**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-KSB**

(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|--------------------------------------------------------------------------------------|

For the fiscal year ended  **March 31, 2006**

[    ]                TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  [    ]  to [    ]  

Commission file number  **000-30193**
| **NATION ENERGY INC.**                         |
|------------------------------------------------|
| (Name of small business issuer in its charter) |

 
| **Wyoming**                                                    |   | **59-2887569**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 
| **Suite 1100****609 West Hastings Street****Vancouver British Columbia** |   | **V6B 4W4** |
|--------------------------------------------------------------------------|--------|-------------|
| (Address of principal executive offices)                                 |   | (Zip Code)  |

Issuer's telephone number  **(800) 400-3969**

Securities registered pursuant to Section 12(b) of the Act:
| Title of each class**Nil** |   | Name of each exchange on which registered**Nil** |
|----------------------------|--------|--------------------------------------------------|

Securities registered pursuant to Section 12(g) of the Act:
| **Common Stock, $0.001 par value per share** |  
(Title of class)

 
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  

 
(Check one):  

Yes [   ]; 

No x.

**Note:**  Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange act from their obligations under those Sections.

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [   ] 

  

No [  X ]

 

 

 

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

Yes o  

No [X ]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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

State issuer's revenues for its most recent fiscal year.  $511,500

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days.  (See definition of affiliate in Rule 12b-2 of the Exchange Act.)

4,935,000 common shares @ $0.25 (1) = $1,233,750  

(1) Closing price on November 28, 2006.

Note:  If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated.

**(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)**

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.     Yes [   ]     No [   ]

**(APPLICABLE ONLY TO CORPORATE REGISTRANTS)**

State the number of shares outstanding of each of the issuer's classes of equity stock, as of the latest practicable date.

**16,020,000 common shares issued and outstanding as of November 28, 2006.**

**DOCUMENTS INCORPORATED BY REFERENCE**

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one):  Yes [   ]         No x

 

 

 

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**PART I**

**Item 1.**

**Description of Business.**

FORWARD-LOOKING STATEMENTS

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

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

As used in this annual report, the terms "we", "us", "our", and "Nation Energy" mean Nation Energy Inc., unless otherwise indicated.

All dollar amounts refer to US dollars unless otherwise indicated.

*Business of the Company*

We are an oil and gas exploration company with interests in properties located in Alberta, Canada.   We commenced production of natural gas from our properties in fiscal 2005.  Nation Energy is a Wyoming corporation with its business offices located at Suite 1100, 609 West Hastings Street, Vancouver, British Columbia.  Our telephone number is (800) 400-3969. 

*Corporate History*

We were formed under the laws of the State of Florida on April 19, 1988 under the name Excalibur Contracting, Inc. and from that date until September 1998, we conducted no business and existed as a shell corporation.  Since the restatement of our Articles of Incorporation on September 16, 1998, our main focus has been the procurement of mineral leasehold interests, primarily for oil and gas exploitation rights.  We reincorporated as a Delaware corporation on February 2, 2000 and changed our name to Nation Energy, Inc. on February 15, 2000.   Following the change in our focus, we commenced corporate strategic development and have explored potential oil and gas projects.  On June 13, 2003 we merged from the State of Delaware with Nation Energy Inc., a corporation organized and existing under the laws of the State of Wyoming, which we incorporated for the purposes of the merger, pursuantto which we have changed our domicile to the State of Wyoming.  

Due to our current operations and their location in Alberta, Canada, we registered as an extra-provincial company in the province of Alberta on June 3, 2003.

*Our Current Business*

Boltan Prospect, Smoky Area, Alberta

On November 21, 2001 we entered into a farm-in agreement with Olympia Energy Inc. (Olympia Energy) under which we agreed to share the development costs and revenues for a natural gas project in the Smoky area near Grande Prairie, Alberta, Canada.  Under the terms of the farm-in agreement, we will fund 25% of the cost to drill and complete a 4,800 meter well in the Boltan prospect and will earn a 15% interest after payout in the Boltan 

 

 

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prospect.  Drilling costs for the Boltan prospect are estimated to be CDN$11,000,000.  An initial well at 09-09-59-02-W6M was drilled to a total depth of 4,830 meters in March of 2002 and has been logged.   A completion program was attempted on the well, and the well flowed small amounts of gas and large amounts of salt water. 

In April 2003, we participated, as to our 15% interest, in the purchase of additional petroleum and natural gas rights underlying five sections of land in the Boltan area.  We and our partners commenced a re-entry and completion of a shallow formation that was thought to be productive in these lands in wellbore 08-09-59-02-W6M in August 2003. The program was completed in late August 2003 and the zone as tested was not deemed commercially productive.  In October 2003, we and our partners reentered wellbore 08-09-59-02-W6M to test an additional zone. The zone of interest has been perforated and has been monitored with pressure recorders.  No further work is planned with respect to the zones as tested and preparations for abandonment of wellbore 08-09-59-02-W6M occurred in October 2005.

In January and February 2004, we participated, as to our 25% before payout working interest, in a 4.5 mile pipeline installation program designed to connect 09-09-59-02-W6M to pipeline infrastructure to enable production from the well to be marketed.  Concurrent with the pipeline installation program the 09-09-59-02-W6M wellbore was reentered to facilitate tubing installation and production optimization.  Attempts to flow test the up hole zone in the well bore were unsuccessful and tubing was set below the up hole zone down to the Gething gas bearing zone which was successfully flow tested.  The Gething zone was expected to produce at an initial rate of 750 thousand cubic feet per day with first production scheduled for June 2004.  In June 2004, Accrete Energy Inc. (“Accrete Energy”) assumed Olympia Energy’s interests and became operator of the Boltan prospect.  

The 09-09-59-02-W6M well commenced production in June 2004 and produced approximately 35.4 million cubic feet of gas in its first month of production (an average of 1,178 thousand cubic feet of gas per day) exceeding original expectations.  Our share of production before royalties is 25% before payout (15% after payout of original well costs).

In December 2004 the well produced approximately 28.9 million cubic feet of gas (an average rate of 934 thousand cubic feet per day).  Between January and November 2005, Boltan 09-09-59-02 W6M has produced on a restricted and interrupted basis due to facilities constraints.  . Gross production from the Boltan 09-09-59-02 W6M well totalled approximately 232 MMcf of natural gas in fiscal 2006 compared to 273 MMcf of natural gas in fiscal 2005.  The lower volumes resulted from natural production declines and intermittent production arising from facilities constraints

On January 10, 2005, we entered into a farm-in agreement with Netco Energy Inc. as to certain interests in two sections at Boltan.  Under the terms of the agreement, Netco Energy Inc. will earn 60% of our 15% working interest by paying for 100% of costs related to our interests in the drilling and development of. exploratory well Boltan 14-10-59-2W6, a location offsetting the Boltan 09-09-59-02-W6M wellbore.  Accrete Energy is the operator.  Gross drilling and casing costs were projected at $2,000,000.  Our remaining interests in the two sections of land and Boltan 14-10-59-2W6 wellbore after payout will be 6%. 

The Boltan 14-10-59-2W6 well has been drilled and successfully completed in March 2005.  Based on initial production tests the well was forecast to produce at a gross raw gas rate of two million cubic feet per day.  As of March 31, 2005 a gathering line has been laid.  The 14-10-59-2W6 well achieved initial production in June 2005.  To enable this wellbore and the Boltan 09-09-59-02W6M wellbore to flow on an unrestricted and uninterrupted basis, compression facilities were installed in November 2005.  The Boltan 09-09-59-02W6M and Boltan 14-10-59-2W6 wellbores have been able to flow on an unrestricted and uninterrupted basis since the installation.  

Effective January 1, 2006 Churchill Energy Inc. (“Churchill Energy”) assumed Accrete Energy’s interests and became operator of the Boltan prospect.  

The company started to earn revenues with the commencement of gas production in June 2004.   Our primary objective over the 12 months ending March 31, 2007, will be to continue to participate in the farm-in agreement relating to the Boltan prospect.  We intend to participate in and develop further wells on the Boltan prospect if warranted.  We anticipate that we have enough cash  plus cash provided from operations to meet our expenses and capital commitments during the next twelve months, as described under Liquidity and Capital Resources below.

 

 

 

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Environment

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

 

**RISK FACTORS**

Much of the information included in this annual report includes or is based upon estimates, projections or other "forward looking statements".  Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgement regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

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

Our shares of common stock are considered speculative while we proceed with our commitments in connection with the Smoky project or while we continue our search for a new business opportunity.  Prospective investors should consider carefully the risk factors set out below.

*Because of the early stage of development and the nature of our business, our securities are considered highly speculative.*

Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of its development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration, development and production stage and have proven reserves of oil and gas as at March 31, 2006.   Accordingly, we have realized limited revenues and profit from our operations to date and there is little likelihood that we will realize material profits in the short term.  Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein.

*A portion of our interest in our properties may be lost if we are unable to obtain significant additional financing.*

Our ability to continue exploration and, if warranted, development of our properties will be dependent upon our ability to raise significant additional financing. If we are unable to obtain such financing, a portion of our interest in our properties may be lost to exploration partners or our properties may be lost entirely.  We have limited financial resources and limited cash flow from operations and we are dependent for funds on our ability to sell our common shares, primarily on a private placement basis.  There can be no assurance that we will be able to obtain financing on that basis in light of factors such as the market demand for our securities, the state of financial markets generally and other relevant factors.  The method of financing employed by us to date results in increased dilution to the existing shareholders each time a private placement is conducted.

 

 

 

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There can be no assurance that additional funding will be available to us for exploration and development of our projects or to fulfil our obligations under any applicable agreements.  Although historically we have announced additional financings to proceed with the development of some of our previous properties, there can be no assurance that we will be able to obtain adequate financing in the future or that the terms of such financing will be favourable.  Failure to obtain such additional financing could result in delay or indefinite postponement of further exploration and development of our projects with the possible loss of such properties.

*We will require substantial funds to enable us to decide whether our properties contain commercial oil and gas deposits and whether they should be brought into production, and if we cannot raise the necessary funds we may never be able to realize the potential of our properties.*

Our decision as to whether our properties contain commercial oil and gas deposits and should be brought into production will require substantial funds and depend upon the results of exploration programs and feasibility studies and the recommendations of duly qualified engineers, geologists, or both.  This decision will involve consideration and evaluation of several significant factors including but not limited to: (1) costs of bringing a property into production, including exploration and development work, preparation of production feasibility studies, and construction of production facilities; (2) availability and costs of financing; (3) ongoing costs of production; (4) market prices for the oil and gas to be produced; (5) environmental compliance regulations and restraints; and (6) political climate, governmental regulation and control.

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

We have obtained title reports with respect to our oil and gas properties and believe our interests are valid and enforceable; however, these reports do not guarantee title against all possible claims.  The properties may be subject to prior unregistered agreements, native land claims or transfers which have not been recorded or detected through title research.  Additionally, the land upon which we hold oil and gas leases may not have been surveyed; therefore, the precise area and location of such interests may be subject to challenge.

*Our accounts are subject to currency fluctuations which may materially affect our financial position and results.*

We maintain our accounts in US and Canadian currencies and are therefore subject to currency fluctuations and such fluctuations may materially affect our financial position and results. We do not engage in currency hedging activities.

*We may not be able to manage the significant strains that future growth may place on our administration infrastructure, systems and controls.*

In the event our properties experience any rapid expansion in production over current levels, we could experience rapid growth in revenues, personnel, complexity of administration and in other areas.  There can be no assurance that we will be able to manage the significant strains that future growth may place on our administrative infrastructure, systems, and controls.  If we are unable to manage future growth effectively, our business, operating results and financial condition may be materially adversely affected.

*The loss of John Hislop would have an adverse impact on future development and could impair our ability to succeed.*

We are dependent on our ability to hire and retain highly skilled and qualified personnel. We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms. We do not have key man insurance on any of our employees. The loss of service of any of our key personnel could have a material adverse effect on our operations or financial condition.

*We are dependent upon our operator’s expertise in the area of oil and gas exploration.*

 

 

 

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Under the farm-in agreement, Churchill Energy, as successor to Olympia Energy, will act as operator for the purposes of carrying out the work necessary at Boltan and we are therefore dependent upon the operator’s expertise in the area of oil and gas exploration.

*Our management currently engages in other oil and gas businesses and, as a result, conflicts could arise.*

In addition to their interest in our company, our management currently engages, and intends to engage in the future, in the oil and gas business independently of our company. As a result, conflicts of interest between us and management of our company might arise.

*Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.*

Our shares of common stock are subject to rules promulgated by the Securities and Exchange Commission relating to "penny stocks," which apply to companies whose shares are not traded on a national stock exchange or on the NASDAQ system, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the Securities and Exchange Commission.  These rules require brokers who sell "penny stocks" to persons other than established customers and "accredited investors" to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks.  These rules may discourage or restrict the ability of brokers to sell our shares of common stock and may affect the secondary market for our shares of common stock.  These rules could also hamper our ability to raise fundsin the primary market for our shares of common stock.

*Since our shares are thinly traded, and trading on the OTC Bulletin Board may be sporadic because it is not an exchange, stockholders may have difficulty reselling their shares.*

Our shares of common stock are currently publicly traded on the OTC Bulletin Board service of the National Association of Securities Dealers, Inc.  The trading price of our shares of common stock has been subject to wide fluctuations.  Trading prices of our shares of common stock may fluctuate in response to a number of factors, many of which will be beyond our control.  The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with no current business operation.  There can be no assurance that trading prices and price earnings ratios previously experienced by our shares of common stock will be matched or maintained.  These broad market and industry factors may adversely affect the market price of our shares of common stock, regardless of our operating performance.

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

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

Our by-laws contain provisions with respect to the indemnification of our officers and directors against all expenses (including, without limitation, attorneys' fees, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that the person is one of our officers or directors) incurred by an officer or director in defending any such proceeding to the maximum extent permitted by Wyoming law.

Insofar as indemnification for liabilities arising under the *Securities Act of 1933* may be permitted to directors, officers and controlling persons of our company under Wyoming law or otherwise, we have been advised that the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the *Securities Act of 1933* and is, therefore, unenforceable.

 

 

 

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

Our constating documents authorize the issuance of 50,000,000 shares of common stock, each with a par value of $0.001.  In the event that we are required to issue any additional shares or enter into private placements to raise financing through the sale of equity securities, investors' interests in our company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold.  If we issue any such additional shares, such issuances also will cause a reduction in the proportionate ownership and voting power of all other shareholders.  Further, any such issuance may result in a change in our control.

*Our by-laws do not contain anti-takeover provisions which could result in a change of our management and directors if there is a take-over of our company.*

We do not currently have a shareholder rights plan or any anti-takeover provisions in our By-laws.  Without any anti-takeover provisions, there is no deterrent for a take-over of our company, which may result in a change in our management and directors.

**Risks Relating to the Industry**

*As our properties are primarily in the exploration and, development stage there can be no assurance that we will establish further commercial discoveries on our properties.*

Exploration for economic reserves of oil and gas is subject to a number of risk factors.  While the rewards to an investor can be substantial if an economically viable discovery is made, few of the properties that are explored are ultimately developed into producing oil and/or gas wells.  Our properties are in the exploration, development and production stage.  We only established proven reserves of oil and gas in fiscal 2006.  There can be no assurance that we will establish further commercial discoveries on any of our properties.

*A decline in oil and natural gas prices will have an adverse impact on our operations.*

Our revenues, cash flows and profitability are substantially dependent upon prevailing prices for oil and natural gas.  In recent years, oil and natural gas prices and, therefore, the level of drilling, exploration, development and production, have been extremely volatile.  Any significant or extended decline in oil or natural gas prices will have a material adverse effect on our business, financial condition and results of operations and could impair access to future sources of capital.  Volatility in the oil and natural gas industry results from numerous factors over which we have no control, including:

 

**•**

the level of oil and natural gas prices, expectations about future oil and natural gas prices and the ability of international cartels to set and maintain production levels and prices;

 

**•**

the cost of exploring for, producing and transporting oil and natural gas;

 

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the domestic and foreign supply of oil and natural gas;

 

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domestic and foreign governmental regulation;

 

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the level and price of foreign oil and natural gas transportation;

 

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available pipeline and other oil and natural gas transportation capacity;

 

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weather conditions;

 

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international political, military, regulatory and economic conditions;

 

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the level of consumer demand;

 

 

 

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**•**

the price and the availability of alternative fuels;

 

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the effect of worldwide energy conservation measures; and

 

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the ability of oil and natural gas companies to raise capital.

Significant declines in oil and natural gas prices for an extended period may:

 

**•**

impair our financial condition, liquidity, ability to finance planned capital expenditures and results of operations;

 

**•**

reduce the amount of oil and natural gas that we can produce economically;

 

**•**

cause us to delay or postpone some of our capital projects;

 

**•**

reduce our revenues, operating income and cash flow; and

 

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reduce the carrying value of oil and natural gas properties.

No assurance can be given that current levels of oil and natural gas prices will continue.  We expect oil and natural gas prices, as well as the oil and natural gas industry generally, to continue to be volatile.

*Continued financial success depends on our ability to replace our reserves in the future.*

Our future success as an oil and natural gas producer depends upon our ability to find, develop and acquire additional oil and natural gas reserves that are profitable.  Oil and natural gas are depleting assets, and production from oil and natural gas from properties declines as reserves are depleted with the rate of decline depending on reservoir characteristics.  If we are unable to conduct successful exploration or development activities or acquire properties containing proved reserves, our proved reserves generally will declines as the reserves are produced, and our level of production and cash flows will be adversely affected.  Replacing our reserves through exploration or development activities or acquisitions will require significant capital which may not be available to us.

*Reserve estimates depend on many assumptions that may turn out to be inaccurate.*

Any material inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and present values of our reserves.  The process of estimating natural gas and oil reserves is complex.  It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors.  Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this quarterly report.  In order to prepare these estimates, we must project production rates and timing of development expenditures.  We must also analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary.  The process also requires economic assumptions relating to matters such as oil and natural gas prices, drilling andoperating expenses, capital expenditures, taxes and availability of funds.

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates.  Any significant variance could materially affect the estimated quantities and pre-tax net present value of reserves shown in this quarterly report.  In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

Investors should not assume that the pre-tax net present value of our proved reserves referred to in this quarterly report is the current market value of our estimated oil and natural gas reserves.  We base the pre-tax net present 

 

 

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value of future net cash flows from our proved reserves on prices and costs on the date of the estimate.  Actual future prices, costs, and the volume of produced reserves may differ materially from those used in the pre-tax net present value estimate.

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

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

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

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

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

*The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.*

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control.  

These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations.  The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.

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

Oil and gas operations are subject to federal, provincial, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment.  Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment.  Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received.  No assurance can be given that environmental standards imposed by federal, provincial, or local authorities will not be changed or that any such changes would not have material adverse effects on our activities.  Moreover, compliance with such laws may cause substantial delays or requirecapital outlays in excess of those anticipated, thus causing an adverse effect on us.  Additionally, we may be subject to liability for 

 

 

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pollution or other environmental damages which it may elect not to insure against due to prohibitive premium costs and other reasons.

*Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.*

In general, our exploration and production activities are subject to certain federal, provincial and local laws and regulations relating to environmental quality and pollution control.  Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation.  Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date.  Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes.  In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities.  However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with all applicable environmental regulations.

Our operating partners maintain insurance coverage customary to the industry; however, it is not fully insured against all environmental risks.

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

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

*Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.*

There is no assurance that the laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency will not be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business.

The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on our company.  Any or all of these situations may have a negative impact on our ability to operate and/or become profitable.

**Item 2.**

**Description of Property.**

We own various non-operated working interests in the Boltan prospect, an oil and gas property located in the Smoky area near Grande Prairie, Alberta, Canada.  Currently two producing wells exist on the property.  The legal description of the Boltan prospect is TWP 59, Rge 2 W6M.  The Boltan prospect includes petroleum and natural gas leases encompassing 5,760 total acres.  Our principal executive office is located at Suite 1100, 609 West Hastings Street, Vancouver, British Columbia  V6B 4W4.  We occupy the Vancouver premises on a proportional cost basis for office rent and administration services and expenses, on a month to month basis.

 

 

 

12

 

 

 

**Item 3.**

**Legal Proceedings.**

We know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders are an adverse party or has a material interest adverse to us.

**Item 4.**

**Submissions of Matters to a Vote of Security Holders.**

There were no matters submitted to a vote of our security holders either through solicitation of proxies or otherwise in the fourth quarter of the fiscal year ended March 31, 2006.

**PART II**

**Item 5.**

**Market for Common Equity and Related Stockholder Matters.**

Our common stock is quoted on the OTC Bulletin Board under the symbol "NEGY".  Prior to March 13, 2000, our common stock traded on the OTC Bulletin Board under the symbol "XCNT", which was a result of a change in our name from Excalibur Contracting, Inc. to our current name.  The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.  The high and low prices of our common stock (obtained from yahoo.com) for the periods indicated below are as follows:

 

**Quarter Ended**

**High**

**Low**

June 30, 2004

$0.13

$0.08

September 30, 2004

$0.12

$0.08

December 31, 2004

$0.10

$0.08

March 31, 2005

$0.35

$0.08

June 30, 2005

$0.24

$0.11

September 30, 2005

$0.27

$0.20

December 31, 2005

$0.27

$0.16

March 31, 2006

$0.85

$0.18

 

Our shares of common stock are issued in registered form. Interwest Transfer Co., Inc., of 1981 East 4800 South, Suite 100, Salt Lake City, UT 84117 (Telephone: 801.272.9294, facsimile: 801.277.3147) is the registrar and transfer agent for our shares of common stock.

As of November 28, 2006, we had 16,020,000 shares of common stock outstanding and approximately 2 stockholders of record.  This number of stockholders does not include stockholders who hold our securities in street name.  

*Dividend Policy*

We have not declared or paid any cash dividends since inception.  We intend to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to pay any cash dividends in the foreseeable future.  There are no restrictions that limit our ability to pay dividends on our shares of common stock.

*Securities Authorized for Issuance under Equity Compensation Plans*

 

 

 

13

 

 

We adopted our current stock option plan, entitled the 1999 Stock Option and Incentive Plan, on May 6, 1999 which was subsequently approved by over 50% of the shares of common stock held by stockholders of our company.  The following table provides a summary of the number of options granted under our stock option plan, the weighted average exercise price and the number of options remaining available for issuance all as at March 31, 2006.

 

Number of Common Shares to be issued upon exercise of outstanding options

Weighted-Average exercise price of outstanding options

Number of options remaining available for further issuance

75,000

$1.00

2,425,000

 

*Recent Sales of Unregistered Securities*

We did not issue any shares during the fiscal years ended March 31, 2006, 2005 and 2004.

**Item 6.**

**Management's Discussion and Analysis or Plan of Operation.**

The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this annual report.  The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" found under "Item 1.  Description of Business".

**Results of Operations**

*Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005*

We generated a net loss of $488,771 for the year ended March 31, 2006 compared to net income of $35,447 for the year ended March 31, 2005.  Net income (loss) per common share for the year ended March 31, 2006 was $(0.03) compared to $Nil per common share for the year ended March 31, 2005.  The loss in fiscal 2006 was primarily a result of the recognition of impairment of our oil and gas properties as a consequence of an independent evaluation of our reserves, resulting in an impairment reserve increase of $555,085 and depletion and depreciation expense of $103,894.  Revenue increased by $167,970 in 2006 over 2005 as a result of higher natural gas prices.  The increase in revenue was offset by increased direct operating costs and the initiation of depletion charges in 2006.  General and administrative costs increased with additional engineering and legal costs as the company entered the production phase.  

Revenues increased to $511,500 for the year ended March 31, 2006 from $343,530 for the year ended March 31, 2005.  The increase in revenues reflected higher average prices which rose to $9.08 per Mcf in fiscal 2006 from $6.15 per Mcf in fiscal 2005.  We produced 49.4 MMcf of natural gas in fiscal 2006 compared to 50.1 MMcf in fiscal 2005.

Royalty expense of $21,552 in fiscal 2006 declined from $91,328 fiscal 2005, reflecting one-time charges in 2005 associated with the commencement of production.  Operating expenses increased to $101,626 in fiscal 2006 from $51,481 in fiscal 2005 as a result of higher operating activity.  

Depletion expense totalled $103,894 for the year ended March 31, 2006 compared to $Nil for the year ended March 31, 2005.  We were still considered to be in the pre-production stage as at March 31, 2005.  We entered the production stage in April 2005 and, accordingly, recorded depletion expense for the first time.

 

 

 

14

 

 

General and administrative expenses increased to $120,500 in fiscal 2006 from $75,048 in fiscal 2005.  The increase in general expenses was primarily attributable to increased costs associated with higher levels of production activity as we moved from being an exploration and development stage company to a production stage company.    General expenses included an increase in administration fees from $38,520 to $51,360 in fiscal 2006.  Conference fees also  increased to $9,459 from $Nil in fiscal 2005.  Consulting fees rose to $13,990 in fiscal 2006 from $677 in the previous year due to increased engineering activity resulting in required engineering consultation and reports.  Legal fees rose to $8,720 in fiscal 2006 from $4,936 in the prior fiscal year.

Interest expense for fiscal 2006 totalled $98,713 compared to $90,377 for fiscal 2005.  The increase reflected the slightly larger average outstanding balance of shareholder loans in fiscal 2006 versus fiscal 2005.

We reported a foreign currency translation loss of $75,376 in fiscal 2006 compared to a gain of $3,086 in fiscal 2005.  Our revenues and expenses are incurred in Canadian dollars while the reporting currency is the US dollar.  The sharp rise in the value of the Canadian dollar relative to the US dollar in fiscal 2006 resulted in a foreign currency translation loss primarily as a result of our loans payable being due in Canadian dollars.  

*Capital Investment*

Our exploration program in fiscal 2004 and 2005 produced gas from the shallower rock formations of the Boltan prospect.  With the installation of compression facilities in November 2005, production was achieved on an unrestricted and uninterrupted basis on Boltan wellbores 09-09-59-02W6M and 14-10-59-02W6.

We incurred development costs totalling $233,783 in the year ended March 31, 2006 compared to $17,200 in the year ended March 31, 2005.  The development costs in fiscal 2005 were primarily associated with the installation of compression facilities to enable unrestricted and uninterrupted production.  

**Liquidity and Capital Resources**

These financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  Our company has incurred losses since inception in excess of $6 million and has only generated modest profitable operations when we commenced gas production in fiscal 2006.  

Our company’s ability to continue as a going concern is contingent upon being able to secure financing and attain profitable operations.  Our company is pursuing financing for its operations and is in the process of determining whether the Bolton prospect has sufficient reserves to justify additional drilling.  

We are currently relying on revenues generated from production to fund our continuing operating expenses and to fund the identification and evaluation of further oil and gas properties.   Net cash provided by operating activities in fiscal 2006 totalled $172,033 versus $46,466 in fiscal 2005.  Cash balances were $58,656 and $47,676, as of March 31, 2006 and March 31, 2005, respectively. 

We entered into bridge loan agreements with a related party, in 2003 and 2004 to fund operations.  The terms of these bridge loan agreements provide that any principal amount outstanding is payable upon demand and bears interest at 15% per annum, payable quarterly.  In fiscal 2006, we consolidated and restructured our loans with the related party.  As part of the restructuring, we borrowed an additional CDN$250,000 (US$203,932).  The new loan bears interest at 15% per annum and is payable quarterly. Any principal amount outstanding under the loan is payable upon demand.  The loan is payable in Canadian dollars and is secured by a Promissory Note.  

We paid down $ 223,970 under this facility in fiscal 2006 compared to $Nil in fiscal 2005.  Accordingly, the balances outstanding under the loan agreement totalled $595,488 at March 31, 2006 versus $522,758 at March 31, 2005.  

 

 

 

15

 

 

Should we require additional financing beyond that provided from operating activities, we would likely seek to secure same through a private placement of common stock or debt securities.  Our material commitments for capital expenditures are limited to the farm-in agreement with Churchill Energy for the development of the Boltan prospect.  

We have limited operating history.  We can only estimate the future needs for capital based on the current status of our operations, our current plans and current economic condition.  Due to the uncertainties regarding our future activities, we are unable to predict precisely what amount will be used for any particular purpose, other than the funds which we will be required to expend under the farm-in agreement.

*Plan of Operation*

Our primary objectives over the 12 months ending March 31, 2007, will be to continue to participate in the Farm-in agreement with Churchill in regards to the development of the shallow formation in the Boltan Prospect and continue to investigate other potential oil and gas property acquisitions.

*Cash Requirements*

Over the next twelve months we intend to use funds to continue our participation in the Boltan prospect and to investigate further acquisitions, as follows:

Estimated Funding Required During the Next Twelve Months  

General and Administrative

$120,000

 

 

Operations

 

 

Farm-in contributions

Nil

 

 

 

Working Capital

50,000

 

 

Total

$170,000

 

We have suffered recurring losses from operations prior to fiscal 2005.  The continuation of our company as a going concern is dependent upon our company attaining and maintaining profitable operations and raising additional capital. Management's plan in this regard is to raise additional capital through a debt or an equity offering.  The financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our company discontinue operations.

Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above, in their report on the annual financial statements for the year ended March 31, 2006, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern.  Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further financing, a successful program of acquisition and exploration, and, finally, achieving a profitable level of operations.  The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders.  Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There are no assurances that we will be able to obtain further funds required for our continued operations.  We are pursuing various financing alternatives to meet our immediate and long-term financial requirements.  There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms.  If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due.  In such event, we will be forced to scale down or perhaps even cease our operations.

 

 

 

16

 

 

*Product Research and Development*

We do not anticipate that we will expend any significant monies on research over the next twelve months.  We anticipate expenses for the development of the Boltan prospect as set out above under our “Plan of Operations”.

*Purchase of Significant Equipment*

We do not intend to purchase any significant equipment through March 31, 2007.

*Employees*

Over the twelve months ending March 31, 2007, we do not anticipate an increase in the number of employees that we may retain.  We currently have no employees other than our director and officer.  

*New Accounting Pronouncements*

 

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3."  This Statement replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for, and reporting of, a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.

 

SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It will only affect the financial statements of the Company if there is a change any accounting principle.  At this time, no such changes are contemplated or anticipated.

 

In February 2006, the FASB issues SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140." This amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."  This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”  

 

This Statement:

 

a.

Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation

 

b.

Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133

 

c.

Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation

 

d.

Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives

 

e.

Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

 

This Statement is effective for all financial instruments acquired or issued after the first fiscal year that begins after September 15, 2006.  The Company is currently reviewing the effects of adoption of this statement but it is not expected to have a material impact on its financial statements.

 

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140," with respect to the accounting for separately recognized servicing assets and servicing liabilities.  This Statement:

 

 

 

17

 

 

 

 

1.

Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations.

 

2.

Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. 

 

3.

Permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. 

 

4.

At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. 

 

5.

Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. 

 

Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006.  The adoption of this statement is not expected to have a material impact on the Company's financial statements.

Application of Critical Accounting Policies

**Estimates**

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

**Fair Value of Financial Instruments**

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2006. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts payable, and accounts payable – related party. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand. 

**Impairment of Long-Lived Assets**

We periodically review the carrying amount of our unproved oil and gas properties to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. 

**Oil and Gas Properties**

We follow the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves, whether productive or unproductive, are capitalized. Such expenditures include land acquisition costs, drilling, exploratory dry holes, geological and geophysical costs not associated with a specific unevaluated property, completion and costs of well equipment. Internal costs are capitalized only if they can be directly identified with acquisition, exploration, or development activities. As of March 31, 2006, we have not capitalized any internal costs.

 

 

 

18

 

 

Expenditures that are considered unlikely to be recovered are written off. On a quarterly basis our board of directors assess whether or not there is an asset impairment.  The current oil and gas activities are considered to be in the exploration, development and production stage. 

We periodically review the carrying amount of our unproved oil and gas properties to determine whether current events or circumstances warrant adjustments to such carrying amounts.  In the year ended March 31, 2003, we recognized an impairment loss related to the abandonment of an initial test well.  In the year ended March 31, 2006, the company obtained an independent evaluation of its reserves and, as a consequence, determined that there was an impairment and recognized an impairment loss.

Depletion and depreciation of the capitalized costs for producing oil and gas properties will be provided by the unit-of-production method based on proved oil and gas reserves.  The Company obtained an independent evaluation as of March 31, 2006 which established proved reserves.  As a consequence, the Company initiated charging depletion and depreciation in the year ended March 31, 2006.

**Item 7.**

**Financial Statements.**

Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

The following consolidated financial statements are filed as part of this annual report:

Report of Independent Public Accounting Firm, dated October 3, 2006.

Balance Sheet at March 31, 2006 

Statements of Operations for the years ended March 31, 2006 and 2005

Statements of Changes in Stockholders' Equity (Deficit) for the years ended March 31, 2006 and 2005 

Statements of Cash Flows for the years ended March 31, 2006 and 2005 

Notes to the Financial Statements

 

 

 

19

 

 

 

REPORT OF REGISTERED INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Shareholders and Board of Directors

Nation Energy, Inc.

 

We have audited the accompanying balance sheet of Nation Energy, Inc. as of March 31, 2006, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the years ended March 31, 2006 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 

 

We conducted our audits in accordance with 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 by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying 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 suffered recurring losses from operations, has no current source of operating revenues, and needs to secure financing to remain a going concern. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nation Energy, Inc. as of March 31, 2006, and the results of its operations, and its cash flows for the years ended March 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Stark Winter Schenkein & Co., LLP

 

Denver, Colorado

October 3, 2006

 

 

 

 

 

- 20 -

 

 

 

**Nation Energy, Inc.**

**Balance Sheet**

**March 31, 2006**

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

Cash

 

 

 

**$**

58,656 

Accounts receivable

 

 

 

62,081 

Prepaid expenses 

 

 

 

16,560 

Total current assets

 

 

137,297 

 

 

 

 

 

 

Oil and gas properties, net - full cost method

 

841,986 

 

 

 

 

 

 

 

 

 

 

$

979,283 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

 

 

 

 

 

 

Current liabilities: 

 

 

 

 

Accounts payable 

 

 

**$**

150,629 

Accounts payable and accrued expenses - related party 

244,976 

Loans payable - related party 

 

 

595,488 

Total current liabilities 

 

 

991,093 

 

 

 

 

 

 

Asset Retirement Obligation 

 

 

3,159 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' (deficit) 

 

 

 

 

Preferred stock, $.001 par value; 5,000,000 

 

 

shares authorized; none outstanding 

 

-

Common stock, $.001 par value; 50,000,000 

 

 

shares authorized; 16,020,000 shares issued 

 

and outstanding 

 

 

 

16,020 

Additional paid-in capital 

 

 

6,868,380 

Accumulated (deficit) 

 

 

(6,836,448)

Accumulated comprehensive income (loss):   

 

 

  Foreign currency translation 

 

 

(62,921)

 

 

 

 

 

(14,969)

 

 

 

 

 

 

 

 

 

 

$

979,283 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

- 21 -

 

 

**Nation Energy, Inc.**

**Statements of Operations**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Year Ended**

 

 

 

 

**March 31, 2006**

 

**March 31, 2005**

 

 

 

 

 

 

 

Revenue:

 

 

$

511,500

$

343,530

Direct expenses:

 

 

 

 

 

 

Royalties

 

 

 

21,552

 

91,328

Operating 

 

 

 

101,626

 

51,481

Impairment of oil and gas properties

 

 

555,085

 

-

Depletion and depreciation

 

 

103,894

 

-

 

 

 

 

782,157

 

142,809

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

(270,657)

 

200,721

 

 

 

 

 

 

 

General and administrative 

 

 

 

120,500

 

75,048

 

 

 

 

 

 

 

Income (loss) before other income (expense)

 

 

(391,157)

 

125,673

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

Interest expense

 

 

 

(98,713)

 

(90,377)

Interest income

 

 

 

1,099

 

151

 

 

 

 

 

 

 

Net income (loss)

 

 

 

(488,771)

 

35,447

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(75,376)

 

3,086

 

 

 

 

 

 

 

Comprehensive income (loss) 

 

 

$

(564,147)

$

38,533

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common

 

 

 

 

 

shares outstanding - basic and diluted

 

 

16,020,000

 

16,020,000

 

 

 

 

 

 

 

Net income (loss) per common share - basic and diluted

$

(0.03)

$

0.00

 

The accompanying notes are an integral part of these financial statements.

 

 

- 22 -

 

 

**Nation Energy, Inc.**

**Statement of Changes in Stockholders' Equity (Deficit)**

**For the Years Ended March 31, 2005 and 2006**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

Paid-in

Capital

 

Accumulated

Comprehensive

Income (loss)

 

 

 

Total

Stockholders'

Equity (Deficit)

 

 

 

Number of

Shares

 

Amount

 

 

 

Accumulated

(Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2004

 

 

16,020,000

$

16,020

$

6,868,380

$

9,369

$

(6,383,124)

$

510,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income 

 

 

-

 

-

 

-

 

3,086

 

-

 

3,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income 

 

 

-

 

-

 

-

 

-

 

35,447

 

35,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2005

 

 

16,020,000

 

16,020

 

6,868,380

 

12,455

 

(6,347,677)

 

549,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)               

 

 

-

 

-

 

-

 

(75,376)

 

-

 

(75,376)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)                                             

-

 

-

 

-

 

-

 

(488,771)

 

(488,771)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2006

 

 

16,020,000

$

16,020

$

6,868,380

$

(62,921)

$

(6,836,448)

$

(14,969)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

- 23 -

 

 

**Nation Energy, Inc.**

**Statements of Cash Flows**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Year Ended**

 

 

 

 

 

**March 31, 2006**

 

**March 31, 2005**

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

Net income (loss) 

 

 

$

(488,771)

$

35,447

Adjustments to reconcile net income (loss) to net cash

 

 

 

provided by operating activities:

 

 

 

 

 

Depletion and depreciation

 

 

103,894

 

-

Impairment of oil and gas properties

 

555,085

 

-

Changes in working capital:

 

 

 

 

 

Increase in accounts receivable

 

(6,162)

 

(55,919)

Decrease in prepaid expenses

 

 

12,187

 

1,345

Increase (decrease) in accounts payable

 

24,197

 

(61,992)

Increase in accounts payable - related party

46,979

 

124,499

Net cash provided by operating activities

 

247,409

 

43,380

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Additions to oil and gas properties

 

(233,783)

 

(17,200)

Net cash (used in) investing activities

 

(233,783)

 

(17,200)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Proceeds from loan payable - related party

296,700

 

-

Payments on loan payable - related party

 

(223,970)

 

-

Net cash provided by financing activities

 

72,730

 

-

Changes in cash due to foreign currency translation

 

(75,376)

 

3,086

 

 

 

 

 

 

 

 

Net increase in cash

 

 

 

10,980

 

29,266

 

 

 

 

 

 

 

 

Beginning balance, cash

 

 

47,676

 

18,410

 

 

 

 

 

 

 

 

Ending balance, cash

 

$

58,656

$

47,676

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

$

-

$

-

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

-

$

-

 

 

 

 

 

 

 

 

Non-cash financing and investing activities:

 

 

 

Asset retirement obligation asset

$

3,159

$

-

Asset retirement obligation

 

$

(3,159)

$

-

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

- 24 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Note 1.  Policies and Accounting Principles**

 

**Organization**

The Company was incorporated on April 19, 1988, in the State of Florida as Excalibur Contracting, Inc.  The Company was reincorporated as a Delaware corporation and changed its name to Nation Energy, Inc. in February 2000. On June 13, 2003, the Company reincorporated as a Wyoming corporation.  The Company is an oil and gas exploration, development and production company with properties located in Alberta Canada.  

**Cash and Cash Equivalents**

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

**Estimates**

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.  Actual results could differ from those estimates.

**Fair Value of Financial Instruments**

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2006.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.  These financial instruments include cash, accounts receivable, accounts payable and loans payable.  Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. 

**Net Income (Loss) Per Common Share**

The Company follows Statement of Financial Accounting Standards (SFAS) 128, “Earnings Per Share.”  Basic earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year.  Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding.  During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation.

 

 

 

- 25 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Oil and Gas Properties**

The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the acquisition, exploration for and development of oil and gas reserves, whether productive or unproductive, are capitalized.  Such expenditures include land acquisition costs, drilling, exploratory dry holes, geological and geophysical costs not associated with a specific unevaluated property, completion and costs of well equipment.  Internal costs are capitalized only if they can be directly identified with acquisition, exploration, or development activities.  As of March 31, 2006, the Company has not capitalized any internal costs.

Expenditures that are considered unlikely to be recovered are written off.  On a quarterly basis the Board of Directors assesses whether or not there is an asset impairment.  The current oil and gas exploration and development activities are considered to be in the production stage. 

The costs of unproved leases, which become productive, are reclassified to proved properties when proved reserves are discovered in the property. Unproved oil and gas interests are carried at original acquisition costs including filing and title fees.    Depreciation and depletion of the capitalized costs for producing oil and gas properties are provided by the units-of-production method based on proved oil and gas reserves.  During the years ended March 31, 2006 and 2005, the Company recognized depreciation and depletion expense of $103,894 and $0, respectively. 

**Impairment of Long-Lived Assets**

The Company periodically reviews the carrying amount of its oil and gas properties to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.  Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.

As of March 31, 2006, the Company obtained an independent reserve report which indicated the carrying value of the oil and gas properties exceeded their net realizable value by $555,085.  Accordingly, the Company recorded a reserve for impairment of $555,085 for the year ended March 31, 2006.  

**Segment Reporting**

The Company follows SFAS 131, “Disclosure about Segments of an Enterprise and Related Information”.  Certain information is disclosed, per SFAS 131, based on the way management organizes financial information for making operating decisions and assessing performance.  The Company currently operates in one business segment and will evaluate additional segment disclosure requirements as it expands operations.

 

 

 

- 26 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Stock-Based Compensation**

The Company accounts for stock based compensation in accordance with SFAS 123, "Accounting for Stock-Based Compensation." The provisions of SFAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company had elected to continue to apply APB 25 in accounting for its stock option incentive plans.

The Company has issued its common stock as compensation to non-employees.  The Company measures the amount of stock-based compensation as of the earlier of (1) the date at which an agreement is reached with the non-employee as to the number of shares to be issued for performance, or (2) the date at which the non-employees performance is complete. 

The Company has a stock based compensation plan whereby stock options are granted in accordance with the policies of regulatory authorities.  The Company had elected to apply the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”* (APB 25).  Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price the employee stock options is less than the market price of the underlying common stock on the date of grant.  Stock-Based compensation for employees is recognized on the straight-line basis over the vesting period of the individual options.  Stock options granted to non-employees are accounted for under SFAS No. 123 *“Accounting for Stock-Based Compensation”* (SFAS123), which establishes a fair value based method of accounting for stock-based awards, and recognizes compensation expense based on the fair value of the stock award or fair value of the goods and services received, whichever is more reliably measurable.

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), "Share Based Payments." SFAS 123(R) amends SFAS 123, “Accounting for Stock-Based Compensation,” and APB Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity’s shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity’s shares or other equity instruments.  Therewas no material affect on the financial statements.  

**Accounts Receivable**

The Company uses the direct write off method for bad debts. This method expenses uncollectible accounts when they become unrealizable.  Any difference between this method and the allowance method is not material.

 

 

 

- 27 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Revenue Recognition**

Revenues from the sale of oil and gas production are recognized when title passes, generally in the month of production.  

**Recent Pronouncements**

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3."  This Statement replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for, and reporting of, a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.

SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It will only affect the financial statements of the Company if there is a change any accounting principle. At this time, no such changes are contemplated or anticipated.

In February 2006, the FASB issues SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140." This amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”

This Statement:

 

a)

Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation

 

b)

Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133

 

c)

Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation

 

d)

Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives

 

e)

Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

This Statement is effective for all financial instruments acquired or issued after the first fiscal year that begins after September 15, 2006.  The Company is currently reviewing the effects of adoption of this statement but it is not expected to have a material impact on its financial statements.

 

 

 

- 28 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140," with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

 

1.

Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations.

 

2.

Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. 

 

3.

Permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. 

 

4.

At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. 

 

5.

Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. 

Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006.  The adoption of this statement is not expected to have a material impact on the Company's financial statements.

**Note 2.  Going Concern**

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.  The Company has incurred losses since inception of $6,836,448, has a working capital deficit of $853,796 and is reliant on raising capital to initiate its business plan.

The Company’s ability to continue as a going concern is contingent upon being able to secure financing and attain sustained profitable operations.  The Company is pursuing financing for its operations and is in the process of determining whether the Bolton Prospect has sufficient reserves to justify additional drilling.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

 

 

- 29 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Note 3.  Oil and Gas Properties**

On November 21, 2001, the Company entered into a farm-in agreement with Olympia Energy Inc. (succeeded by Churchill Energy Inc.)(the “Farm-in”) under which the Company will share the development costs and revenues for a natural gas project in the Smoky area near Grande Prairie, Alberta, Canada (the “Bolton Prospect”), which encompasses 5,760 acres.  Under the terms of the Farm-in, the Company will fund 25% of the costs of exploration and development and will earn a 15% interest after payout in the Bolton Prospect. 

On January 27, 2005, the Company entered into a farm-in agreement with Netco Energy Inc. (“Netco”) under which Netco will pay 100% of the costs related to the Company’s 15% working interest in the exploration and development of an exploratory well to earn 60% of the Company’s interest in two sections of land in the Bolton area of Alberta.  Netco will earn a 9% interest, after payout, in the well and the well spacing unit and one additional section of land.  Estimated gross drilling and casting costs are approximately $2,000,000.

The Company commenced production on the Bolton Prospect in fiscal 2005 on a restricted and interrupted basis and, accordingly, was still considered in the pre-production stage as at March 31, 2005.  During fiscal 2006, compression facilities were installed, permitting the wells to produce gas on an unrestricted and uninterrupted basis.  The Company obtained an independent reserve report as of March 31, 2006 which established proved reserves associated with the properties in accordance with SFAS 69.  Accordingly, the properties were reclassified from unproved to proved properties in fiscal 2006.  As a consequence of the establishment of proved reserves, the Company initiated recording depletion and depreciation expenses in fiscal 2006.

As a consequence of the independent reserve report, the Company determined that there was an impairment in its oil and gas properties and recognized an impairment loss of $555,085 for the year ended March 31, 2006.

The following table sets forth the capitalized costs and associated accumulated depletion and depreciation, including impairments, relating to the Company’s oil and gas production, exploration and development activities:

 

 

 

2006

 

2005

 

 

 

 

 

Exploration 

$

2,124,728

$

2,124,728

Development

 

1,743,980

 

1,510,197

Asset Retirement Obligation Costs

 

3,159

 

nil

Less Impairment

 

(2,925,987)

 

(2,370,902)

 

 

945,880

 

1,264,023

Accumulated depletion and depreciation

 

(103,894)

 

Nil

Oil and gas properties

 

 

 

 

Proven

$

841,986

 

 

Unproven

 

 

$

$1,264,023

 

 

 

 

 

 

 

 

 

- 30 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Note 4:  Asset Retirement Obligations**

The Company’s asset retirement obligations result from net ownership interests in oil and gas properties including well sites, gathering systems and processing facilities.  

SFAS 143 “Accounting for Asset Retirement Obligations” requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset.  The cost of the tangible asset, including the initially recognized ARO, is depleted such that the cost of the ARO is recognized over the useful life of the asset.  The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.  The value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate.  

The Company records an abandonment liability associated with its oil and gas wells when those assets are placed in service.  An ARO liability of $3,159 was recognized in 2006 as the Company placed wells in service for the first time. 

The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $14,000.  The majority of the costs will be incurred after 2018.  An inflation factor of 1.5% has been applied to the estimated assets retirement cost.  A credit-adjusted, risk-free rate of 10% was used to calculate the fair value of the asset retirement obligations.  

The asset retirement obligation liability is as follows: 

 

Asset retirement obligation, as at March 31, 2005

$

Nil 

Liabilities incurred

 

Nil 

Accretion expense

 

3,159 

Asset retirement obligation, as at March 31, 2006

$

3,159 

**Note 5.  Stockholders’ Equity (Deficit)**

**Equity Incentive Plan**

On May 6, 1999 the Board of Directors adopted a stock option plan (“The Plan”) which was subsequently approved by over 50% of our shareholders.  The Plan allows for the issuance of incentive stock options to employees, consultants, directors, and others providing service of special significance to our company.  The Plan is administered by the Board of Directors.  The Plan provides for the issuance of up to 2,500,000 options.  The exercise price of each option shall be determined by the Board or by the CEO with reference to such factors as current fair market value of the common stock, net book value per share, other remuneration already being received by the optionee.  No option may be exercised more than five years from the date of grant and they vest on the date granted.  The Plan does not have an expiry date.  

On February 26, 2003, options to purchase a total of 225,000 shares of Common Stock at an exercise price of $0.10 per share were granted to two officers pursuant to the Plan.  Subsequently, on January 20, 2004, the Company cancelled 150,000 share options previously granted to one of the officers.  The Company’s Common Stock was trading at $0.115 per share on the date of the grant.  The fair value of the options was estimated on the date of the grant utilizing the Black-Scholes option pricing model with the following weighted average assumptions: expected life of the options of 5-years, expected volatility of 114.65%, risk-free interest rate of 4.2%, and no dividend yield.  The weighted average fair value for the options granted was approximately $0.12 per share.  

 

 

 

- 31 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

The changes in the outstanding stock options during the years ended March 31, 2006 and March 31, 2005 are summarized as follows:

 

 

 

March 31, 2006

March 31, 2005

 

 

Weighted

 

Weighted

 

 

Average

 

Average

 

 

Exercise

 

Exercise

 

Shares

Price

Shares

Price

Beginning of period

75,000

$0.10

75,000

$0.10

Granted

nil

 

nil

 

Exercised

nil

 

nil

 

Expired

-

 

-

 

End of period

75,000

$0.10

75,000

$0.10

At March 31, 2006, the weighted average remaining contractual life for the options is 1.9 years.  The options expire on February 26, 2008.

**Note 6.  Income Taxes**

The Company accounts for income taxes under SFAS 109, "Accounting for Income Taxes", which requires use of the liability method.  SFAS 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.  Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.

The provision (benefit) for income taxes consists of the following components:

 

 

 

 

March 31,

 

 

 

 

2006

 

 

2005

 

Current

 

$

---

 

$

---

 

Deferred

 

$

---     

 

$

---     

 

 

The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:

 

 

 

- 32 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

 

 

 

March 31,

 

 
 

 

2006

 

2005

 

Deferred tax assets:

 

 

 

 

 

Net operating loss carryforwards

$

1,726,600

$

1,723,500

 

 

 

 

 

 

 

Less valuation allowance

 

(1,726,600)

(1,723,500)

 

$

---

$

---

 

A reconciliation of the statutory U.S. federal rate and effective rates is as follows:

 

Statutory U.S. federal rate

34.00%

State income taxes

---%

Total

34.00%

 

The Company’s provision for income taxes differs from applying the statutory United States federal income tax rate to income before income taxes. The primary differences result from net operating losses.  

The net operating loss carryforward will expire through 2026.  The deferred tax asset has been fully reserved at March 31, 2006.  The change in the valuation allowance during the year ended March 31, 2006 was $3,100.

**Note 7.  Related Party Transactions**

**(a) Administrative Services Agreement**

During March 2002, the Company entered into a verbal agreement with a related party in which the related party will provide administrative services on a month-to-month basis.  Total expenses recognized under this agreement for the years ended March 31, 2006 and 2005 were $51,360 and $38,520 respectively.

**(b) Loans Payable – Related Party**

On July 7, 2005, the Company entered into a revised loan agreement with a related party and borrowed an additional $CDN$250,000 (US$203,932).  The loan bears interest at 15% per annum and is payable quarterly.  Any principal amount outstanding under the loan is payable upon demand.  The loan is payable in Canadian dollars and is secured by a Promissory Note.  As of March 31, 2006, the balance of the loan payable was $595,488. Accrued interest payable related to this loan and prior loans since 2003 was $244,976 at March 31, 2006.  

 

 

 

- 33 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Note 8.  Disclosures about Oil and Gas Producing Activities**

**Oil and Gas Operations**

The following table sets forth the revenue and direct cost information relating to the Company’s oil and gas production activities since the commencement of production in fiscal 2006:

 

 

**2006**

 

 

Production revenues

$511,500

 

 

Direct operating expenses

 

Royalties

21,552

Operating expenses

101,626

Depletion and depreciation

103,894

Results of operations

$284,428

 

 

Amortization rate per boe

$17.32

 

**Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities.**

The following table sets forth the costs incurred in the Company’s oil and gas property acquisition, exploration and development activities:

 

 

 

**2006**

 

**2005**

 

 

 

 

 

Property acquisition

$

Nil

$

Nil

Exploration

 

Nil

 

Nil

Development

 

233,783

 

17,200

 

 

233,783

 

17,200

Asset retirement obligation costs

 

. 3,159

 

. Nil

Costs incurred

$

236,942

$

17,200

**Capitalized Costs**

The following table sets forth the capitalized costs and associated depletion and depreciation, including impairments, relating to the Company’s oil and gas production, exploration and development activities:

 

 

 

**2006**

 

**2005**

 

 

 

 

 

Unproved properties

$

Nil

$

1,264,023

Proved properties

 

945,880

 

Nil

Less: Accumulated depletion and 

 

 

 

 

depreciation

 

103,894

 

.  Nil

 

$

841,986

$

1,264,023

 

 

 

 

 

- 34 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Note 9.  Supplemental Oil And Gas Disclosures (Unaudited)**

**Reserve Information**

The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in Canada.

Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods.  Proved developed reserves have been evaluated in accordance with SEC Guideline 2 and SFAS 69.  

The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.

The following table illustrates the Company’s net proved reserves, including changes, and proved developed reserves for the year ended March 31, 2006, as estimated by independent petroleum engineers:

 

 

Oil 

(Mbbls)

Gas 

(MMcf)

Proved developed reserves

 

 

Beginning of year

Nil

Nil

Revisions of previous estimates

-

-

Extensions, discoveries and other additions

Production

3.1

 

(0.2)

500.3

 

(34.3)

End of year

2.9

466.0

 

 

 

 

- 35 -

 

 

**Nation Energy Inc.**

Notes to Financial Statements

March 31, 2006

 

**Standardized Measure of Discounted Future Net Cash Flows at March 31, 2006**

 

 

 

**$000s**

Future cash inflows

$  2,927

Future production costs

(1,278)

Future development costs

--

Future income tax expenses

--

Future net cash flows

1,649

10% annual discount for

 

estimated timing of cash flows

(810)

 

$839

 

There were no reserves at March 31, 2005; therefore there are no changes in standardized measures of discounted future net cash flows relating to proved oil and gas reserves.  

 

 

 

- 36 -

 

 

 

**Item 8.**

**Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.**

Not applicable.

**Item 8A.  Controls and Procedures**

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, being March 31, 2006, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our management, including our president and chief financial officer.  Based upon that evaluation, our president and chief financial officer****concluded that our  disclosure controls and procedures are effective as at the end of the period covered by this report.  There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. 

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

**PART III**

**Item 9.**    **Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.**

**DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**

*Directors and Executive Officers*

All directors of our company hold office until the next annual meeting of the shareholders or until their successors have been elected and qualified.  The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office.

As at November 28, 2006, our directors and executive officers, their ages, positions held, and duration of such, are as follows:

 

**Name**

**Position Held with our Company**

**Age**

**Date First****Elected or Appointed**

John R. Hislop

Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, Secretary and Director

53

June 4, 1999

 

*Business Experience*

The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee, indicating the principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.

 

 

 

- 37 -

 

 

*John R. Hislop, chairman of the board, president, chief executive officer, chief financial officer, secretary and director*

Mr. Hislop has been the president and chief executive officer of our company since October 22, 2003 and the chairman, chief financial officer, secretary and a director of our company since June 1999.  Since 1990, Mr. Hislop has been working as an independent financial consultant and has served as an officer and director of various emerging growth companies.  He is currently a director of Q Investments Ltd. (formerly named Cubix Investments, Ltd.), a holding company for various public oil and gas and internet companies, and has been a director since February 1994 and served as president of Q Investments Ltd. (formerly Cubix Investments, Ltd.) from February 1994 to February 2001.  He iscurrently director of Exxel Energy Corp. since October 15 2001 and Chairman of the Board of Exxel Energy Corp. since July 27, 2006; served as..President and CEO of Exxel Energy Corp. from October 15, 2001 to July 27, 2006.and served as CFO of Exxel Energy Corp. from October 15, 2001 to October 2, 2003.  Mr. Hislop is also a Director of Patriot Petroleum Corp. since April 7, 1999 and President and CEO of Patriot Petroleum Corp. since October 22, 2003; President and Director of Warrior Energy N.V. (formerly Luxmatic Technologies N.V) since October 6, 1997 and CEO of Warrior Energy N.V. since November 3, 2003.    In the past five years Mr. Hislop has also been a director of the following companies: Gemini Energy Corp. from March 1995 to June 27, 2002 (Mr. Hislop also served as president from March 1997 to January 1998), Ultra Petroleum Corp. from March 1993 to January 2001 (Mr. Hislop also served as president from March 1993 to May 1996, chief financial officer from May 1996 to September 1998), Rio Amarillo Mining Ltd. from December 1993 to April 1994 (Mr. Hislop also served as Secretary and CFO from December 1993 toApril 1994), Spectrum Resources, Ltd. from September 1996 to November 1997, KinYSIS Pharmaceutical, Inc. from July 1997 to October 1997 (Mr. Hislop also served as president, secretary, chief executive officer and chief financial officer from July 1997 to August 1997), Ultra Holdings Inc. from July 1999 to October 2001 (Mr. Hislop also has served as president from July 1999 to October 2001), Zconnexx Corporation (formerly known as Capital Charter Corp.) from November 1998 to May 2000, Netco Energy Inc. (formerly known as Green River Holdings Inc. and Green River Petroleum, Inc.) from June 1999 to June 17, 2004.  Mr. Hislop trained as a Chartered Accountant with Ernst & Young and has a bachelor of Commerce in Finance from the University of British Columbia.  

*Committees of the Board*

We do not have an audit or compensation committee at this time.

*Family Relationships*

There are no family relationships between any of our directors or executive officers.

*Involvement in Certain Legal Proceedings*

Other than as discussed below, none of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:

- any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

- any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

- being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

- being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

 

 

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*Audit Committee Financial Expert*

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

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

*Section 16(a) Beneficial Ownership Compliance*

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively.  Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.

To the best of our knowledge, all executive officers, directors and greater than 10% shareholders filed the required reports in a timely manner.

*Code of Ethics*

Effective July 13 2004, our company's board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our company's officers including our president (being our principal executive officer) and our company's chief financial officer (being our principal financial and accounting officer), contractors, consultants and advisors.  As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

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

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

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

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

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

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

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by 

 

 

 

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witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company's president or secretary.  If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president or secretary, the incident must be reported to any member of our board of directors.  Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter.  It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics was filed with the Securities and Exchange Commission as Exhibit 14.1 to our annual report on Form 10-KSB filed on July 15, 2004.  We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request.  Requests can be sent to: Nation Energy Inc., Suite 1100 - 609 West Hastings Street, Vancouver, British Columbia, V6B 4W4.

**Item 10.**

**Executive Compensation.**

The following table summarizes the compensation paid to our president and chief executive officer during the last fiscal year.  No other officers or directors received annual compensation in excess of $100,000 during the last three complete fiscal years.

  

  

**Annual Compensation**

**Long Term****Compensation(1)**

**Pay-****outs**

**Name and Principal****Position**

**Year**

**Salary**

**Bonus**

**Other****Annual****Compen-****sation(1)**

**Securities****Under****Options/****SAR's****Granted**

**Restricted****Shares or****Restricted****Share Units**

**LTIP****Pay-****outs**

John Hislop(2)President, Chief Executive Officer, Secretary, Chief Financial Officer and Director

200620052004

NilNilNil

NilNilNil

N/AN/AN/A

NilNilNil

NilNilNil

NilNilNil

(1)  The value of perquisites and other personal benefits, securities and property for the named executive officers that do not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus is not reported herein.

(2) Mr. Hislop was appointed the president and chief executive officer of our company on October 22, 2003.

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

*Employment or Consulting Agreements*

We have not entered into any employment or consulting agreements with any of our current officers, directors or employees.

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that our directors and executive officers may receive stock options at the discretion of our board of directors.  Other than the management agreements discussed above, we do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors.

 

 

 

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*Stock Options/SAR Grants*

There were no stock options or stock appreciation rights made during the fiscal year ended March 31, 2006.

*Stock Options/SAR Exercise*

There were no stock options or stock appreciation rights exercised during the fiscal year ended March 31, 2006.

*Long-Term Incentive Plans*

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that our directors and executive officers may receive stock options at the discretion of our board of directors.  We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors.

We have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $60,000 per executive officer.

*Directors Compensation*

We reimburse our directors for expenses incurred in connection with attending board meetings but did not pay director's fees or other cash compensation for services rendered as a director in the year ended March 31, 2006. 

No cash compensation was paid to any of our directors for the director's services as a director during the fiscal year ended March 31, 2006.  We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors except for the granting from time to time of incentive stock options.  The board of directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director.  Other than indicated below, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.

**Item 11.**         **Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.**

*Principal Stockholders*

The following table sets forth, as of November 28, 2006, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock, as well as by each of our current directors and executive officers.  Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated.  Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

 

**Name and Address of Beneficial Owner**

**Amount and Nature of****Beneficial Ownership(1)**

**Percentage****of Class(1)**

*Jayco Investments(2)**Palm Court, 28 Pine Road  Belleville, St, Michael**Barbados*

*11,010,000*

*68.7%*

 

 

 

 

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*John Hislop**1589 Marpole Avenue**Vancouver, BC  V6J 2R9*

*75,000(3)*

**%*

 
*Directors and Executive Officers as a Group*

*11,085,000(3)***

*68.7%*

 
 
*Less than 1%

(1)    Based on 16,020,000 shares of common stock issued and outstanding as of November 28, 2006.  Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

(2)  Jayco Investments  is a private company, wholly-owned by John Hislop, our chairman, president, chief executive officer, chief financial officer, secretary and director.

(3)  Includes options to acquire an aggregate of 75,000 shares of common stock, exercisable within sixty days.

**Item 12.**

**Certain Relationships and Related Transactions.**

Except as otherwise indicated below, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $60,000, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holder, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest. 

We receive administrative services and back office support under an oral administrative service agreement with Caravel Management Corp., pursuant to which we are charged CAD$3,000 per month. Caravel Management Corp. is a private management company that is wholly-owned by John Hislop, our chairman, president, chief executive officer, secretary and chief financial officer.  The agreement with Caravel Management Corp. is on a month to month basis. 

We have borrowed $595,488 under a loan agreement with Caravel Management Corp.  The loan bears interest at 15% per annum and is payable quarterly.  Any principal amount outstanding under the loan is payable upon demand.  The loan in payable in Canadian dollars and is secured by a Promissory Note. 

**Item 13.**

**Exhibits**

*Exhibits Required by Item 601 of Regulation S-B*

**Exhibit Number and Description**

**(3)**

**Articles of Incorporation/Bylaws**

3.1          Certificate of Incorporation (incorporated by reference from our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 31, 2000) 

3.2          Certificate of Amendment of Certificate of Incorporation (incorporated by reference from our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 31, 2000)

 

 

 

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3.3          Bylaws (incorporated by reference from our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 31, 2000)

3.4          Certificate of Merger (Delaware) effective June 12, 2003 (incorporated by reference from our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on June 30, 2003)

3.5          Certificate of Merger (Wyoming) effective June 13, 2003 (incorporated by reference from our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on June 30, 2003)

**(10)**

**Material Contracts**

10.1         1999 Stock Option Plan (incorporated by reference from our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 31, 2000)

10.2         Farm-in Agreement with Olympia Energy Inc., dated November 21, 2001 (incorporated by reference from our Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on February 14, 2002).

10.3         Agreement with Netco Energy Inc. dated January 10, 2005 (incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 28, 2005).

**(14)**

**Code of Ethics**

14.1        Code of Business Conduct and Ethics (incorporated by reference from our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on July 15, 2004).

**(31)**

**Section 302 Certifications**

31.1*

Section 302 Certification under Sarbanes-Oxley Act of 2002

**(32)**

**Section 906 Certifications**

32.1*

Section 906 Certification under Sarbanes-Oxley Act of 2002 

*Filed herewith

**Item 14.  Principal Accountants Fees and Services**

*Audit Fees*

The aggregate fees billed by Stark Winter Schenkein & Co. LLP for professional services rendered for the audit of our annual financial statements included in our Annual Report on Form 10-KSB for the fiscal years ended March 31, 2006 and for the review of quarterly financial statements included in our Quarterly Reports on Form 10-QSB for the quarters ending June 30, 2005, September 30, 2005 and December 31, 2005 were $17,400.

*Audit Related Fees*

For the fiscal years ended March 31, 2006 and 2005, the aggregate fees billed for assurance and related services by Stark Winter Schenkein & Co. LLP relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above, was $nil.

*Tax Fees*

For the fiscal years ended March 31, 2006 and 2005, the aggregate fees billed by Stark Winter Schenkein & Co. LLP for other non-audit professional services, other than those services listed above, totalled $1,800.  

 

 

 

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We do not use Stark Winter Schenkein & Co. LLP for financial information system design and implementation.  These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally or by other service providers.  We do not engage Stark Winter Schenkein & Co. LLP to provide compliance outsourcing services.

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before Stark Winter Schenkein & Co. LLP is engaged by us to render any auditing or permitted non-audit related service, the engagement be:            

**•**              approved by our audit committee (which consists of John Hislop); or

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

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

The audit committee has considered the nature and amount of fees billed by Stark Winter Schenkein & Co. LLP and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Stark Winter Schenkein & Co. LLP's independence.

 

 

 

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**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.

**NATION ENERGY INC.**

 

 

By:  /s/ John R Hislop
John Hislop, President, Chief Executive Officer, 

Chief Financial Officer, Secretary,and Director 

(Principal Executive Officer, Principal Financial Officer 

and Principal Accounting Officer)

 

 

Date:  

November 7,  2006

 

 

CW907709.1

 

 

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