0.52
              
              $
              0.52
              
              $
              0.52GrantedExercisedCanceledMay
                  31, 2004
              
              
              1,425,250
              
              $
              0.52
              
              $
              0.52
              
              $
              0.52




**NOTE
        17 - RELATED PARTY TRANSACTIONS**
  The
        Company had a service agreement with Kathy Ackles, wife of the former President,
        for bookkeeping and administrative services for $36,000 per annum (Note 14).
        This agreement was expired as of June 1, 2003.
  The
        Company had an employment agreement with Gary Ackles, the Company’s former
        president, providing for an annual salary of $107,134 and severance benefits
        (Note 14). As of March 26 th 2003 Mr.
        Ackles resigned from the Company and exercised his severance
        package.
  The
        Company had a license agreement with the Company’s former President for the use
        of his Patented Robotic Technology. The technology will remain exclusive
        to the
        Company as long as the Company purchases one robotic system per year (Notes
        9
& 14). The manufacturing and license agreements were cancelled as of May
        2003.
  The
        Company has a three-year consulting agreement with Sheridan B. Westgarde,
        Director and President, commencing April 1, 2003 and providing for monthly
        consulting fees of $7,500. In addition, the Board of Directors has committed
        to
        make Mr. Westgarde a significant shareholder in the Company with a share
        position of 5 percent of the authorized share volume of the Company issued
        over
        the course of three years. Effective, March 1, 2004, the agreement for Mr.
        Westgarde was modified to reduce the cash portion of the consulting fee to
        $5,000 per month and include $1,500 per month in stock compensation.
  During
        July 2004, the Company entered into an agreement to exchange amounts due
        to
        Sheridan Westgarde, as well as stock compensation due Mr. Westgarde under
        the
        current consulting agreement, for a 27 percent common share equity position
        in
        the Company post-restructured and pending shareholder approval of the Proxy.
        Mr.
        Westgarde would be an affiliate of the Company bearing all the restrictions
        of
        affiliates according to the Securities and Exchange Act of 1933 (Note 21).
  During
        May 2004, the Company borrowed $44,000 from Legacy Systems Corporation, owned
        by
        Gary Ackles. The security for the loan was the ATH equipment (Note
        5).
  During
        June 2003, the Company signed a Memorandum of Understanding with Legacy Systems
        Corp. (“Legacy”) to merge the public Company with the Tiger-Lynk robotic
        technology, also patented and owned by Mr. Ackles.
  During
        September 2003, the Company signed a Memorandum of Understanding, followed
        in
        December 2003, by a Letter of Intent with Century Resources Inc. (“Century”) of
        Houston, Texas, for the acquisition of Century by the Company. These two agreements
        with Century negate and preclude all other agreements between Legacy, Century
        and the Company and outline the intent to amalgamate Century and the TigerLynk
        technology with the Company. During the forth quarter of the fiscal year
        ended
        May 31, 2004, the Company believes that the planned acquisition of Tiger-Lynk
        is
        likely to be replaced with a negotiated settlement. During July 2004, the
        Company entered into an agreement to return the aquatic timber harvesting
        equipment and settle the amount due Legacy Systems as of May 31, 2004 (Note
        21).


F-29




**AQUATIC
        CELLULOSE INTERNATIONAL CORP.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **MAY
        31, 2004**
 During
          July 2004, the Company entered into an agreement with Gary Ackles, former
          Company CEO and Legacy Systems, a company controlled by Ackles, to settle
          amounts currently owed to both Ackles and Legacy (Note 9). The agreement
          requires the Company to return the Aquatic Timber Harvesting equipment
          (Note 5)
          and issue 40,000,000 pre-restructured shares of the Company’s common stock in
          exchange for, forgiveness of the $44,000 borrowed from Legacy (Note 9)
          and the
          $80,000 due Legacy in un-paid licensing fees (Note 9). The remaining amount
          due
          G. Ackles of $417,000 will be converted into 13 percent of the issued and
          outstanding post-restructured shares of the Company pending shareholder
          approval
          of the Proxy. The agreement stipulates that Mr. Ackles would be an affiliate
          of
          the Company bearing all the restrictions of Affiliates according to the
          Securities and Exchange Act of 1933.
  During
          October 2002, the Company entered into an agreement with Gary Ackles, former
          CEO, to sell the equipment located in Brazil with a net book value of $4,275
          in
          addition to a prototype machine with a net book value of $-0- located on
          the
          Tucurui reservoir. Under the terms of the agreement, the proceeds of sale
          were
          $70,000 resulting in a pre-tax gain of approximately $65,700. The Company
          applied the value of the machine as an offset to the unpaid license fee
          owed to
          Legacy Systems Corp. (Notes 9 and 17).
  During
          the fiscal year ended May 31, 2003, approximately $100,000 of loans made
          to a
          Director for the exercise of Company stock options was called by the Company.
          The balance owed to the Company was offset against unpaid wages due to
          Gary
          Ackles (Notes 9 and 14). The remaining loans were forgiven to the two other
          Directors during January 2003.
  **NOTE
          18 - SEGMENT INFORMATION**
  During
          the fiscal years ended May 31, 2004 and 2003, the Company had foreign assets
          in
          Canada. The following geographic area data for trade revenues is based
          on
          product or service delivery location, and property, plant, and equipment
          is
          based on physical location.
  Net
          earnings from external sources at May 31,:
 ****
                  **2004**
                  ****
                  **2003**United
                      States
                  
                  $
                  33,053
                  
                  $
                  —Canada
                  
                  
                  —
                  
                  
                  —$
                  33,053
                  
                  $
                  —Segment
                      assets:
 
 **2004**
                  
                  **2003**United
                      States
                  
                  $
                  744,031
                  
                  $
                  —Canada
                  
                  
                  106,870
                  
                  
                  116,060$
                  850,901
                  
                  $
                  116,060
 
 F-30


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****




**MAY
      31, 2004** ****




**NOTE
      19 - LITIGATION**




The
      Company is not a party to any material pending legal proceedings and, to the
      best of its knowledge, no such action by or against the Company has been
      threatened.




**NOTE
      20 - SUBSEQUENT EVENTS**


Beginning
      June 2004, maintenance work was commenced on the Hamill property, which resulted
      in 2 additional wells coming into production. These 2 wells added approximately
      250 thousand cubic feet of gas per day to over-all lease production.
      Additionally, maintenance work was performed on the original producing well,
      which resulted in that well production rising from approximately 700 thousand
      cubic feet of gas per day to approximately 1.05 million cubic feet of gas per
      day.




During
      July 2004, the Company entered into a agreement to exchange amounts due to
      Sheridan Westgarde, as well as stock compensation due Mr. Westgarde under the
      current consulting agreement, for a 27 percent common share equity position
      in
      the Company post-restructured and pending shareholder approval of the Proxy.
      As
      a director of the Company, Mr. Westgarde shares would be affiliate status and
      bearing all restrictions according to affiliates as stated in the Securities
      and
      Exchange Act of 1933.




Amounts
      Due Westgarde




**Description**
            
            **Original
                Agreement**
            
            **New
                Agreement**
              **(Pending
                shareholder approval)**
              **(See
                Note 21)**Un-paid
                Consulting Fees (Note 9)
            
            $
                81,675
            
            $
                0Shares
                Returned to Treasury (Note 9)
            
            $
                46,360
            
            $
                0Agreement
                for Common Stock (Note 14 & 21)
            
            150
                Million
            
            6.75
                Million(Based
                on an increase in the authorizedshares
                to 3,000,000,000)




During
      July 2004, the Company entered into an agreement with Gary Ackles, former
      Company CEO and Legacy Systems, a company controlled by Ackles, to settle
      amounts currently owed to both Ackles and Legacy (Note 9). The agreement
      requires the Company to return the Aquatic Timber Harvesting equipment (Note
      5)
      and issue 40,000,000 pre-restructured shares of the Company’s common stock in
      exchange for, forgiveness of the $44,000 borrowed from Legacy (Note 9) and
      the
      $80,000 due Legacy in un-paid licensing fees (Note 9). The remaining amount
      due
      G. Ackles of $417,000 will be converted into 13 percent of the issued and
      outstanding post-restructured shares of the Company pending shareholder approval
      of the Proxy. The agreement stipulates that Mr. Ackles would be an affiliate
      of
      the Company bearing all the restrictions of Affiliates according to the
      Securities and Exchange Act of 1933.




Amounts
      Due Ackles




**Description**
              
              **Original
                  Agreement**
              
              **New
                      Agreement**
                    **(Pending
                      shareholder approval)**
                    **(See
                      Note 21)**Unpaid
                  license agreement between Legacy
              
              $
                  124,000
              
              40
                  Million common sharesSystems
                    and Company (Notes 4, 14 & 17)and
                    funds borrowed from Legacy Systems. (Notes5 &
17)
              
              ($80,000
                  + $ 44,000)
              
              andAquatic
                  Timber Harvesting Equipment (Note 5)Un-paid
                  Consulting Fees (Note 9) and Shares
              
              $
                  475,879
              
              $417,000
                  or 3.25 Million SharesReturned
                  to Treasury
              
              
              
              (See
                  Note 21)


F-31





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****




**MAY
      31, 2004** ****




During
      July 2004, the Company received short term loans from Sheridan Westgarde, the
      Company’s CEO, Lonnie Hayward, consultant, and Robert March and in an amount
      aggregating $42,000 which was used, along with Company’s available cash, to fund
      the purchase of the 50 percent ownership position in the Prado Field lease.
      The
      Company agreed to repay the loan amount borrowed once funding becomes available
      and agreed to pay an additional 20 percent of the amount borrowed over the
      next
      12 months. Following the closing of the $250,000 convertible debentures in
      August 2004, Mr. Westgarde and Mr. Hayward were repaid their principal amounts
      plus 10 percent, while Mr. March and declined repayment in favor of re-investing
      his principal and proceeds with the Company. The remaining 10 percent will
      be
      paid within the next 10 months.




During
      August 2004, the Company completed an acquisition of a 50 percent ownership
      position and a 45 percent net revenue interest of an approximately 1,400 acre
      lease in the Prado Oil Field (Prado), located in Jim Hogg County Texas. The
      Company’s 50 percent portion of the cost of the acquisition was $70,000. This
      lease has 20 existing wells that were originally produced in the 1960’s 2 of
      which are still producing approximately 30 Barrels of oil per day. In
      cooperation with Century Resources Inc., the Company is planning to develop
      bypassed oil reserves as well as undeveloped natural gas reserves. The Company
      is awaiting the completion of 3D seismic processing that will be the basis
      for
      future development plans.




During
      July 2004, the Company entered into a preliminary agreement in principle to
      sell
      a portion of its working interest in the Prado Field to Titan Consolidated
      Inc.,
      a Nevada based corporation. Should this agreement be consummated, Titan would
      be
      responsible for 40 percent of the development and operating costs while
      receiving 20 percent of the net revenue from all Prado production. The purchase
      price is $500,000 of which the Company received, in July 2004, $10,000 of a
      $40,000 non-refundable deposit. The balance of the deposit is due by September
      15, 2004 with the final closing date and remainder of the purchase price due
      on
      November 15, 2004. On September 15, 2004 the Company granted an extension of
      the
      non-refundable deposit due date to October 20, 2004 and the final closing date
      to December 1, 2004.




During
      August 2004, the Company issued $250,000 in convertible debentures and warrants
      to acquire a working interest in Prado and pay a portion of outstanding
      consulting fees as of May 31, 2004.




**NOTE
      21 - PROXY 14A SHAREHOLDER VOTE**




The
      Company is currently in process to seek approval from shareholders for the
      following;




1.
            To
                amend our certificate of incorporation to increase the number of
                authorized Common Stock from 100,000,000 to 3,000,000,000
                shares;




2.
            To
                amend our certificate of incorporation to change the Company name
                to Valor
                Energy Corporation;




3.
            Amend
                our certificate of incorporation to provide for a stock restructuring
                (reverse split) of the Common Stock in an exchange ratio to be approved
                by
                the Board, ranging from one newly issued share for each two outstanding
                shares of Common Stock to one newly issued share for each seven hundred
                and fifty outstanding shares of Common Stock.




The
      increase in authorized shares (Item 1.) will allow the Company to facilitate
      the
      conversion of existing convertible debt as well as amounts due to related
      parties (see Notes 9, 10, 14 and 17).




The
      change of our Company name (Item 2.) will better identify the Company in the
      new
      business.




The
      stock
      restructuring or reverse split (Item 3.) will allow the Company to facilitate
      the issuance of common shares in connection with the purchase of the Hamill
      natural gas lease, meet obligations to industry professionals as well as to
      facilitate the continued conversion of existing convertible debt. (see Notes
      1,
      3, 8, 9, 10, 14 and 17)





F-32





**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****




**MAY
      31, 2004** ****




The
      Company plans to convert existing convertible debt to reducing the amount
      outstanding and then perform a restructuring or reverse split of the stock.
      The
      following table details the Company’s commitments pending approval of
      shareholders.




**Number
                  of proposed**
                **common
                  share (in**
                **millions)**
              
              **Proposed
                  percentage of**
                **common
                  stock after**
                **reverse**Existing
                  Shareholders, certain accounts payables & notes (Note
                  8).
              
              3.278
              
              13.11%Ed
                  Destafano - Century Resources Inc. (Notes1 and 3)
              
              3.750
              
              15.00%Lonnie
                  Hayward - future Director (Note 14).
              
              6.750
              
              27.00%Gary
                  Ackles for Amounts Due Related Parties (Notes 9 & 20)
              
              3.250
              
              13.00%Harvey
                  Smith for expertise & consulting (Note 14)
              
              1.223
              
              4.89%Sheridan
                  B. Westgarde Director/CEO & for Amounts Due Related Parties (Notes 9,
                  14, 17 & 20)
              
              6.750
              
              27.00%Totals
              
              25.000
              
              100.00%




**NOTE
      22 - UNAUDITED GAS RESERVE QUANTITIES**




This
      section provides information required by Statement of Financial Accounting
      Standards No. 69, *Disclosures
      about Oil and Gas Producing Activities* .




The
      following unaudited natural gas reserve estimates were prepared by Century
      Resources Inc. as of February 1, 2004, and adjusted by the Company for actual
      production. There are many uncertainties inherent in estimated proved reserve
      quantities and in projecting future production rates and the timing of
      development expenditures. In addition, reserve estimates of new discoveries
      that
      have little production history are more imprecise than those of properties
      with
      more production history. Accordingly, these estimates are expected to change
      as
      future information becomes available.




Proved
      natural gas reserves are the estimated quantities of natural gas and natural
      gas
      liquids which geological and engineering data demonstrates with reasonable
      certainty to be recoverable in future years from know reservoirs under existing
      economic and operating conditions.




Proved
      natural gas reserves are those reserves expected to be recovered through
      existing wells with existing equipment and operating methods.





F-33


**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****




**MAY
      31, 2004** ****




Unaudited
      net quantities of proved developed reserves of natural gas for the Hamill lease,
      all of which are located on the 3,645 property located in Matagorda County,
      Texas, are summarized below:




**Billion
                      Cubic Feet**
                    **(BCF)**Changes
                  in proved reserves:Estimated
                  quantity, March 1, 2004
              
              
              4.990Production
              
              
              .058Acquisitions
              
              
              —Discoveries
              
              
              —Estimated
                  quantity, May 31, 2004
              
              
              4.932




The
      following table presents a standardized measure of the discounted future net
      cash flows attributable to the Company’s proved natural gas reserves. Future
      cash inflows were computed by applying period end prices of natural gas to
      the
      estimated future production of proved natural gas reserves. The future
      production and development costs represent the estimated future expenditures
      (based on current costs) to be incurred in developing and producing the proved
      reserves, assuming continuation of existing economic conditions. Future
      unexpected costs or changes in production could affect discounted future net
      cash flows.




A
      discount factor of 10 percent was used to reflect the timing of future net
      cash
      flows. The standardized measure of discounted future net cash flows is not
      intended to represent the replacement cost or market value of the Company’s
      natural gas properties.




Standardized
      measure of discounted future net cash flows for the Hamill lease as of May
      31,
      2004:




Future
                cash inflows
            
            $
            3,039,520Future
                production costs
            
            
            421,530Future
                net cash flows
            
            
            2,617,99010
                percent annual discount per annum
            
            
            (507,235
            )Standardized
                measure of discounted future net cash flows
            
            $
            2,110,755




F-34




**AQUATIC
      CELLULOSE INTERNATIONAL CORP.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****




**MAY
      31, 2004** ****




Pro-rata
      allocation of standardized measure of discounted future net cash flows for
      the
      Company’s 16 percent working interest in Hamill lease as of May 31,
      2004:




Future
                cash inflows
            
            $
            486,323Future
                production costs
            
            
            67,445Future
                net cash flows
            
            
            418,87810
                percent annual discount per annum
            
            
            (81,158
            )Standardized
                measure of discounted future net cash flows
            
            $
            337,720




The
      Company is currently waiting on the completion of an evaluation of site data
      that will define the future development costs. As of May 31, 2004 the property
      has 7 wells in total, 2 of which are producing wells.




Due
      to
      recurring net operating losses, which can be utilized to offset projected
      discounted future net cash flows, no provision for income taxes is considered
      necessary.




No
      reserve estimates have been filed with any other Federal authority or
      agency.




The
      3,645-acre property currently has 7 wells on the property with a regulatory
      well
      spacing requirement of 40 acres per well. This amounts to approximately 300
      developed acres and the remaining 3,345 acres undeveloped.




Beginning
      June 2004, re-completion work was commenced on the property, which resulted
      in 2
      additional wells coming into production. These 2 wells added approximately
      250
      thousand cubic feet of gas per day to over-all lease production. Additionally,
      re-completion work was performed on the original producing well, which resulted
      in that well production rising from approximately 700 thousand cubic feet of
      gas
      per day to approximately 1.05 million cubic feet of gas per day. At this time,
      evaluations of available engineering and new 3D Seismic data are being completed
      that will formulate the basis for future development.




F-35