**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-KSB**





(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, 2005.**





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
            
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)








2504
                - 43rdStreet, Suite 5, Vernon, British Columbia, Canada
            
            V1T
                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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no


disclosure
      will 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




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


(Check
      one): Yes o No x





The
      issuer had net earnings for the fiscal year ended May 31, 2005 of
      $91,634.





The
      aggregate market value of the voting stock held by non-affiliates on May 31,
      2005 was approximately $410,000 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 **October
      18, 2005** ,
      100,000,000 shares of the issuer’s common stock were outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE














**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.








**OIL
      & GAS PROPERTY INTERESTS**





**-
      HAMILL LEASE - SOUTH SARGENT FIELD, MATAGORDA COUNTY,
      TEXAS:**





On
      March
      of  2004,
      the
      Company acquired from Century Resources Inc. (Century has since become a wholly
      owned subsidiary of the publicly traded company New Century Energy Corp and
      is
      herein referred to as “Century”), 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 the South Sargent
      Field, 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 agreement with Century included an exclusive, optional, “New Project
      and Exploration Drilling Participation” agreement. This aspect of the agreement
      had three successive one-year terms, with the Company holding the exclusive
      option on each year.





Effective
      January 1, 2005, the exclusive, optional, “New Project and Exploration Drilling
      Participation’ agreement with Century was modified, wherein, both, the Company’s
      three successive one year term options for participation on all Century deals
      and Century’s 15% ownership percentage were deleted from the agreement. These
      clauses were replaced by an agreement whereby the Company purchased the option
      to participate on two specific projects of interest to the Company for a 7.5
      percent ownership stake in the Company.


-2-


At
      the
      time of this acquisition there were two producing wells, the Hamill #2 and
      Hamill #19. In March 2004, recompletion work was done on a shut-in well on
      the
      lease, Hamill #10 and established production in the 3,345' sand. One of the
      original producing wells acquired, the Hamill #19 ceased flowing gas after
      producing 615 MMCF of gas from the original completion at 3,917', in May 2004.
      This Hamill #19 well was recompleted in July 2004, in a sand at 4,324 feet
      and
      this sand produced 107 MMCF of gas until it was depleted in October 2004. The
      Hamill #19 is currently shut-in, while the well and seismic data are being
      further evaluated for possible recompletion.




The
      3645-acre Hamill Lease is secured by the property’s natural gas production from
      three of the seven existing wells; Hamill #10, Hamill #14 and Hamill #17.,
      with
      daily production in excess of approximately 500 MCF of gas per day, (MCFGPD)
      however, the Company can give no assurances that the wells will continue to
      produce at this rate, if at all. W ith
      a
      regulatory well spacing requirement of 40 acres per well the property has wells
      spanning approximately 300 acres with the remaining 3,345 acres largely
      available for drilling of new wells. The property has historically produced
      natural gas from multiple stacked pay sands supported by a 10 square mile area
      of mutual interest.




The
      Hamill Lease development benefits from a license to a 10 square mile 3-D seismic
      survey ("3-D") that was acquired by Century. This 3-D seismic survey is
      currently being used by Century in the development planning of the property
      and
      new drilling locations have already been identified for drilling in 2005 and
      2006. The process of interpreting the 3-D data will be an ongoing, with results
      from any new wells being integrated into the interpretation.




During
      January 2005, work over operations were commenced on the Hamill #17 well which
      had been shut-in since 2001, by the previous owner and operator. The wellhead
      and surface equipment were replaced and remedial operations commenced to drill
      out and remove various cement and cast iron bridge plugs set inside the well
      casing by previous operators. The well bore was cleaned out to a depth of 4,500
      feet, and tests were run in the well to evaluate potential productive sands
      in
      this well. In March 2005, the Hamill #17 well was recompleted in a stray sand
      at
      4230 feet; and is currently producing gas at the rate of 260 MCF per day on
      a
      7/64" choke with a flowing tubing pressure of 980 pounds per square inch
      ("psi"). Additional probable and proven behind pipe gas sands have been
      identified in the Hamill #17 well for future recompletion attempts, if/when
      the
      current completion at 4,230 feet depletes.




**(Subsequent
      Event)** -  During
      June 2005, work over operations commenced on the Hamill #14 well, which had
      been
      shut-in since 2001. The wellhead and surface equipment were repaired and
      remedial operations commenced to drill out and remove a number of cement and
      cast iron bridge plugs set inside the well casing by previous operators. The
      well bore was cleaned out to a depth of 5,905 feet and tests were run in the
      well to evaluate potential productive sands in this well. In July 2005 , the
      Hamill #14 was recompleted in a sand at 4,209 feet at the rate of 250 MCF of
      gas
      per day on a 8/64" choke with flowing tubing pressure of 1000 pounds per square
      inch. Additional probable and proven behind pipe gas sands have been identified
      in the Hamill #14 well for future recompletion attempts, when the current
      completion at 4,209 feet depletes.




**(Subsequent
      Event)** -  During
      July 2005, work over operations commenced on the Hamill #10 well after the
      well
      ceased producing gas earlier in the month. Remedial operations commenced to
      drill out and remove a number of cement and cast iron bridge plugs set inside
      the well casing by previous operators. The well bore was cleaned out to a depth
      of 3,515 feet but encountered collapsed casing at this depth. The bottom section
      of the well bore was plugged off and tests were run in the well to evaluate
      potential productive sands in this well above 3,515 feet. In August 2005, the
      Hamill #10 was recompleted in a stray sand at 3,032 feet at the rate of
      approximately 100 MCF of gas per day on a 8/6 inch choke with flowing tubing
      pressure of 800 pounds per square inch. Additional probable and proven behind
      pipe gas sands have been identified in the Hamill #10 well for future
      recompletions attempts, when the current completion at 3,032 feet depletes.




**(Subsequent
      Event)** -  We
      have
      commenced work over operations on the Hamill #2 well bore in August 2005, and
      a
      workover rig has been committed to this project and is on location.





**-
      PRADO FIELD LEASES, JIM HOGG COUNTY, TEXAS:**





During
      July, 2004, the Company’s, through its original New Project Joint Participation
      agreement with Century 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.


-3-




On
      April
      26, 2005, the Company, together with Century, entered into a Development
      Agreement with Shengkang Energy International, Inc. (now doing business as
      Strong Petroleum Group, Inc. a Texas corporation hereinafter "Strong") to invest
      and participate in the re-development of the Company and Century's Prado field
      interests. This agreement was subject to receiving consent from the lessor
      for
      an anticipated future partial assignment, which was received on May 11, 2005.
      The Development Agreement calls for Strong to invest at least $2.0 million
      in
      the initial work program in 2005 and to pay a signing bonus to the Company
      and
      Century. Strong will pay all of the initial work program expenditures while
      providing the Company and Century a 12.5% carried working interest. Strong
      paid
      Century a $25,000 deposit towards the project on April 7, 2005 and on May 12,
      2005 Strong paid Century the balance due under this Development Agreement of
      $200,000. Century promptly distributed 50% of the total aggregate of the
      payments made by Strong to the Company. The Development Agreement also provides
      for, o n
      a
      pro-rata basis, the Company and Century to have a one time option to elect
      to
      convert the 12.5% carried working interest to a 33 1/3% cost bearing working
      interest following the completion of the initial work program by Strong. If
      elected, the Company and Century will reimburse Strong for their pro-rata
      percentage share of any increase in ownership greater than the 12.5% up to
      the
      33.333% of the initial $2.0 million expenditures.




**(Subsequent
      Event) - BROOKSHIRE DOME FIELD AREA:**




In
      June
      of 2005, the Company purchased a 50% working interest in a 26 lease program
      in
      Waller County in the area of the Brookshire Dome Field. This project is the
      first of two planned development projects the company acquired the rights to
      participate in by means of the amended agreement with Century dated January
      1,
      2005. The
      Company commenced drilling activities on the first well on June 15, 2005 and
      the
      well was temporarily plugged and abandoned at a depth of 5,200 feet on June
      27,
      2005. A prognosis is being developed to deepen this wellbore to 7,500 feet
      to
      explore for a deeper potential target. Depending on the availability of a
      suitable drilling rig this operation may start as early as the second or third
      quarter of 2005. As an alternative, a new shallow test may be proposed on the
      west side of the acreage to test a shallower potential target.







**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.


-4-


**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.





**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.








-5-


**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.








**IMPORTANT
      EVENTS AND INCLUDING EVENTS SUBSEQUENT TO MAY 31, 2005**





**General
      Business**





·
            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.





·
            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 percentof
                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.





·
            **(Subsequent
                Event) -**During September 2005, 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.





**Corporate
      Finance**





·
            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.


-6-


·
            During
                March 2004, the Company completed the issuance of $900,000 in convertible
                debentures and warrants to acquire a working interest in Hamill Lease
                and
                pay a portion of outstanding consulting
                fees.





·
            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. As of fiscal year ended May 31, 2005 the remaining
                10
                percent has not been paid.





·
            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.





·
            **(Subsequent
                Event) -**In
                June of 2005, the Company entered into a working capital loan agreement
                with United Business Associates (“UBA”), a company partly owned by the
                Company’s current CEO Sheridan Westgarde and Company consultant Lonnie
                Hayward. In the terms of the agreement UBA will provide the Company
                $200,000 in working capital that will be secured as a convertible
                note,
                convertible to the Company’s common stock. Additionally, UBA will be
                granted a 5 percent non-cost bearing over-ride on revenues generated
                by
                certain new project developments of the
                Company.




·
            **(Subsequent
                Event) -**In
                June of 2005, the Company agreed to an amendment to the convertible
                debentures dated March 19, 2004 having a total aggregate of $900,000.
                The
                agreement amends the applicable percentage of discount from 60 to
                70
                percent.







**Property
      Acquisition, Sale and Development**





***Hamill
      Lease***





·
            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 inMatagorda
                County, Texas, pursuant to an agreement with Century Resources Inc
                (Century has since become a wholly owned subsidiary of the publicly
                traded
                company New Century Energy Corp and is herein referred to as “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
                interestbefore
                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 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





·
            Effective
                January 1, 2005, the exclusive, optional, “New Project and Exploration
                Drilling Participation’ agreement with Century was modified, wherein,
                both, the Company’s three successive one year term options for
                participation on all Century deals and Century’s 15% ownership percentage
                were deleted from the agreement. These clauses were replaced by an
                agreement whereby the Company purchased the option to participate
                on two
                specific projects of interest to the Company for a 7.5 percent ownership
                stake in the Company.





·
            Effective
                March 1, 2004, the Company has a Lease Operating Agreement in place
                with
                Century. The operating agreement outlines the various responsibilities
                of
                both the Company and Century in regards to the management and operations
                of Hamill Lease.


-7-


***Prado
      Field***





·
            During
                July 2004, the Company, together with Century, 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,
                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.




·
            On
                April 26, 2005, the Company, together with Century, entered into
                a
                Development Agreement with Shengkang Energy International, Inc. (now
                doing
                business as Strong Petroleum Group, Inc. a Texas corporation hereinafter
                "Strong") to invest and participate in the re-development of the
                Company
                and Century's Prado field interests. This agreement was subject to
                receiving consent from the leassor for an anticipated future partial
                assignment, which was received on May 11, 2005. The Development Agreement
                calls for Strong to invest at least $2.0 million in the initial work
                program in 2005 and to pay a signing bonus to the Company and Century.
                Strong will pay all of the initial work program expenditures while
                providing the Company and Century a 12.5% carried working interest.
                Strong
                paid Century a $25,000 deposit towards the project on April 7, 2005
                and on
                May 12, 2005 Strong paid Century the balance due under this Development
                Agreement of $200,000. Century promptly distributed 50% of the total
                aggregate of the payments made by Strong to the Company. The Development
                Agreement also provides for, on
                a
                pro-rata basis, the Company and Century to have a one time option
                to elect
                to convert the 12.5% carried working interest to a 33 1/3% cost bearing
                working interest following the completion of the initial work program
                by
                Strong. If elected, the Company and Century will reimburse Strong
                for
                their pro-rata percentage share of any increase in ownership greater
                than
                the 12.5% up to the 33.333% of the initial $2.0 million
                expenditures.




·
            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 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 $50,000 non-refundable deposit.
                On
                October 15, 2004 the Company received from Titan an additional $30,000
                of
                the $50,000 non-refundable deposit. Based on this payment the Company
                agreed to again extend the non-refundable deposit due date to November
                15,
                2004. As of February 28, 2005, the Company had not received from
                Titan the
                remaining amount due of the non-refundable deposit. Under the terms
                of the
                agreement the Company has no further obligations to
                Titan.




·
            **(Subsequent
                Event) -**On
                June 1, 2005, 47,300,000 share certificates of Titan Oil and Gas
                (formerly
                Titan Consolidated Inc. and herein refereed to as “Titan”), were received
                by the Company. Titan represented that the shares were valued, and
                the
                Company agreed, at $460,000. These shares were issued to the Company
                as
                consideration for a 40 percent working interest in the Company’s Prado
                field interest. An agreement was also reached with Titan, whereby
                the
                Prado field property interest could be exchanged for a different
                property
                interest that the Company may elect to participate in in the future.
                At
                the time of this report the Company is finalizing the sale of the
                Titan
                shares to third parties for the conversion of the shares to cash.




***Brookshire
      Dome***





·
            **(Subsequent
                Event) -**In
                June 2005 the Company used a $116,000 of loan proceeds for the purchase
                and initial test drilling of a 50% working interest in a 26 leases
                program
                in Waller County in the area of the Brookshire Dome Field. This project
                is
                the first of two planned development projects the company acquired
                the
                rights to participate in by means of the amended agreement with Century
                dated January 1, 2005.The
                Company commenced drilling activities on the first well on June 15,
                2005
                and the well was temporarily plugged and abandoned at a depth of
                5,200
                feet on June 27, 2005. A prognosis is being developed to deepen this
                wellbore to 7,500 feet to explore for a deeper potential target.
                Depending
                on the availability of a suitable drilling rig this operation may
                start as
                early as the second or third quarter of 2005. As an alternative,
                a new
                shallow test may be proposed on the west side of the acreage to test
                a
                shallower potential target.





-8-


**Consulting**





·
            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. This
                contract expired February 1, 2005 and has not been renewed by the
                Company.





·
            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. As
                of fiscal
                year ended May 31, 2005, the Company has continued to honor the terms
                of
                Mr. Hayward’s original contract and have doing so on a month to month
                basis.








**GOING
      CONCERN**





Aquatic
      Cellulose International Corporation has experienced recurring losses, has a
      working capital deficiency of $2,758,865 and an accumulated deficit of
      $9,330,518 as of May 31 st ,
      2005.
      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 ,
      2005
      the Company is utilizing consultants to manage 100 percent of the administration
      and business development, for which there is one Consultant under contract
      and
      one Consultant operating on a month to month basis.





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





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.





During
      August 2003, AQCI moved its office to the new location at 2504 43 rd Street,
      Suite 5, Vernon, British Columbia, V1T6L1. As of September 2005, AQCI continues
      to operate at this same address. There is no lease and the rent is due on a
      monthly basis at the rate of $280.00.




**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.





-9-





**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.




**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
                2003**First
                Quarter 2003
            
            .09
            
            .018Second
                Quarter 2003
            
            .033
            
            .014Third
                Quarter 2003
            
            .014
            
            .004Fourth
                Quarter (5/31/03)
            
            .008
            
            .002**Fiscal
                2004**First
                Quarter 2004
            
            .004
            
            .004Second
                Quarter 2004
            
            .006
            
            .004Third
                Quarter 2004
            
            .006
            
            .006Fourth
                Quarter (5/31/04)
            
            .007
            
            .004**Fiscal
                2005**First
                Quarter 2004
            
            .005
            
            .002Second
                Quarter 2004
            
            .0015
            
            .0015Third
                Quarter 2004
            
            .0014
            
            .0014Fourth
                Quarter (5/31/05)
            
            .005
            
            .0032





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





As
      of May
      31 st ,
      2004,
      there were approximately 398 shareholders of record (that are not in street
      name) of AQCI's Common Stock.


-10-





**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.





On
      August
      6 th ,
      2004
      Aquatic issued four convertible debentures of $40,000, $7,500, $92,500 and
      $110,000 respectively, in cash each for an aggregate of $250,000 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.


-11-


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.





On
      August
      6 th ,
      2004,
      Aquatic issued common stock purchase warrants for the right to purchase 250,000
      shares of Common Stock of AQCI at $.0004 per share and expire August
      6 th ,
      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**




This
      report contains forward looking statements within the meaning of Section 27a
      of
      the Securities Act of 1933 and Section 21e of the Securities Exchange Act of
      1934. These forward looking statements are subject to certain risks and
      uncertainties that could cause actual results to differ materially from
      historical results or anticipated results, including those set forth under
      "Risk
      Factors" in this Management's Discussion and Analysis of Financial Condition
      and
      Results of Operations" and elsewhere in this report. The following discussion
      and analysis should be read in conjunction with "Selected Financial Data" and
      the Company's financial statements and notes thereto included elsewhere in
      this
      report.






**P** **LAN
      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 and
      commencing with the acquisition of the Hamill lease and Prado field. Subsequent
      to May 31, 2005 the Company has expanded its investments to include a 26 lease
      program in Waller County in the area of the Brookshire Dome Field.




**HAMILL
      LEASE**




The
      3645-acre Hamill Lease is secured by the property’s natural gas production from
      three of the seven existing wells; Hamill #10, Hamill #14 and Hamill #17.,
      with
      our portion of the daily production in excess of approximately 80 MCF of gas
      per
      day, (MCFGPD) however, the Company can give no assurances that the wells will
      continue to produce at this rate, if at all. W ith
      a
      regulatory well spacing requirement of 40 acres per well the property has wells
      spanning approximately 300 acres with the remaining 3,345 acres largely
      available for drilling of new wells. The property has historically produced
      natural gas from multiple stacked pay sands supported by a 10 square mile area
      of mutual interest.




The
      Hamill Lease development benefits from a license to a 10 square mile 3-D seismic
      survey ("3-D") that was acquired by Century. This 3-D seismic survey is
      currently being used by Century in the development planning of the property
      and
      new drilling locations have already been identified for drilling in 2005 and
      2006. The process of interpreting the 3-D data will be an ongoing, with results
      from any new wells being integrated into the interpretation.




The
      Company plans to participate in the development of the property throughout
      2005
      and 2006 by continuing recompletion work of existing well bores, as well as
      drilling of new wells identified prospects.




**(Subsequent
      Event) -**  We
      have
      commenced work over operations on the Hamill #2 well bore in August 2005, and
      a
      workover rig has been committed to this project and is on location.







**PRADO
      FIELD**





Our
      6.33
      percent portion of the production from the Prado field currently covers the
      Company’s portion of the operating costs of the project.


-12-







On
      April
      26, 2005, the Company, together with Century, entered into a Development
      Agreement with Shengkang Energy International, Inc. (now doing business as
      Strong Petroleum Group, Inc. a Texas corporation hereinafter "Strong") to invest
      and participate in the re-development of the Company and Century's Prado field
      interests. This agreement was subject to receiving consent from the lessor
      for
      an anticipated future partial assignment, which was received on May 11, 2005.
      The Development Agreement calls for Strong to invest at least $2.0 million
      in
      the initial work program in 2005 and to pay a signing bonus to the Company
      and
      Century. Strong will pay all of the initial work program expenditures while
      providing the Company and Century a 12.5% carried working interest. Strong
      paid
      Century a $25,000 deposit towards the project on April 7, 2005 and on May 12,
      2005 Strong paid Century the balance due under this Development Agreement of
      $200,000. Century promptly distributed 50% of the total aggregate of the
      payments made by Strong to the Company. The Development Agreement also provides
      for, o n
      a
      pro-rata basis, the Company and Century to have a one time option to elect
      to
      convert the 12.5% carried working interest to a 33 1/3% cost bearing working
      interest following the completion of the initial work program by Strong. If
      elected, the Company and Century will reimburse Strong for their pro-rata
      percentage share of any increase in ownership greater than the 12.5% up to
      the
      33.333% of the initial $2.0 million expenditures.




Following
      the completion of the initial $2.0 million work program by Strong the Company
      will make evaluation of the production results. If those results are favorable
      the Company will attempt to exercise its one time option to convert the 6.25
      percent carried working interest to a 16 2/3 percent cost bearing working
      interest, however, the Company cannot give any assurances that it will be
      successful in acquiring the necessary financing.







**(Subsequent
      Event) - BROOKSHIRE DOME FIELD AREA**




In
      June
      of 2005, the Company purchased a 50% working interest in a 26 lease program
      in
      Waller County in the area of the Brookshire Dome Field. This project is the
      first of two planned development projects the company acquired the rights to
      participate in by means of the amended agreement with Century dated January
      1,
      2005. The
      Company commenced drilling activities on the first well on June 15, 2005 and
      the
      well was temporarily plugged and abandoned at a depth of 5,200 feet on June
      27,
      2005. A prognosis is being developed to deepen this wellbore to 7,500 feet
      to
      explore for a deeper potential target. Depending on the availability of a
      suitable drilling rig this operation may start as early as the second or third
      quarter of 2005. As an alternative, a new shallow test may be proposed on the
      west side of the acreage to test a shallower potential target.






**OTHER
      ENDEVOURS**




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 an 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
      Notes 4, 10 and 13 - Notes to Consolidated Financial Statements)





**SUMMARY
      OF OBJECTIVES**





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 Lease and Prado Field
                in
                Matagorda County and Jim Hogg County Texas respectively.**(Subsequent Event) -**Development of its current working interest in the Brookshire Dome
                Area in
                Waller County Texas.





2)
            Completing
                the acquisition and development of one additional property and working
                interest opportunity with proven reserve potential, made known to
                the
                Company through its amended 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 an additional exclusive
      opportunity, available to it through its amended agreement with Century, to
      acquire oil and gas property interests and development drilling interests.




-13-





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. The Company has
      in
      the past successfully relied on private placements of common stock, 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, as well as the settlement agreement
      with Mr. Ackles divesting of the equipment at Kamloops, British Columbia (See
      Notes 4, 10 and 13 - Notes to Consolidated Financial Statements) the Company
      currently does not own any significant equipment.





As
      of
      February 28, 2005 the Company is utilizing consultants to manage 100 percent
      of
      the administration and business development, for which there is one Consultant
      under contract and one Consultant operating on a month to month
      basis.





**RESULTS
      OF OPERATIONS**





**Year
      Ended May 31** **st** **,
      2005 Compared to Year Ended May 31** **st** **,
      2004**





The
      company earned revenue of $91,634 for the year ended May 31, 2005, compared
      with
      $33,053 for fiscal 2004 for a increase of $58,581. The increase was attributable
      to the acquisition of the Hamill lease natural gas producing property and the
      Prado Field.





Operating
      costs and expenses for the year ended May 31, 2005, were $1,620,144 and $782,964
      for the year ended May 31 st ,
      2004,
      for a increase of $837,180. While the selling, general and administrative
      expenses in 2005 of $288,683 were comparable to the 2004 figure of $301,930,
      the
      financing fees of $1,293,963, was a significant increase of $820,287 over the
      2004 figure of $473,676. Depreciation and depletion was also up from the 2004
      figure of $7,358 to $37,498 for the year ended May 31, 2005, for an increase
      of
      $30,140. These increases are directly attributable to the depletion of the
      Hamill and Prado acquisitions, as well as the amortization of the convertible
      notes and interest expense as a result of the financing of these purchases.





The
      Company incurred a loss in fiscal 2005 of $1,425,436 compared with a loss of
      $749,911 in fiscal 2004. This increase is mainly attributable to the increase
      in
      financing fees associated with the financing of the Hamill and Prado
      acquisitions.





**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities in fiscal 2005 amounted to $210,393 compared to
      $264,583 in fiscal 2004 for a decrease use of cash of $54,190. The use of cash
      is attributable to a net loss of $1,425,436, gain on partial sale of investment
      in Prado lease of $76,344 and a gain on write off of accounts payable of $61,122
      which was offset by $37,498 in depreciation and depletion, $64,248 in
      amortization of deferred financing costs, $921,863 in amortization of beneficial
      conversion feature, $41,936 in unpaid equity in earnings/loss of Hamill and
      Prado leases, prepaid expenses and other current assets of $1,686 and accounts
      payable and accrued liabilities of $285,278.





The
      Company has the following contractual obligations:








**AQCI****Monthly
                Contractual Obligations****Cash**
            
            **Stock**Sheridan
                Westgarde
            
            $
            5,000
            
            $
            1,500Lonnie
                Hayward
            
            
            3,500
            
            
            1,500Monthly
                Total
            
            $
            8,500
            
            $
            3,000





-14-








Financing
      activities generated net cash of $297,721 in fiscal 2005 compared with $947,044
      in fiscal 2004. The cash from financing activities for fiscal year 2005 was
      generated from issuance of notes of $11,812 and convertible debenture of
      $250,000 and un-paid fees and expenses due to stockholders of $63,381 less
      deferred financing costs of $27,472.




At
      May
      31 st ,
      2005
      the Company had cash of $83,114 for total current assets of $143,969.




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. 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 may 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.


-15-








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.





**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.





**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.


-16-





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.





**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 28** **th** **,
      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.”


-17-





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 10** **th** **,
      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.





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 23** **rd** **,
      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.


-18-





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.





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.


-19-








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 May 12** **th** **,
      2005, reporting a change in accounting firms.**





By
      way of
      letter dated April 11, 2005 Wong Johnson and Associates, a Professional
      Corporation, (the “Former Accountants”) confirmed to Aquatic Cellulose
      International Corp. (the “Company”) their earlier verbal notification that they
      resigned as the Company’s principal accountants effective March 6, 2005 because
      they ceased auditing publicly traded companies.





The
      Former Accountants’ reports on the consolidated financial statements for the
      years ended May 31, 2004 and 2003 did not contain an adverse opinion or
      disclaimer of opinion and were not qualified as to audit scope or accounting
      principles.





The
      Former Accountants’ report on the consolidated financial statements of the
      Company as of and for the year ended May 31, 2004, contained two explanatory
      paragraphs, which read as follows:





Aquatic
      Cellulose International Corporation (the "Company") has experienced recurring
      losses, has negative working capital and an accumulated deficit as of May 31,
      2004. These factors raise substantive doubt about the Company’s ability to
      continue as a going concern Management’s plans in regard to these matters is
      disclosed in Note 2.





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 result from
      the outcome of this uncertainty.





The
      Company’s Board of Directors has received and accepted the resignation of the
      Former Accountants.





During
      the last two years preceding the Former Accountants’ resignation and for the
      interim period from June 1, 2004 through April 11, 2005, there were no
      disagreements with the Former Accountants 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 the Former Accountants to make reference to
      the
      subject matter of the disagreements in connection with the Former Accountants’
      reports.





During
      the last two years preceding the Former Accountants’ resignation and for the
      interim period from June 1, 2004 through April 11, 2005, there were no
“reportable events” as defined by regulation S-K, Item 304(a)(1)(v)(A) through
      (D).





After
      receiving the letter of resignation of the Former Accountants and on April
      20,
      2005, the Company engaged Peterson Sullivan, PLLC, of Seattle, Washington (the
      "New Accountants") as the principal accountants to audit the Company’s financial
      statements. Prior to formally engaging the New Accountants, the Audit Committee
      of the Company’s Board of Directors approved said action with respect to the New
      Accountants.





A
      letter
      from the Former Accountants addressed to the Securities & Exchange
      Commission (“SEC”) stating that the Former Accountants agree with the statements
      contained herein has been filed as an exhibit to this report





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





(a)  Our
      Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of our disclosure controls and procedures (as such term is defined
      in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”)) as of the period ended May 31, 2005, covered by this
      annual report (the “Evaluation Date”), and based on such evaluation, such
      officers have concluded, as of the Evaluation Date, that our disclosure controls
      and procedures were effective in ensuring that all information required to
      be
      disclosed in reports that 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 rules and forms.


-20-







(b)  Changes
      in Internal Control over Financial Reporting: During our fourth quarter of
      fiscal 2005 there were no changes made in our internal control over financial
      reporting 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**
            **Position**Sheridan
                B. Westgarde
            36
            Director
                & PresidentGary
                J. Ackles * 1
            51
            Director
                & PresidentShane
                Kerpan *1
            34
            Secretary
                & TreasurerClaus
                Wagner-Bartak *2
            66
            Director





*1
      Resigned in 2003


*2
      Resigned in 2004





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.





**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.




-21-


**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 ,
      2005 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 Position
            Year
            Salary
            Bonus
            Other
                Annual Compensation ($)
            Restricted
                Stock Awards ($)
            Securities
                Underlying Options/SAR (#)
            LTIP
                Payouts ($)
            All
                Other Compensation ($)Sheridan
                B. Westgarde
              President/CEO
            2005
              2004
              2003
            60K
              82.5K
              15K
            
            
            
            0
              0
              0Gary
                Ackles President/CEO
              *1
            2005
              2004
              2003
            0
              49.5K
              100K
            
            
            
            0
              0
              0Shane
                Kerpan
              Secretary
                *1
            2005
              2004
              2003
            0
              0
              0
            
            
            
            0
              0
              0Claus
                Wagner-Bartak
              Director
                *2
            2005
              2004
              2003
            0
              0
              0
            
            
            
            0
              0
              0





*1
      Resigned in 2003


*2
      Resigned in 2004








**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.





(1)  Long
      Term
      Incentive Plans (Options)





There
      are
      no long- term incentive plans currently in effect. However, the Board of
      Directors had previously granted the directors and officers of the Company
      stock
      options that were intended to place each director and officer in an equity
      position in our Company that roughly equated to their original percentage of
      shares owned in our Company. These options were issued on February 22, 2000
      and
      were 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:


-22-





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


These
      options expired on February 22, 2005.





**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 ClassSheridan
                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.




**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. These options expired on February
      22,
      2005.




-23-


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.





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. This contract was terminated in February of 2004.





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.




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
      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
            Description3.1
            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)14
            Code
                of Ethics for Chief Executive Officer and Senior Financial
                Officers23.1
            Consent
              of WJ&A LLLP31.1
            Certification
                of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section
                302 of the Sarbanes-Oxley Act of 2002)31.2
            Certification
                of the Chief Financial Officer pursuant to Rule 13a-14(a) 
(Section
                302 of the Sarbanes-Oxley Act of 2002)32.1
            Certification
                of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350 (Section
                906 of the Sarbanes-Oxley Act of 2002)32.2
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 (Section
                906
                of the Sarbanes-Oxley Act of 2002)


-24-





(1)
            Previously
                filed with the Commission on August 16th,
                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 21st,
                2000 as part of Aquatic Cellulose International Corp.’s Registration (File
                NO: 333-44184) on Form SB-2 filed on August 21st,
                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.


6 . Form
        8- K/A
        dated April 20 th ,
        2005
        reported by way of letter dated April 11, 2005 Wong Johnson and Associates,
        a
        Professional Corporation, (the “Former Accountants”) confirmed to Aquatic
        Cellulose International Corp. (the “Company”) their earlier verbal notification
        that they resigned as the Company’s principal accountants effective March 6,
        2005 because they ceased auditing publicly traded companies. The Former
        Accountants’ reports on the consolidated financial statements for the years
        ended May 31, 2004 and 2003 did not contain an adverse opinion or disclaimer
        of
        opinion and were not qualified as to audit scope or accounting principles.
        During the last two years preceding the Former Accountants’ resignation and for
        the interim period from June 1, 2004 through April 11, 2005, there were no
        disagreements with the Former Accountants 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 the Former Accountants to make reference to
        the
        subject matter of the disagreements in connection with the Former Accountants’
        reports. After receiving the letter of resignation of the Former Accountants
        and
        on April 20, 2005, the Company engaged Peterson Sullivan, PLLC, of Seattle,
        Washington (the "New Accountants") as the principal accountants to audit
        the
        Company’s financial statements. Prior to formally engaging the New Accountants,
        the Audit Committee of the Company’s Board of Directors approved said action
        with respect to the New Accountants.




-25-





**ITEM
      14.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





**1) 
      Audit Fees & Audit-Related Fees**





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.





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.





During
      fiscal year 2005, the Company’s principal accountant billed $5,000 in fees that
      were directly associated with the preparation of quarterly reports.





**2)
      Tax Fees**





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.





During
      fiscal year 2005, there were no fees billed associated with the preparation
      of
      tax filings.





**3)
      All Other 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.





During
      fiscal year 2005, 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%.





-26-


Consolidated
      Financial Statements of


**AQUATIC
        CELLULOSE**
 **INTERNATIONAL
        CORP.**
 May
        31,
        2005 and 2004
 
 
 Page**Index
                  To Audited Financial Statements**Independent
                  Auditors’ Report
              F-2Independent
                Auditors’
                Report
              F-3Consolidated
                  Balance Sheet as of May 31, 2005 and 2004
              F-5Consolidated
                  Statement of Operations for the years ended May 31, 2005 and
                  2004
              F-6Consolidated
                  Statement of Comprehensive Loss for the years ended May
                  31, 2005 and 2004
              F-7Consolidated
                  Statement of Cash Flows for the years ended May 31, 2005 and
                  2004
              F-8Consolidated
                  Statement of Stockholders' (Deficiency) Equity for
                  the years ended May 31, 2005 and 2004
              F-9Notes
                  to Consolidated Financial Statements
              F-10
 
 
 
 
 
  F-1
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders
 Aquatic
        Cellulose International Corp.
 Vernon,
        B.C. Canada
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Aquatic Cellulose
        International Corp. and Subsidiary as of May 31, 2005, and the related
        statements of operations, comprehensive loss, stockholders' deficit, and
        cash
        flows for the year then ended. These consolidated financial statements are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these consolidated financial statements based on our
        audit.
 
 We
        conducted our audit in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance whether the consolidated
        financial statements are free of material misstatement. The Company has
        determined that it is not required to have, nor were we engaged to perform,
        an
        audit of its internal control over financial reporting. Our audit included
        consideration of internal control over financial reporting as a basis for
        designing audit procedures that are appropriate in the circumstances, but
        not
        for the purpose of expressing an opinion on the effectiveness of the Company's
        internal control over financial reporting. Accordingly, we express no such
        opinion. An audit includes examining, on a test basis, evidence supporting
        the
        amounts and disclosures in the consolidated financial statements. An audit
        also
        includes assessing the accounting principles used and significant estimates
        made
        by management, as well as evaluating the overall consolidated financial
        statement presentation. We believe that our audit provides 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 Corp. and Subsidiary as of May 31, 2005, and the results of
        their
        operations and their cash flows for the years then ended, in conformity with
        accounting principles generally accepted in the United States.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note 2 to the
        consolidated financial statements, the Company has not generated positive
        cash
        flows from operations and has an accumulated deficit at May 31, 2005. These
        conditions raise substantial doubt about the Company's ability to continue
        as a
        going concern. Management's plan regarding those matters is also described
        in
        Note 2. The consolidated financial statements do not include any adjustments
        that might result from the outcome of this uncertainty.
 
 
 /s/
        Peterson Sullivan PLLC
 
 
 Seattle,
        Washington
 August
        19, 2005
    F-2




**REPORT
        OF 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-3
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders
 Aquatic
        Cellulose International Corp.
 Vernon,
        B.C. Canada
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Aquatic Cellulose
        International Corp. and Subsidiary as of May 31, 2005, and the related
        statements of operations, comprehensive loss, stockholders' deficit, and
        cash
        flows for the year then ended. These consolidated financial statements are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these consolidated financial statements based on our
        audit.
 
 We
        conducted our audit in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance whether the consolidated
        financial statements are free of material misstatement. The Company has
        determined that it is not required to have, nor were we engaged to perform,
        an
        audit of its internal control over financial reporting. Our audit included
        consideration of internal control over financial reporting as a basis for
        designing audit procedures that are appropriate in the circumstances, but
        not
        for the purpose of expressing an opinion on the effectiveness of the Company's
        internal control over financial reporting. Accordingly, we express no such
        opinion. An audit includes examining, on a test basis, evidence supporting
        the
        amounts and disclosures in the consolidated financial statements. An audit
        also
        includes assessing the accounting principles used and significant estimates
        made
        by management, as well as evaluating the overall consolidated financial
        statement presentation. We believe that our audit provides 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 Corp. and Subsidiary as of May 31, 2005, and the results of
        their
        operations and their cash flows for the years then ended, in conformity with
        accounting principles generally accepted in the United States.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note 2 to the
        consolidated financial statements, the Company has not generated positive
        cash
        flows from operations and has an accumulated deficit at May 31, 2005. These
        conditions raise substantial doubt about the Company's ability to continue
        as a
        going concern. Management's plan regarding those matters is also described
        in
        Note 2. The consolidated financial statements do not include any adjustments
        that might result from the outcome of this uncertainty.
 
 
 /s/
        Peterson Sullivan PLLC
 
 
 Seattle,
        Washington
 August
        19, 2005







F-4




**AQUATIC
                  CELLULOSE INTERNATIONAL CORP.**Consolidated
                  Balance Sheet**May
                  31,**
              
              **2005****Assets**Current
                  AssetsCash
              
              $
              83,114Deferred
                    financing costs, net of accumulatedamortization
                    of $74,350
              
              
              60,855Total
                  current assets
              
              
              143,969Property
                  and equipment, net
              
              
              2,171Investment
                  in Hamill lease
              
              
              640,234Investment
                  in Prado lease
              
              
              5,420Advance
                  on equipment purchase
              
              
              100,000Total
                  Assets
              
              $
              891,794**Liabilities
                  and Stockholders' Deficit**Current
                  LiabilitiesAccounts
                  payable
              
              $
              21,369Accrued
                  expenses
              
              
              792,969Amounts
                  due to related parties
              
              
              804,601Convertible
                  debentures
              
              
              1,222,104Notes
                  payable
              
              
              61,791Total
                  current liabilities
              
              
              2,902,834Long
                  Term LiabilitiesTotal
                  Liabilities
              
              
              2,902,834Stockholders'
                  DeficitPreferred
                  stock,$0.001 par value per share10,000,000
                  shares authorized. No sharesissued
                  and outstanding
              
              
              -Common
                  stock, $0.001par value, 100,000,000shares
                  authorized, 100,000,000 shares issued andoutstanding
              
              
              100,000Advance
                  on deposit of equipment
              
              
              (125,000
              )Additional
                  paid in capital
              
              
              7,389,493Accumulated
                  deficit
              
              
              (9,330,518
              )Other
                  comprehensive income
              
              
              (45,015
              )Total
                  stockholders' deficit
              
              
              (2,011,040
              )Total
                  Liabilities and Stockholders' Deficit
              
              $
              891,794




**See
      accompanying notes**




F-5






Consolidated
                  Statements of Operations**For
                  the Years Ended****May
                  31, 2005**
              
              **May
                  31, 2004**Equity
                  in earnings of leases
              
              $
              91,634
              
              $
              33,053Operating
                  expensesSelling,
                  general and administrative
              
              
              288,683
              
              
              301,930Financing
                  fees
              
              
              1,293,963
              
              
              473,676Depreciation
                  and depletion
              
              
              37,498
              
              
              7,358Total
                  operating expenses
              
              
              1,620,144
              
              
              782,964Loss
                  from operations
              
              
              (1,528,510
              )
              
              (749,911
              )Other
                  income (expense)Gain
                  on debt forgivness
              
              
              26,730
              
              
              -Gain
                  on partial sale of investment - Prado lease
              
              
              76,344
              
              
              -Total
                  other income
              
              
              103,074
              
              
              -Net
                  loss
              
              $
              (1,425,436
              )
              $
              (749,911
              )Weighted
                  Average Shares Outstanding
              
              
              100,000,000
              
              
              100,000,000Loss
                  Per Common Share
              
              $
              (0.01
              )
              $
              (0.01
              )




See
      accompanying notes








F-6






Consolidated
                  Statements of Comprehensive Loss**For
                  the Years Ended****May
                  31, 2005**
              
              **May
                  31, 2004**Net
                  loss
              
              $
              (1,425,436
              )
              $
              (749,911
              )Foreign
                  currency translation adjustment
              
              
              (3,983
              )
              
              (56,724
              )Comprehensive
                  loss
              
              $
              (1,429,419
              )
              $
              (806,635
              )




See
        accompanying notes
     F-7





Consolidated
                  Statements of Cash Flows**For
                  the Years Ended****May
                  31, 2005**
              
              **May
                  31, 2004**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (1,425,436
              )
              $
              (749,911
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
                  and depletion
              
              
              37,498
              
              
              7,358Amortization
                  of deferred financing costs
              
              
              64,248
              
              
              27,395Amortization
                  of beneficial conversion feature
              
              
              921,863
              
              
              274,243Undistributed
                  equity in earnings (loss) of Hamill and Prado leases
              
              
              41,936
              
              
              (18,671
              )Gain
                  on partial sale of investment - Prado lease
              
              
              (76,344
              )
              
              -Gain
                  on debt forgivness
              
              
              (27,730
              )
              
              -Changes
                  in operating assets and liabilitiesPrepaid
                  expenses and other current assets
              
              
              1,686
              
              
              (160
              )Accounts
                  payable and accrued expenses
              
              
              251,886
              
              
              195,163Net
                  cash used in operating activities
              
              
              (210,393
              )
              
              (264,583
              )**Cash
                  flows from investing activities:**Purchase
                  of interest in Hamill lease
              
              
              -
              
              
              (580,000
              )Purchase
                  of interest in Prado lease
              
              
              (70,000
              )
              
              -Non-refundable
                  deposit on partial sale of Prado lease
              
              
              40,000
              
              
              -Proceeds
                  from sale of partial interest in Prado lease
              
              
              112,500
              
              
              -Additional
                  investment in Hamill lease
              
              
              (121,772
              )
              
              -Additional
                  investment in Prado lease
              
              
              (18,522
              )
              
              -Acquisition
                  of equipment
              
              
              (689
              )
              
              (689
              )Net
                  cash used by investing activities
              
              
              (58,483
              )
              
              (580,689
              )**Cash
                  flows from financing activities:**Proceeds
                  from the issuance of notes payable
              
              
              11,812
              
              
              53,000Proceeds
                  from issuance of convertible debenture payable
              
              
              250,000
              
              
              900,000Unpaid
                  fees and expenses due to stockholders
              
              
              63,381
              
              
              101,777Deferred
                  financing costs
              
              
              (27,472
              )
              
              (107,733
              )Net
                  cash provided by financing activities
              
              
              297,721
              
              
              947,044Effect
                  of foreign currency exchange rate on cash balance
              
              
              (3,983
              )
              
              (56,724
              )Net
                  increase in cash
              
              
              24,862
              
              
              45,048Cash
                  at beginning of period
              
              
              58,252
              
              
              13,204Cash
                  at end of period
              
              $
              83,114
              
              $
              58,252SUPPLEMENTAL
                  INFORMATION:


Interest
                  paid
              
              $
              -
              
              $
              -Income
                  taxes paid
              
              $
              -
              
              $
              -






See
      accompanying notes




F-8






Consolidated
                Statement of Stockholders' DeficitCommon
                Shares
              
              Common
                Stock
              
              Paid
                In
                Capital
              
              Advance
                  on
                Deposit
              
              Foreign
                Currency
                Translation
              
              Accumulated
                Deficit
              
              Total
                  Stockholders'
                DeficitBalance
                  at May 31, 2003
              
              
              100,000,000
              
              $
              100,000
              
              $
              5,484,691
              
              $
              (125,000
              )
              $
              15,692
              
              $
              (7,155,171
              )
              $
              (1,679,788
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (56,724
              )
              
              
              
              
              (56,724
              )Benefical
                  conversion features
              
              
              
              
              
              
              
              
              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
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,983
              )
              
              
              
              
              (3,983
              )Benefical
                  conversion features
              
              
              
              
              
              
              
              
              250,000
              
              
              
              
              
              
              
              
              
              
              
              250,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,425,436
              )
              
              (1,425,436
              )Balance
                  at May 31, 2005
              
              
              100,000,000
              
              $
              100,000
              
              $
              7,389,493
              
              $
              (125,000
              )
              $
              (45,015
              )
              $
              (9,330,518
              )
              $
              (2,011,040
              )






See
      accompanying notes






F-9
 AQUATIC
            CELLULOSE INTERNATIONAL CORP.
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 May
            31, 2005







**NOTE
      1 - ORGANIZATION AND BUSINESS COMBINATION**




Aquatic
      Cellulose International Corp. (the "Company" or "AQCI") 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
      timber recovery operations and entered the oil and gas industry by acquiring
      and
      holding non-operating interests in oil and gas properties in the
      US.




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
      has
      since become a wholly owned subsidiary of the publicly traded company New
      Century Energy Corp. and is herein referred to as “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
      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 had 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 that
      was
      originally agreed to was $580,000 in cash and prior to the subsequent amendment,
      a 15 percent ownership stake in the Company.




Effective
      January 1, 2005, the exclusive, optional, “New Project and Exploration Drilling
      Participation’ agreement with Century was modified, wherein, both the Company’s
      three successive one year term options for participation on all Century deals
      and Century’s 15 percent ownership percentage were deleted from the agreement.
      These clauses were replaced by an agreement whereby the Company purchased the
      option to participate on two specific projects of interest to the Company for
      a
      7.5 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 7.5 percent ownership commitment (Note 16). The Company has not
      yet
      determine the exact number of shares that will be issued to give effect to
      the
      purchase nor can it determine the value of those shares. Because of the
      contingent nature of this element of the purchase price the value of those
      shares will be recorded as an additional element of the cost once determined.




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 (Notes 7). The
      lease has 20 existing wells that were originally producing in the 1960’s, 2 of
      which are still producing.







F-10
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005












On
      April
      26, 2005, the Company, together with Century, entered into a Development
      Agreement with Shengkang Energy International, Inc. (now doing business as
      Strong Petroleum Group, Inc. a Texas corporation hereinafter “Strong”) to invest
      and participate in the re-development of the Company’s and Century’s Prado field
      interests. This agreement was subject to receiving consent from the lessor
      for
      an anticipated future partial assignment, which was received on May 11, 2005.
      The Development Agreement calls for Strong to invest at least $2.0 million
      in
      the initial work program in 2005 and to pay a signing bonus to the Company
      and
      Century. Strong will pay all of the initial work program expenditures while
      providing the Company and Century a 12.5 percent working interest. Strong paid
      Century a $25,000 deposit towards the project on April 7, 2005 and on May 12,
      2005 Strong paid Century the balance due under the Development Agreement of
      $200,000. Century promptly distributed 50 percent of the total aggregate
      payments made by Strong to the Company. The Development Agreement also provides
      for, on a pro-rata basis, the Company and Century to have a one time option
      to
      elect to convert the 12.5 percent working interest to a 33.33 percent working
      interest following the completion of the initial work program by Strong. If
      elected, the Company and Century will reimburse Strong for their pro-rata
      percentage share of any increase in ownership greater than the 12.5 percent
      up
      to the 33.33 percent of the initial $2.0 million expenditures.




**Discontinued
      Operations**




The
      Company has discontinued its timber recovery operations and as of July 2004
      entered into an agreement to return aquatic timber harvesting equipment and
      settle the amount due the former CEO as of May 31, 2004 (Notes 4, 9 and
      16)




**Basis
      of Consolidation**




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-11
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005












**Business
      Operations**




As
      of May
      31, 2005, the Company operated primarily in the United States, although its
      corporate offices are in Canada. The Company currently operates in a single
      business segment and a description of the business operations of each company
      is
      as follows:




Aquatic
      Cellulose International Corp (AQCI) provides management services to its wholly
      owned subsidiary, Aquatic Cellulose Ltd (ACL) and its working interests in
      the
      Hamill lease and Prado properties (Notes 6 and 7).




ACL
      was
      working closely with its manufacturer on the construction of aquatic timber
      harvesting equipment. As of May 31, 2003, these operations were discontinued.
      During July 2004, the Company entered into an agreement to return the aquatic
      timber harvesting equipment and settle the amount due its manufacturer as of
      May
      31, 2004 (Notes 4, 9 and 16).




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




**Basis
      of Presentation**




The
      Company has experienced recurring losses, has a working capital deficiency
      of $2,758,865
      and an accumulated deficit of $9,330,518 as of May 31, 2005 .
      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 debt and/or equity
      financing to allow for the development of oil and gas properties, of which
      there
      can be no assurance.




Accordingly,
      the consolidated financial statements are accounted for as if the Company is
      a
      going concern and 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.




**Revenue
      Recognition**




The
      Company currently has no operating activities other than its working interests
      in oil and gas producing properties (Notes 6 and 7). The
      Company recognizes revenue from its investments in oil and gas properties on
      the
      accrual basis in proportion to its ownership interest. Net revenues include
      revenues from oil and gas sales less direct lease operating expenses. Lease
      operating expenses include monthly obligations to monitor and maintain
      production, including monitoring personnel, electricity and sales equipment
      rental fees.





F-12
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005












The
      Company records estimated amounts of natural gas revenues based on volumetric
      calculations under its natural gas sales contract.




Revenue
      from the Company’s sales of oil and natural gas are subject to a 7.5 percent
      severance tax and 0.000667 percent oil field clean-up tax.




**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 range from three to five
      years. 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 years ended May 31, 2005 and
      2004, no impairments have been recorded on proved properties.





F-13
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005









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 years ended May
      31,
      2005 and 2004, no impairments have been recorded on unproved
      properties




**Investment
      in Hamill and Prado Leases**




The
      Company accounts for its investments in the Hamill and Prado leases at cost
      initially, and the cost is adjusted for the Company’s net revenue interest in
      the Hamill and Prado leases net revenue. The cost of the investments are
      increased by additional contributions to and reduced by distributions from
      the
      Hamill and Prado leases.




The
      Company depletes the acquisition cost of the Hamill and Prado leases using
      the
      units-of-production method as the related gas and oil reserves are produced
      so
      that each unit of gas or oil produced is assigned a pro rata portion of the
      unamortized acquisition cost plus additional improvements. The unit cost is
      computed on the basis of the total estimated units of gas or oil reserves.




In
      the
      case of the Prado lease where the Company owns a 50 percent interest, the
      Company does not believe that consolidation is appropriate as the other 50
      percent owner has controlling interest through management of the
      property.




**Amounts
      Due to Related Parties**




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




**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







F-14
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







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




There
      were no dilutive securities as of May 31, 2005 and 2004, as the effect of which
      would be anti-dilutive due to the Company’s net losses. No adjustments were made
      to reported net income in the computation of EPS.







F-15
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







**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 using the effective
      interest method.






**Comprehensive
      Income**




The
      Company has determined that the Company’s net income and foreign currency
      translation adjustments were the only components of its comprehensive income
      as
      of May 31, 2005 and 2004, 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 only one segment (Note 15).




**Fair
      Value of Financial Instruments**




The
      fair
      values of the Company's cash, accounts receivable, accounts payable and accrued
      expenses 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 and its reporting currency is the United States
      dollar. The Company's subsidiary, ACL, operates in Canada and its operations
      are
      conducted in Canadian currency and therefore its functional currency is the
      Canadian dollar. In consolidation, foreign currency translation gains and losses
      are included in other comprehensive income.







F-16
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







**** **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.




**Recent
      Accounting Pronouncements**




On
      December 16, 2004, FASB published Statement of Financial Accounting Standards
      No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R). SFAS 123R requires
      that compensation cost related to share-based payment transactions be recognized
      in the financial statements. Share-based payment transactions within the scope
      of SFAS 123R include stock options, restricted stock plans, performance-based
      awards, stock appreciation rights, and employee share purchase plans. The
      provisions of SFAS 123R are effective as of the first interim period that begins
      after June 15, 2005. Accordingly, the Company will implement the revised
      standard in the second quarter of fiscal year 2005. Currently, the Company
      accounts for its share-based payment transactions under the provisions of APB
      25, which does not require the recognition of compensation cost in the financial
      statements. The Company does not anticipate that the implementation of this
      standard will have a material impact on its financial position.




On
      December 16, 2004, FASB issued Statement of Financial Accounting Standards
      No.
      153, “Exchanges of Nonmonetary Assets” (“SFAS 153”), an amendment of APB Opinion
      No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”). This statement
      amends APB 29 to eliminate the exception for nonmonetary exchanges of similar
      productive assets and replaces it with a general exception of exchanges of
      nonmonetary assets that do not have commercial substance. Under SFAS 153, if
      a
      nonmonetary exchange of similar productive assets meets a commercial-substance
      criterion and fair value is determinable, the transaction must be accounted
      for
      at fair value resulting in recognition of any gain or loss. SFAS 153 is
      effective for nonmonetary transactions in fiscal periods that begin after June
      15, 2005. The Company does not anticipate that the implementation of this
      standard will have a material impact on its financial statements.




SFAS No. 151, *Inventory
      Costs* ,
      is
      effective for fiscal years beginning after June 15, 2005. This statement
      amends the guidance in Accounting Research Bulletin No. 43,
      Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
      amounts of idle facility expense, freight, handling costs, and wasted material
      (spoilage). The adoption of SFAS No. 151 is expected to have
      no impact
      on the Company's consolidated financial statements.





F-17
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005











SFAS No. 152, *Accounting
      for Real Estate Time-Sharing Transactions* ,
      is
      effective for fiscal years beginning after June 15, 2005. This statement
      amends SFAS No. 66, *Accounting
      for Sales of Real Estate* ,
      to
      reference the financial accounting and reporting guidance for real estate
      time-sharing transactions that is provided in American Institute of Certified
      Public Accountants Statement of Position 04-2, *Accounting
      for Real Estate Time-Sharing Transactions* .
      The
      adoption of SFAS No. 152 is expected to have no impact on the
      Company's consolidated financial statements.





SFAS No. 153, *Exchanges
      of Nonmonetary Assets* - an
      amendment of APB Opinion No. 29, is effective for fiscal years beginning
      after June 15, 2005. This statement addresses the measurement of exchange
      of nonmonetary assets and eliminates the exception from fair-value measurement
      for nonmonetary exchanges of similar productive assets in paragraph 21(b)
      of APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      and
      replaces it with an exception for exchanges that do not have commercial
      substance. The adoption of SFAS No. 153 is not expected to have
      a
      significant impact on the Company's consolidated financial
      statements.





Financial
      Accounting Standards Board Interpretation ("FIN") No. 46(R) revised
      FIN No. 46, *Consolidation
      of Variable Interest Entities* ,
      requiring the consolidation by a business of variable interest entities in
      which
      it is the primary beneficiary. The adoption of FIN No. 46(R) is expected to
      have
      no impact on the Company's consolidated financial statements.





The
      Emerging Issues Task Force ("EITF") reached consensus on Issue No. 03-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      which
      provides guidance on determining when an investment is considered impaired,
      whether that impairment is other than temporary and the measurement of an
      impairment loss. The FASB issued FSP EITF 03-1-1, *Effective
      Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning
      of
      Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      which
      delays the effective date for the measurement and recognition criteria contained
      in EITF 03-1 until final application guidance is issued. The adoption
      of
      this consensus or FSP is expected to have no impact on the Company's
      consolidated financial statements.





F-18
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005








The
      EITF
      reached a consensus on Issue No. 04-8, *The
      Effect of Contingently Convertible Debt on Diluted Earnings Per
      Share* ,
      which
      addresses when the dilutive effect of contingently convertible debt instruments
      should be included in diluted earnings (loss) per share. Upon ratification
      by
      the Financial Accounting Standards Board, EITF 04-8 will become effective
      for reporting periods ending after December 15,  2004 .
      The
      adoption of EITF 04-8 did not have an impact on diluted earnings (loss)
      per share of the Company.





**NOTE
      3- PROPERTY AND EQUIPMENT**




Property
      and equipment is summarized as follows at May 31, 2005:




2005Computer
                equipment
            
            $
            3,931Furniture
                and equipment
            
            
            5,258Leasehold
                improvements
            
            
            4,85314,042Less:
                accumulated depreciation
            
            
            11,871$
            2,171




Depreciation
      expense was $467 and $617 for the fiscal years ended May 31, 2005 and 2004,
      respectively.




**NOTE
      4 - ADVANCE ON EQUIPMENT PURCHASES**




Pursuant
      to an agreement with a manufacturer, which was controlled by the Company's
      former CEO, the Company had advanced $100,000 towards the purchase of an aquatic
      timber harvesting machine at a cost of $750,000. 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 the former CEO and the manufacturer  (Notes
      14
      and 16).







F-19
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







**NOTE
      5- DEFERRED FINANCING COSTS**




In
      connection with the sale of convertible debentures in March and August 2004,
      the
      Company incurred financing fees. These fees are amortized on the effective
      interest method over the 24-month life of the debentures. The unamortized
      balance of these fees was $60,855 at May 31, 2005.




**NOTE
      6 - INVESTMENT IN HAMILL LEASE**




The
      investment in Hamill lease consists of the following for fiscal year ended
      May
      31, 2005:




Balance
                at beginning of fiscal year
            
            $
            591,930Additional
                investment
            
            
            121,770Proportionate
                equity in natural gas revenues
            
            
            127,539Proportionate
                share of lease operating expenses
            
            
            (30,413
            )Receipt
                of earnings in Hamill lease
            
            
            (135,299
            )Depletion
                of investment cost
            
            
            (35,293
            )$
            640,234





**NOTE
      7 - INVESTMENT IN PRADO LEASE**




The
      investment in Prado lease consists of the following for fiscal year ended May
      31, 2005:




Payment
                to acquire working interest (Notes 1 and 3)
            
            $
            70,000Nonrefundable
                deposits to acquire 40 percent interest
            
            
            (40,000
            )Sale
                of partial interest in Prado lease - Strong
            
            
            (36,156
            )Additional
                investment
            
            
            18,522Proportionate
                equity in oil revenues
            
            
            9,474Proportionate
                share of lease operating expenses
            
            
            (14,962
            )Depletion
                of Investment Cost
            
            
            (1,637
            )$
            5,420








F-20
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005








During
      July 2004, the Company entered into an agreement in principle to sell a portion
      of its working interest in the Prado field to Titan Consolidated Inc. (“Titan”),
      a Nevada corporation. The Company received a total of $40,000 in non-refundable
      deposits from Titan. As of May 31, 2005, the Company had not received from
      Titan
      the remaining amount due of the non-refundable deposit of $10,000. Under the
      terms of the agreement, the Company has no further obligations to Titan (see
      Note 17).





**NOTE
      8 - 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 assets. 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 $780,800 at May 31, 2003, were amended in
      December 2003 to be convertible into the Company's common shares at 40 percent
      of the average of the lowest three inter-day sales prices during the twenty
      trading days immediately preceding the conversion date.




Additionally,
      in connection with this amendment, 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 discount
      of $377,400 was recognized for beneficial conversion features in connection
      with
      the debentures outstanding as of May 31, 2003 and has been expensed as financing
      fees during the fiscal year ended May 31, 2005 because the debentures are
      immediately convertible.




In
      December 2003, the Company signed a $100,000 convertible promissory note as
      an
      advance on $900,000 convertible notes and warrants that were subsequently issued
      in March 22, 2004. The Company used $80,000 as
      a
      deposit to acquire the Hamill Lease (Notes 1 and 6).




During
      March 2004 and August 2004, the Company issued a $900,000 and $250,000,
      respectively, 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 assets. 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







F-21
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







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.




The
      debentures are due as follows:




Due
                  Date
              
              May
                  31, 2004
              
              Issued
              
              Converted
              
              May
                  31, 2005September
                  29, 2001(*)
              
              $
              480,800
              
              
              -
              
              $
              -
              
              $
              480,800March
                  14, 2002(*)
              
              
              100,000
              
              
              -
              
              
              -
              
              
              100,000December
                  4, 2002(*)
              
              
              200,000
              
              
              -
              
              
              -
              
              
              200,000March
                  22, 2006
              
              
              900,000
              
              
              -
              
              
              -
              
              
              900,000August
                  6, 2006
              
              
              -
              
              
              250,000
              
              
              -
              
              
              250,0001,680,800
              
              $
              250,000
              
              $
              -
              
              $
              1,930,800







Unamortized
                discount related to beneficial conversion options on the convertible
                debentures payable
            
            
            (1,380,559
            )
            
            (708,696
            )$
            300,241
            
            $
            1,222,104




(*)
      Maturity extended until March 2006




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











ExercisePrice
                per
            
            Outstanding
            
            
            
            
            
            OutstandingExpiration
                Date
            
            Share
            
            May
                31, 2004
            
            Issued
            
            Expired
            
            May
                31, 2005March
                22, 2009
            
            $
            0.004
            
            
            900,000
            
            
            -
            
            
            -
            
            
            900,000August
                6, 2009
            
            
            0.004
            
            
            -
            
            
            250,000
            
            
            -
            
            
            250,000900,000
            
            
            250,000
            
            
            -
            
            
            1,150,000




The
      March
      2004 and August 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 and $250,000, respectively, 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 $544,463
      for beneficial conversion features in connection with the March 2004 and August
      2004 debentures and warrants have been expensed as finance fees in the fiscal
      year ended May 31, 2005.




In
      connection with these convertible debentures, the Company had $626,525 and
      $323,165 of accrued interest at May 31, 2005 and 2004, respectively, which
      is
      included in accrued expenses in these consolidated financial
      statements.







F-22
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







All
      convertible debentures are issued to the same group, thus no conflict exist
      with
      security in the first priority interest in the Company’s assets.




**NOTE
      9 - 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 16).




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 16).




During
      July 2004, the Company received a short-term loan in the amount of $7,460,
      which
      was used, along with Company’s available cash, to fund the purchase of the 50
      percent ownership interest in the Prado field lease. The Company agreed to
      repay
      the $7,460 once funding became available and agreed to pay interest at 20
      percent of the amount borrowed over the next 12 months. Following the closing
      of
      the $250,000 convertible debentures in August 2004, the investor declined the
      repayment in favor of re-investing his principal and 20 percent proceeds with
      the Company. Thus, the total aggregate of the loan is $36,791 and is included
      in
      notes payable in these consolidated financial statements.




**NOTE
      10 - INCOME TAXES**




The
      components of the provision for taxes based on income for the fiscal years
      ended
      May 31 are as follows:




2005
            
            2004CurrentFederal
            
            $
            -
            
            $
            -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:




2005
            
            2004Federal
                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, 2005, the Company had net operating loss carry-forwards for Federal income
      tax purposes of approximately $4,800,000. 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-23
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







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
            
            $
            2,029,715Less:
                Valuation Allowance
            
            
            (
                2,029,715
            )Net
                Deferred Tax Asset
            
            $
            -




Net
      operating loss carry-forwards expire starting in 2012 through 2025. Per year
      availability is subject to change of ownership limitations under Internal
      Revenue Code Section 382.






**NOTE
      11 - COMMITMENTS AND CONTINGENCIES**




**Operating
      leases**




The
      Company rents office space on a month-to-month basis for approximately $280
      per
      month. Rent expense was approximately $3,300 and $3,400 for the fiscal years
      ended May 31,
      2005 and 2004, respectively.




**Service
      and Consulting Agreements**




The
      Company has entered into various service and consulting agreements as follows:






·
            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
                monthscommencing
                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 defined as 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, 2005,approximately
                $132,800 was owedto
                Mr. Westgarde and Mr. Ackles for unpaid consulting
                fees.







F-24
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005









·
            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, was for one year and provided for consulting
                fees of $2,000 cash and $2,000 worth of Company common stock. In
                addition,
                the Company had committed to make Mr. Smith a significant shareholder
                pending shareholder approval of the proxy (Note 16). The Company
                had also
                agreed to compensate Mr. Smith with a 7 percent commission on any
                financings that Mr. Smith brings to the Company. This contract expired
                February 1, 2005 and has not been renewed by the Company.






·
            During
                March 2004, the Company entered into consulting agreement with Lonnie
                Hayward, a Consultant who was instrumental in the Company acquiring
                the
                working interest in the Hamill lease. The consulting agreement, effective
                December 15, 2004, was for one year and provided 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 16). As of fiscal
                year
                ended May 31, 2005, the Company has continued to honor the terms
                of Mr.
                Hayward’s original contract and have been doing so on a month to month
                basis.




**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, unscheduled 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.







F-25
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







**NOTE
      12 - 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 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 (Notes 11, and 16).




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 the stockholder. A s
      of May
      31, 2005, the Company has received from the executor of the stockholder’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. ****




In
      accordance with the debenture agreement (Note 8), 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, 2005 and 2004, no
      classes of preferred stock were authorized, issued or outstanding.




**NOTE
      13 - STOCK OPTIONS**




As
      of May
      31, 2004, 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. These options expired on
      February 22, 2005.







F-26
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







The
      following table summarizes the option activity for the fiscal year ended May
      31,
      2005:






Weighted-
            
            Weighted-Number
                of
            
            
            
            Average
            
            Average
                FairShares
            
            Exercise
                Price
            
            Exercise
                Price
            
            ValueMay
                31, 2004
            
            
            1,425,250
            
            $
            0.52
            
            $
            0.52
            
            $
            0.52Granted
            
            
            -Exercised
            
            
            -Expired
            
            
            (1,425,250
            )May
                31, 2005
            
            
            -




**NOTE
      14 - RELATED PARTY TRANSACTIONS**




The
      Company has a three-year consulting agreement with it’s CEO, 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 the CEO a
      significant shareholder in the Company with a share position of 5 percent of
      the
      new authorized share volume of the Company issued over the course of three
      years. Effective, March 1, 2004, this agreement 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 a agreement to exchange amounts due to
      the
      CEO, as well as stock compensation due 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,
      the
      CEO’s shares
      would be affiliate status and bearing all restrictions according to affiliates
      as stated in the Securities and Exchange Act of 1933 (Note 16).




During
      May 2004, the Company borrowed $44,000 from Legacy Systems Corporation, a
      Company owned by the former CEO. The security for the loan was the aquatic
      timber harvesting equipment (Note 4).







F-27
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005





During
      July 2004, the Company entered into an agreement with the former Company CEO
      and
      a manufacturing company controlled by him, to settle amounts currently owed
      to
      both. The agreement requires the Company to return the aquatic timber harvesting
      equipment (Note 4) and issue 40,000,000 pre-restructured shares of the Company’s
      common stock in exchange for, forgiveness of the $44,000 borrowed from the
      manufacturer and the $80,000 due in un-paid licensing fees. The remaining amount
      due the former CEO 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 (Note 16). The agreement stipulates that
      the
      former CEO 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 its CEO, a consultant
      and
      another individual for a total of $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, the CEO and the consultant were repaid
      their principal amounts plus 10 percent, while the other individual 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
      March 2004, the Company entered into consulting agreement with a consultant
      to
      provide oil and gas expertise. The consulting agreement, effective February
      1,
      2004, was for one year and provided for consulting fees of $2,000 cash and
      $2,000 worth of Company common stock. The stock was to be payable at every
      six
      month anniversary, for as long as the agreement was in place. The issued stock
      was to be at a 20 percent discount to the average stock price of the 6
      proceeding months of consulting services. In addition, the Company had committed
      to make the consultant a significant shareholder pending shareholder approval
      of
      the proxy (Note 16). The Company had also agreed to compensate the consultant
      with a 7 percent commission on any financings that he brings to the Company.
      This contract expired February 1, 2005 and has not been renewed by the
      Company.




During
      March 2004, the Company entered into consulting agreement with a consultant
      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 the consultant a significant shareholder pending
      shareholder approval of the proxy (Note 16). As of fiscal year ended May 31,
      2005, the Company has continued to honor the terms of this contract on a month
      to month basis.







F-28
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005












**NOTE
      15 - SEGMENT INFORMATION**




During
      the fiscal years ended May 31, 2005 and 2004, 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:




2005
            
            2004United
                States
            
            $
            91,634
            
            $
            33,053Canada
            
            
            -
            
            
            -$
            91,634
            
            $
            33,053Segment
                assets:2005
            
            
            2004United
                States
            
            $
            789,604
            
            $
            744,031Canada
            
            
            102,190
            
            
            106,870$
            891,794
            
            $
            850,901





**NOTE
      16 - 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.







F-29
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005









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 (Notes 11 and 14).





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. (Notes 1,
      8,
      12 and 14)





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
                reverseExisting
                Shareholders, certain accounts payables & notes
            3.278
            
            13.11%New
                Century Energy Corp. (Notes1)
            3.750*
            
            15.00%*Lonnie
                Hayward - future Director (Notes 11 & 14).
            6.750
            
            27.00%Gary
                Ackles for settlement of amounts due (Notes 14)
            3.250
            
            13.00%Harvey
                Smith for expertise & consulting (Notes 10 & 14)
            1.223
            
            4.89%Sheridan
                B. Westgarde Director/CEO & for amounts due (Notes 14)
            6.750
            
            27.00%Totals
            25.000
            
            100.00%





(*)
      Share
      percentage has been reduced to 7.5% and thus the volume of shares distributed
      would reduce accordingly.





F-30
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005










**NOTE
      17 - SUBSEQUENT EVENTS**





In
      June
      2005 the Company purchased a 50% working interest in a 26 leases program in
      Waller County in the area of the Brookshire Dome Field. The cost of the
      acquisition was $19,930. This project is the first of two planned development
      projects the company acquired the rights to participate in by means of the
      amended agreement with Century dated January 1, 2005. The
      Company further invested an additional $95,143 for drilling activities that
      were
      commenced on the first well on June 15, 2005.  This well was
      temporarily plugged and abandoned at a depth of 5,200 feet on June 27, 2005.
      A
      prognosis is being developed to deepen this wellbore to 7,500 feet to explore
      for a deeper potential target. Depending on the availability of a suitable
      drilling rig this operation may start as early as the second or third quarter
      of
      2005. As an alternative, a new shallow test may be proposed on the west side
      of
      the acreage to test a shallower potential target.




On
      June
      1, 2005, 47,300,000 share certificates of Titan Oil and Gas (formerly Titan
      Consolidated Inc. and herein refereed to as “Titan”), were received by the
      Company. Titan represented that the shares were valued, and the Company agreed,
      at $460,000. These shares were issued to the Company as consideration for a
      40
      percent working interest in the Company’s Prado field interest. An agreement was
      also reached with Titan, whereby the Prado field property interest could be
      exchanged for a different property interest that the Company may elect to
      participate in in the future. At the time of this report the Company is
      finalizing the sale of the Titan shares to third parties for the conversion
      of
      the shares to cash.




In
      June
      of 2005, the Company entered into a working capital loan agreement with United
      Business Associates (“UBA”), a company partly owned by the Company’s current CEO
      and a consultant. In the terms of the agreement UBA will provide the Company
      $200,000 in working capital that will be secured as a convertible note,
      convertible to the Company’s common stock. Additionally, UBA will be granted a 5
      percent non-cost bearing over-ride on revenues generated by certain new project
      developments of the Company.





F-31
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005








In
      June
      of 2005, the Company agreed to an amendment to the convertible debentures dated
      March 19, 2004 having a total aggregate of $900,000. The agreement amends the
      applicable percentage of
      discount from 6 0
      to 7 0
      percent.





**NOTE
      18 -**  **ESTIMATED
      QUANTITIES OF PROVED OIL AND GAS RESERVES AND PRESENT VALUE OF ESTIMATED FUTURE
      NET REVENUES**




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




As
      of
      fiscal year ended May 31, 2004, no report was available on which the Company
      could base audited reserve estimates consistent with the Securities and Exchange
      Commission regulations. As such, the Company reported unaudited estimates that
      were subject to change once such a report became available. As of fiscal year
      ended May 31, 2005, the Company’s reserve estimates were changed based on the
      January 1, 2005, report produced by R.A. Lenser and Associates, registered
      petroleum engineers and geologists. The
      proved reserves estimates in the report conform to the definitions as set forth
      in the Securities
      and Exchange Commission's Regulation S-X Part 210.4-10 (a) as clarified by
      various Commission
      Staff Accounting Bulletins and to the definitions endorsed by the Society of Petroleum
      Engineers (SEE), the Society of Petroleum Evaluation Engineers (SPEE) and the World
      Petroleum Congresses (WPC).”




R.
      A.
      Lenser & Associates, independent petroleum engineers located in
      Houston ,
      Texas,
      prepared estimates of the net proved oil and natural gas reserves as of January
      1, 2005 for the South Sargent Field, Hamill Lease. The reserve estimates were
      prepared using constant prices and costs in accordance with the guidelines
      of
      the Securities and Exchange Commission ("SEC"). The prices used in preparation
      of the reserve estimates were based on the market prices in effect as of
      December 31 2004, with the appropriate adjustments (transportation, gravity,
      basic sediment and water ("BS&W,") purchasers' bonuses, Btu, etc.) applied
      to each field. The reserve estimates represent the gross property revenue for
      the Hamill Lease (South Sargent Field).




Our
      proved undeveloped (PUD) reserves primarily relate to reserves that are to
      be
      recovered from two new proved drilling locations. Since our Hamill Lease located
      in the South Sargent field in Matagorda County, Texas is in an area with
      multiple pay zones, this property has proved producing, proved non-producing
      and
      proved undeveloped reserves.







F-32
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005












Proved
      undeveloped reserves associated with the Hamill Lease in the South Sargent
      field
      in Matagorda County, Texas accounts for approximately 100% of our proved
      undeveloped gas reserves. We consider these reserves to be lower risk than
      other
      proved undeveloped reserves that require drilling at locations offsetting
      existing production. All of these proved undeveloped reserves are located in
      favorable structural locations within known producing fault blocks, with
      multiple pay zones, in a field with reservoirs that historically produced
      substantial volumes of gas under primary production. The main reason these
      reserves are classified as undeveloped is because they require significant
      additional capital investment associated with drilling new wells and building
      additional sales facilities in order to produce the reserves.











**Aquatics
                  Cellulose International Corp.**
                **Estimated
                  Net Reserves and Income Data**
                **Attributable
                  to Certain Leasehold
                  Interests**
  **As
                  of January 1. 2005**Proved
                Producing
              
              Proved
                Undeveloped
              
              Total
                ProvedRemaining
                  ReservesOil
                  / Condensate-MBbIs
              
              
              1
              
              
              0
              
              
              1Gas-MMCF
              
              
              39
              
              
              205
              
              
              244Income
                  DataFuture
                  Gross Revenue
              
              $
              257,131
              
              $
              1,046,928
              
              $
              1,304,059Deductions
              
              
              95,986
              
              
              409
                  150
              
              
              505,136Future
                  Net Income
              
              $
              161,145
              
              $
              637,778
              
              $
              1,809,195Discounted
                  FNI @ 10%
              
              $
              150,345
              
              $
              443,408
              
              $
              593,753








REPRESENTATIVE
      OIL AND GAS PRICES: Oil -$41.43 Natural gas- $5.22




(1)
      Determined based on year-end unescalated prices and costs in accordance with
      the
      guidelines of the SEC, discounted at 10% per annum.







F-33
 AQUATIC
          CELLULOSE INTERNATIONAL CORP.
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 May
          31, 2005







There
      are
      numerous uncertainties inherent in estimating quantities of proved oil and
      natural gas reserves and their values, including many factors beyond our
      control. The reserve data included herein represents only estimates. Reserve
      engineering is a subjective process of estimating underground accumulations
      of
      oil and natural gas that cannot be measured in an exact manner. The accuracy
      of
      any reserve estimate is a function of the quality of available geological,
      geophysical, engineering and economic data, the precision of the engineering
      and
      judgment. As a result, estimates of different engineers often vary. The
      estimates of reserves, future cash flows and present value are based on various
      assumptions, including those prescribed by the SEC relating to oil and natural
      gas prices, drilling and operating expenses, capital expenditures, taxes and
      availability of funds, and are inherently imprecise. Actual future production,
      cash flows, taxes, development expenditures, operating expenses and quantities
      of recoverable oil and natural gas reserves may vary substantially from our
      estimates. Such variations may be significant and could materially affect
      estimated quantities and the present value of our proved reserves. Also, the
      use
      of a 10% discount factor for reporting purposes may not necessarily represent
      the most appropriate discount factor, given actual interest rates and risks
      to
      which the Company or the oil and natural gas industry in general are
      subject.




The
      present values referred to herein should not be assumed to represent the current
      market value of estimated oil and natural gas reserves. In accordance with
      requirements of the SEC, the estimates of present values are based on prices
      and
      costs as of the date of the estimates, which was January 1, 2005. Actual future
      prices and costs may be materially higher or lower than the prices and costs
      as
      of the date
      of
      the estimate.




Quantities
      of proved reserves are estimated based on economic conditions, including oil
      and
      natural gas prices in existence at the date of assessment. Our reserves and
      future cash flows may be subject to revisions based upon changes in economic
      conditions, including oil and natural gas prices, as well as due to production
      results, results of future development, operating and development costs and
      other factors. Downward revisions of our reserves could have an adverse affect
      the Company’s financial condition, operating results and cash flows.




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.






F-34
 AQUATIC
            CELLULOSE INTERNATIONAL CORP.
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 May
            31, 2005






**SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 Aquatic
                  Cellulose International Corp.By:
                  /s/Sheridan WestgardeSheridan
                  WestgardeDirector,
                  Chief Executive Officer,President
                  and Chief Accounting OfficerDate:
                  October 28, 2005By:
                  /s/Sheridan WestgardeSheridan
                  WestgardePresident
                  and Chief Accounting OfficerDate:
                  October 28, 2005
 
 
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 /s/Sheridan
                  Westgarde
              Director,
                  Chief Executive Officer
              October
                  28, 2005/s/Sheridan
                  Westgarde
              President
                  and Chief Accounting Officer
              October
                  28, 2005






EXHIBIT
      INDEX










Exhibit
              No.
            Description14
            Code
                of Ethics for Chief Executive Officer and Senior Financial
                Officers23.1
            Consent
              of WJ&A LLLP31.1
            Certification
                of the Chief Executive Officer pursuant to Rule 13a-14(a) 
(Section
                302 of the Sarbanes-Oxley Act of 2002)31.2
            Certification
                of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section
                302 of the Sarbanes-Oxley Act of 2002)32.1
            Certification
                of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350 (Section
                906 of the Sarbanes-Oxley Act of 2002)32.2
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 (Section
                906
                of the Sarbanes-Oxley Act of 2002)