<PAGE>

================================================================================

                      Securities and Exchange Commission
                            Washington, D.C. 20549

                                   _________

                                   FORM 10-K
                                   _________

[X]  Annual

     For the fiscal year ended December 31, 1999

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from ___________ to ___________

Commission file number: 0--24027

                       PINNACLE OIL INTERNATIONAL, INC.
            (Exact name of registrant as specified in its charter)

                Nevada                                  61-1126904
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

Suite 750 Phoenix Place, 840-7/th/ Avenue, S.W., Calgary, Alberta, Canada T2P
                                      3G2
              (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (403) 264-7020

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $0.001 per share
                               (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 2000 was approximately $337,396,000 based upon the
closing price per share of the registrant's common stock of $38 on that date.
The number of shares outstanding of the registrant's common stock as of March
28, 1999: 12,870,016 shares

                      Documents Incorporated By Reference

Information required by Part III (Items 10, 11, 12 and 13) is incorporated into
this annual report by reference to the registrant's definitive proxy statement
to be disseminated in advance of its annual meeting of stockholders to be held
later in 2000.

================================================================================
<PAGE>

                               Table Of Contents

<TABLE>
<CAPTION>
                                                                                                                        Page
                                                                                                                        ----
<S>                                                                                                                     <C>
Item 1.           Business............................................................................................   1
-------           --------
                  Overview............................................................................................   1
                  --------
                  Our Corporate History...............................................................................   1
                  ---------------------
                  Status Of Our Exploration Efforts...................................................................   2
                  ---------------------------------
                  Corporate Objective.................................................................................   4
                  -------------------
                  Theoretical Basis Of SFD Technology.................................................................   5
                  -----------------------------------
                  Operational Practices In Conducting SFD Surveys.....................................................   6
                  -----------------------------------------------
                  Our Business And Geographic Segments................................................................  11
                  ------------------------------------
                  Joint Venture Partners..............................................................................  11
                  ----------------------
                  Competition.........................................................................................  15
                  -----------
                  Employees...........................................................................................  15
                  ---------
                  Research and Development............................................................................  16
                  ------------------------
                  Manufacturing Capacity and Suppliers................................................................  16
                  ------------------------------------
                  Governmental And Environmental Regulation...........................................................  16
                  -----------------------------------------
                  Operating Hazards...................................................................................  16
                  -----------------
                  Our SFD Technology License..........................................................................  17
                  --------------------------
                  We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD
                  ------------------------------------------------------------------------------
                  Technology..........................................................................................  20
                  ----------
Item 2.           Properties..........................................................................................  20
-------           ----------
                  Leased Premises.....................................................................................  20
                  ---------------
                  Petroleum Properties................................................................................  20
                  --------------------
Item 3.           Legal Proceedings...................................................................................  22
-------           -----------------
Item 4.           Submission Of Matters To A Vote Of Securities Holders...............................................  22
-------           -----------------------------------------------------
Item 5.           Market Price Of And Dividends On Our Common Stock And Related Stockholder Matters...................  22
-------           ---------------------------------------------------------------------------------
                  Market Information..................................................................................  22
                  ------------------
                  Dividend Policy.....................................................................................  23
                  ---------------
Item 6.           Selected Consolidated Financial Information.........................................................  23
-------           -------------------------------------------
Item 7.           Management's Discussion And Analysis Of Financial Condition And Results Of Operations...............  25
-------           -------------------------------------------------------------------------------------
                  Overview............................................................................................  25
                  --------
                  Capital Requirements................................................................................  26
                  --------------------
                  Results Of Consolidated Operations..................................................................  27
                  ----------------------------------
                  Liquidity And Capital Resources.....................................................................  30
                  -------------------------------
                  Other Matters.......................................................................................  31
                  -------------
                  Uncertainties And Risk Factors That May Affect Our Future Results And Financial
                  -------------------------------------------------------------------------------
                  Condition...........................................................................................  32
                  ---------
Item 7A.          Quantitative and Qualitative Disclosure About Market Risk...........................................  42
--------          ---------------------------------------------------------
                  Oil And Gas Price Fluctuations......................................................................  42
                  ------------------------------
                  Oil And Gas Price Fluctuations......................................................................  43
                  ------------------------------
                  Currency Fluctuations...............................................................................  43
                  ---------------------
                  Interest Rate Fluctuations..........................................................................  43
                  --------------------------
Item 8.           Financial Statements And Supplementary Data.........................................................  44
-------           -------------------------------------------
Item 9.           Changes In And Disagreements With Accountants On Accounting And Financial Disclosure................  44
-------           ------------------------------------------------------------------------------------
Item 10.          Our Directors And Executive Officers................................................................  44
--------          ------------------------------------
Item 11.          Executive Compensation..............................................................................  44
--------          ----------------------
Item 12.          Ownership Of Our Securities by Beneficial Owners And Management.....................................  44
--------          ---------------------------------------------------------------
Item 13.          Certain Relationships And Related Transactions......................................................  44
--------          ----------------------------------------------
Item 14.          Exhibits, Financial Statements, Schedules And Reports On Form 8--K..................................  45
--------          ------------------------------------------------------------------
</TABLE>
                                     -ii-
<PAGE>

The information set forth in Item 1 of this annual report, captioned "Business,"
is current as of April 14, 2000, unless an earlier or later date is indicated in
such section. The information set forth in the sections of this annual report
other than Item 1 is current as of December 31, 1999, unless an earlier or later
date is indicated in those sections.

All references to "dollars" in this prospectus refer to United States, or U.S.,
dollars unless specific reference is made to Canadian, or Cdn., dollars. For
information relative to rates of exchange and currency conversion, see note 2(l)
to our consolidated financial statements.

                                    Part I

Item 1.   Business

Overview

Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle") is a
technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We are a publicly traded company whose common stock trades
over-the-counter on the NASD Electronic Bulletin Board under the symbol "PSFD."
Our principal executive offices are located at Suite 750, Phoenix Place, 840 7th
Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403)
264-7020.

We use our SFD technology to survey or reconnoiter large exploration areas from
our survey aircraft at speeds in excess of 150 mph to identify and "high-grade"
leads for further evaluation and potential drilling. Our SFD technology is a
recently developed technology which we adapted for airborne survey operations,
and field tested for independent geologists and our joint venture partners, in
1996 and 1997. We commenced SFD survey activities on a full commercial basis for
our joint venture partners in early 1998.

Our SFD technology affords us the relatively inexpensive ability to obtain near
real-time analysis and interpretation of potential hydrocarbon accumulations in
a matter of days or weeks, as compared to months and in some cases years in the
case of the seismic methods currently employed by the oil and gas exploration
industry for wide area exploration or reconnaissance. These cost and time
advantages will ultimately enable us to effectuate potentially significant
reductions in oil and gas exploration "finding costs." Finding costs include the
cumulative costs of acquiring seismic, purchasing mineral rights, and drilling
and completing exploration wells. The ability to reduce finding costs is an
extremely important financial factor in the oil and gas industry, insofar as low
finding costs represent a measure of an oil and gas company's ability to
effectively and efficiently find new reserves, as well as generate cash flow.

Our Corporate History

We were initially incorporated in Nevada on September 27, 1994 under the name
"Auric Mining Corporation." In January 1996, we acquired all of the common stock
of Pinnacle Oil Inc., a Nevada corporation, from its stockholders in exchange
for our common stock. As a consequence of this transaction, Pinnacle Oil Inc.,
whom we refer to as "Pinnacle U.S.," became our wholly-owned subsidiary and its
stockholders acquired a 92% controlling interest in our common stock. Prior to
this transaction we were a corporate shell conducting no active business, and
Pinnacle U.S. was a development stage research and development enterprise
holding world-wide rights to use what is now our SFD technology for hydrocarbon
exploration purposes. Immediately after this transaction we changed our name to
"Pinnacle Oil International, Inc."

                                      -1-
<PAGE>

Status Of Our Exploration Efforts

We conduct our reconnaissance exploration activities, as well as land
acquisition, drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two wholly-owned operating
subsidiaries. Our first subsidiary, Pinnacle U.S., focuses on United
States-based exploration. Our second subsidiary, Pinnacle Oil Canada, Inc., whom
we refer to as "Pinnacle Canada," focuses on Canadian-based exploration.
Pinnacle, in turn, concentrates on research and development efforts to improve
the efficacy of our SFD Survey System.

Our United States exploration efforts to date have been focused on the Greater
Green River Basin in Wyoming and the Williston Basin in North Dakota. These
exploration activities have been conducted under a joint exploration and
development agreement with CamWest Exploration LLC, a Colorado-based exploration
company. Under this agreement we conduct aerial surveys to identify prospects in
exploration areas in the United States selected by CamWest.

Our Canadian exploration efforts to date have been focused on southern Alberta,
northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The
majority of these exploration activities have been conducted under an
exploration joint venture agreement with Encal Energy Ltd., a Calgary-based
exploration and production company. Under this agreement we conduct aerial
surveys to identify prospects in exploration areas in Canada selected by Encal.
We have also recently commenced conducting exploration activities in western
Canada for our own account. We anticipate developing these prospects through
a joint venture with either Encal or another Canadian exploration company.

From the inception of our commercial airborne survey activities in mid-1997
through the date of this annual report, we have:

 .   flown over:

       .  60,000 linear survey miles in 20 separate exploration areas in the
          United States and Canada for our joint venture partners, and

       .  2,500 linear survey miles in an separate exploration area in Canada
          for our own account; and

 .   tendered 81 prospects which we believe to have commercial potential to our
     joint venture partners for further geological and geophysical evaluation as
     a result of our analysis and interpretation of SFD Data acquired during
     these flights.

Of the 81 prospects we have tendered to our joint venture partners:

 .   25 prospects have been accepted by our joint venture partners for
     acquisition and drilling upon completion of their geological and
     geophysical evaluation.

 .   seven prospects have been designated as "key tracts" by our joint venture
     partners for future drilling based upon long-term considerations such as
     land availability;

 .   nine prospects have been rejected by our joint venture partners and have
     either reverted to Pinnacle for our own account or will be jointly
     exploited by Pinnacle and the joint venture partner pursuant to the terms
     of the joint venture agreement; and

 .   the balance of the tendered prospects remain subject to acceptance pending
     completion of geological and geophysical evaluation, land acquisition or
     other considerations.

Of the 25 prospects that have been accepted by our joint venture partners:

                                      -2-
<PAGE>

 .   One exploration well spudded in early 1999 by a third-party operator at
     Shoal Point, Newfoundland, was drilled directionally to an unknown bottom
     hole target, evaluated, and abandoned as being uneconomic. Pinnacle
     Canada elected a royalty interest through Encal with respect to this
     prospect.

 .   One exploration well spudded in September 1999 by a third-party operator at
     our Leucite Hills South prospect in Wyoming, was drilled, cased and
     completed in September 1999 as a natural gas discovery. This well will not
     be placed into production by the operator, however, until a sufficient
     number of additional wells are drilled on the exploratory block and can be
     tied into a gathering system. Pinnacle U.S. elected a combination working
     interest and overriding royalty interest with respect to this prospect.

 .   One exploration well spudded by CamWest in October 1999 at our Poblano
     prospect in Wyoming, was drilled, cased and completed in January 2000 as a
     natural gas discovery, and production will commence upon completion of a
     twelve-mile pipeline that will tie the well into a sales system. CamWest
     spudded a step-out exploratory well on this prospect in March 2000, which
     is still in the process of being drilled as of the date of this annual
     report. Pinnacle U.S. elected a combination working interest and overriding
     royalty interest with respect to this prospect.

 .   One exploration well spudded by a third-party operator in October 1999 at
     our Poblano South prospect in Wyoming, was drilled, cased and completed in
     January 2000. This well has been shut-in by the operator pending further
     evaluation of its completion program. Pinnacle U.S. elected a combination
     working interest and overriding royalty interest with respect to this
     prospect.

 .   One exploration well spudded in December 2000 by Encal at our Carbon
     prospect in southern Alberta, was drilled, cased and completed in January
     2000 as a natural gas discovery. This well is currently suspended pending
     further completion activity by the operator. Pinnacle Canada elected an
     overriding royalty interest with respect to this prospect.

 .   One exploration well spudded in March 2000 by Encal at our Monarch prospect
     in southern Alberta. This well is currently cased and awaiting completion.
     Pinnacle Canada elected a combination working interest and overriding
     royalty interest with respect to this prospect.

 .   Drilling rights for the balance of the prospects have either been acquired
     and exploration wells are scheduled for drilling at a future date, or
     remain in the process of being acquired. We anticipate that two to four
     exploration wells will be spudded on these prospects by our joint venture
     partners or third-party operators by June 30, 2000. As of the date of this
     annual report, our joint venture partners have acquired drilling rights for
     fourteen of those prospects.

The joint venture agreements we have entered into with our joint venture
partners generally entitle us to elect to receive one of the two following
payment streams for each SFD-identified prospect accepted and drilled under the
applicable agreement:

 .   A capital investment and generally risk-free overriding royalty of 5% to 8%
     of oil or natural gas revenues received by the joint venture partner with
     respect to the prospect. In any situation where we elect to receive this
     royalty, our joint venture partner will be responsible, at its own cost and
     risk, to acquire the necessary drilling rights for the prospect if it has
     not already done so, and to conduct all drilling, production and marketing
     activities necessary to exploit the prospect.

 .   A working interest of up to 45% of the joint venture partner's net revenues
     with respect to the prospect. In any situation where we elect to
     participate on a working interest basis, we must bear our share of the
     acquisition of mineral and drilling rights (if necessary), drilling and
     production costs incurred with respect to the prospect based upon our
     working interest percentage. Although we will bear our share of these
     costs, our joint venture partner will nevertheless remain responsible for
     conducting and managing all drilling, production and marketing activities
     to exploit the prospect.

                                      -3-
<PAGE>

Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty.

Our U.S. joint venture partner is also required under the terms of its joint
venture agreement to reimburse us for 100% of the expenses we incur in
conducting aerial surveys for that partner, while our Canadian joint venture
partner is required under the terms of its joint venture agreement to reimburse
us for 50% of the expenses we incur in conducting aerial surveys for that
partner.

Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum a fee equal to 1% of any "prospect
profits" which we may receive on or before December 31, 2000, and 5% of any
prospect profits which we may receive after December 31, 2000. Momentum is
controlled and indirectly owned by two of our significant stockholders, both of
whom currently serve as our directors and one of whom currently serves as one of
our executive officers.

Since we have not generated operating revenues to date, we should be considered
a development stage enterprise. Although we have sufficient working capital as
of December 31, 1999 to fund our current level of operations for several years
assuming we make minimal investments in petroleum properties, our ability to
continue as a going concern in the longer term will nevertheless be dependent
upon our ability, either through our joint venture arrangements or for our own
account, to successfully identify hydrocarbon bearing prospects, and to finance,
develop, extract and market oil and natural gas from these prospects for a
profit. We anticipate that we will continue to incur further operating losses
until such time as we receive revenues from our joint venture partners with
respect to prospects currently in the development stage, or through prospects we
identify and exploit for our own account.

Corporate Objective

Our corporate objective is to become an industry leader in technology-driven oil
and gas exploration. Utilizing our unique and exclusive SFD technology, we can
provide to our joint venture partners competitive advantages not seen in the
exploration business. We anticipate that we will attain our corporate objective
through the following evolutionary steps:

 .   In the short-term we will continue to work with our joint venture partners
     to explore the sedimentary basins they request we survey. Our primary
     interest at this stage of our development is to focus on drilling results
     to prove our SFD technology, while participating in a sufficient number of
     exploratory wells on a working interest basis to demonstrate our commitment
     to our technology. Budgetary considerations permitting, we will participate
     in drilling activities on either a pure working interest basis up to our
     permitted 45% where we are willing to accept higher risk in order to earn
     higher returns, or a combination working interest/overriding royalty basis
     where we desire to participate on a lower percentage basis. In other
     circumstances we will not participate, and will instead be paid an
     overriding royalty on production revenue. All of these projects will allow
     us to not only establish a statistical drilling track record for our SFD
     technology, but enable us to build cash flow to further fund our
     exploration drilling and research & development programs.

 .   In the longer term once the value of our SFD technology has been
     demonstrated to the oil and gas industry, we will adopt a strategy to
     accomplish the following objectives:

       .   promote the expeditious acquisition and drilling of SFD Prospects;

       .   maximize the return on our investment while minimizing risk
           associated with direct investments in oil and gas drilling projects;
           and

       .   enable us to have a greater degree of control and influence over
           strategic project decisions, while at the same time not becoming
           bogged down in drilling, production and marketing operational issues.

     While we anticipate that we will continue to participate in projects with
     third party exploration companies, we anticipate that the economics of
     investment or the underlying arrangements will change as follows:

       .   we will either invest in the same way as we currently invest--i.e.,
           on a straight working interest or royalty participation basis or a
           combination of the two depending upon capital investment
           requirements, potential reserve size, geographic location, risk
           levels, project completion times and parties involved--although we
           would expect that our working interest and royalty percentages would
           be increased; or

       .   we will engage independent drilling, production and marketing
           companies on a contract basis.

We anticipate that we will be able to finance our increased land acquisition
costs and working interest participations through available cash flow or
financings funded, in part, through our anticipated base of proven reserves.
Most importantly, we will endeavor to acquire drilling and land rights in our
name in order to procure maximum leverage in negotiating transactions with
drilling and production partners or contractors on terms most beneficial to our
company.

While we will acquire a land department to acquire drilling rights and manage
our properties, we do not intend to become a manpower- and cost-intensive
drilling and production company, and will instead delegate these matters to our
partners or independent contractors or service providers, although it is
possible that we may establish a separate affiliated entity to manage production
and marketing functions. We anticipate that we will increase our staffing
levels--exclusive of any separate production and marketing entity we may
establish--to approximately 50 employees in this business model, including
additional administrative, research and development and SFD flight, survey and
interpretive staff. Given our relatively modest projected staffing requirements,
we anticipate that our annual operating expenses would be kept to relatively
minimal levels.

You should note that prospects that are confirmed through exploratory drilling
as containing commercial quantities of oil and gas may become immediately
marketable based on the size of their estimated reserves. It is therefore not
necessary to actually place production wells on-line to recognize the value of
these reserves, and we may consider selling the reserves and associated drilling
rights to third parties based upon a discounted cash flow formula derived from
estimated reserves and other production and/or market factors. We also
anticipate that we will have the similar ability, once our SFD technology is
proven, to sell SFD Prospects on the market, even if exploratory wells have not
been drilled. We have, in fact, set up a mechanism under our joint venture
agreements with our joint venture partner to dispose of smaller SFD Prospects
which may have commercial value.

                                      -4-

<PAGE>

Theoretical Basis Of SFD Technology

What Is Our SFD Technology

Our SFD technology allows us to measure the variations in energies relating to
`stressed' subsurface structures and hydrocarbon accumulations. By analyzing
these field patterns, we are able to determine the probability of locating
commercially viable deposits. The principal components of our SFD technology,
the SFD sensors, are `stand-alone' devices that incorporate principals of
contemporary quantum theory in their operation.

What Is Quantum (Field) Theory And Its Applications


`Quantum theory' incorporates two bodies of physics--`quantum mechanics,' which
deals with wave-particle duality, superposition principle, uncertainty
principle, wave function and probabilities; and `special relativity' which
examines the effects of space-time geometry and the relativity of motion.
Traditional physics, known as `classical theory,' cannot account for the
structure and behavior of elementary particles, for example, the lattice-
vibration effects that arise from electrons colliding with atoms. In contrast,
quantum theory is successful in dealing with these phenomena. It describes
matter and energy interactions in the universe in terms of single indivisible
units called `quanta,' or in the singular `quantum.'

According to the `standard model' of quantum theory, which summarizes current
understanding of elementary particles and the fundamental forces of nature,
`fields' are the basic make-up of the universe.  Therefore, each elementary
particle has an associated field with it.  Little ripples in these fields carry
information, energy and momentum from one area or particle to another.

Quantum theory describes matter as both waves and as particles. A direct
consequence of the wave-particle duality is the `uncertainty principle' advanced
by Heisenberg. According to this principle, particles do not have definite
locations, speeds, and paths as usually described by classical physics. Instead,
quantum theory describes positions and other properties of particles in terms of
the incidental events where the property will have a certain value. The way a
quantum object behaves is defined by its 'wave function' developed by
Schrodinger, allowing us to compute the `probability' that certain event will be
observed. Everything in quantum theory is based on probability. This simply
means that one cannot predict an event definitely but can estimate the
probability for the event to occur.

In spite of its success, there are situations where quantum theory is
insufficient to give proper explanation. Under the umbrella of quantum theory,
three fundamental forces--the `electromagnetic,' the `weak,' and the `strong'
forces--are successfully unified. However, it cannot adequately incorporate the
fourth, `gravitation.' None of the branches of quantum theory can account for
the discrepancies in masses of elementary particles. To address this issue,
Higgs proposed a mechanism--known as `massive gauge bosons'--by which particles
acquire mass without breaking the symmetry laws of modern physics. Higgs bosons
have no intrinsic spin or electric charge and can not be distinguished from
empty space or vacuum. It is now proposed by physicists that the all-pervading
Higgs scalar fields homogenize space and give rise to as many particles as there
are many special scalar fields. In support, Peccei-Quinn symmetry and String
theory predict the existence of `composite scalar fields' that are massless at
high energies. Presently, physicists are working on proving the existence of
these complex scalar fields. They forecast a number of individual and composite
Higgs fields and torsion fields, the latter of which relates to the quantum spin
of empty space or vacuum. These issues have ramification in our theoretical
discussions with respect to the operation of our SFD technology and we interpret
the role of Higgs fields as being direct and relevant.

Quantum theory has already been applied in the development of commercially
available instruments and devices. Superconducting Quantum Interference Device
or SQUID is a typical example. It is the most sensitive detector of magnetic
fields known so far. The application of SQUID technology ranges from medical
diagnostics for detecting brain damage to performing special tests in
relativity. Quantum lasers are another example of the successful commercial
application of quantum theory. The major advantage of these lasers is that they
can be tailored to emit light over a wide range of the spectrum--something that
no other laser can do. In fact, anyone who owns a compact-disc player today uses
this technology. By means of Molecular-Beam Epitaxy or MBE, initially developed
at Bell Labs, layers of atoms can be deposited on a heated metal surface. This
technology is essential in the fabrication of advanced semiconductor devices and
integrated circuits including the quantum-well lasers. Nowadays, computer
scientists are moving towards embracing quantum-wire and quantum computers as
the future of computing. Theoretically, quantum computers will perform
calculation orders of magnitude faster than the best computers of today.

What Are Stress Fields And Their Relation To SFD Theory

On a global scale, the earth's crust is under variable stress resulting from
crustal plate (tectonic) movements that produce subsurface mechanical and
hydraulic interactions. Stress is manifest in the macroscopic deformation of
buried sediments and rock strata, the microscopic deformation of their
constituent minerals. It is well known that electrical energy balance in a
crystal lattice is maintained by the alternation of equal and opposite charges.
However, when the crystal lattice of a material, for example quartz, is suddenly
subjected to stress, electromagnetic radiation will be emitted. Under sustained
localized stress conditions, we believe that `scalar energy fields' are also
generated or modified at a quantum level. The word `scalar' in its basic form
means that the field carries no direction only magnitude, unlike vector fields
resulting from conventional electromagnetic fields that carry both magnitude and
direction. The generated or modified scalar energy fields are non-
electromagnetic in nature, and we believe are related to Higgs and torsion
fields.

Our SFD sensors are passive quantum transducers. The operation of these devices
is based on quantum mechanical principles and involves the capture and
interaction, translation and conversion of certain scalar energy fields into
electrical signals. Our SFD sensors have demonstrated the ability to date to
directly detect scalar energy effects generated or modified at depths in excess
of 15,000 ft below the surface, and at altitudes in excess of 10,000 ft. Surface
cultural phenomena, such as large body of water, do not affect the SFD sensors
as long as the change in magnitude is moderate. By generating and maintaining
their own quantum fields, the SFD sensors are able to interact with these energy
fields via quantum particles. The resulting interactions are converted and
"recorded" as electrical signals.

Our SFD sensors are also non-linear `chaotic' devices. Chaos theory
characterizes chaotic devices as behaving in a complex manner, despite the fact
that they can be described quite simply. By definition, these systems exhibit
unpredictable dynamics that are sensitive to their initial conditions. Chaotic
systems are mathematically deterministic--that is, they follow precise laws, but
their irregular behavior can appear random to the casual observer. The response
of our device to a phenomenon may diverge exponentially and much faster than
that of a slower linear system. Once a response to a phenomenon is initiated, it
will proceed until saturation or occurrence of the next phenomenon. Even though,
within the confinement of the inherent restrictions of quantum mechanics, the
number of possibilities of reacting to the same stimulus is deterministic, the
device still behaves irregularly. Nevertheless, by cycling about an optimum
function point, the behavior of a quantum device can achieve some stability in a
way that never quite repeats itself.

Sustained geological stress will lead to the development of new conditions
manifested in scalar energy fields of different origin that are related to Higgs
and torsion fields. We postulate that the fields generated or modified are due
to complex variations in quantum vibrations and vacuum interactions. These
fields carry information, momentum and in some cases, substantial energy.
Although these energy fields appear scalar in nature, they can in effect act as
vector fields under certain conditions.

When scalar energy fields interact with existing anomalies they can create large
vortices with smaller internal vortices over a given subsurface phenomenon. The
vortices may dynamically increase and decrease in magnitude, and when traversed
they significantly affect the quantum interactions in our SFD sensor. Based on
observations we have made from several hundred surveys of known oil and gas
fields, it appears that these vortices are associated with `mechanical' and
`hydraulic' stresses, as explained below, in particular, geologic structures and
hydrocarbon accumulations.

What Is The Practical Application Of Stress Fields to Geology and Hydrocarbon
Exploration

We believe that all regional substrata exhibit their own unique stress fields,
reflecting the sedimentary and burial histories of those substrata and, more
importantly for the purposes of the application of our technology, the
mechanical and in some cases hydraulic stresses or pressures inherent in or
placed upon those substrata. This is important because it is our ability to
identify the changes in subsurface stresses and pressures with our SFD
technology which allows us to either inferentially or directly identify oil and
gas accumulations. Through our continued research and development, a high level
of correlation has been shown between the science of geology and our quantum-
based SFD technology.

What Are Subsurface Mechanical Stresses

Subsurface mechanical stresses are caused by directional tectonic forces that
disrupt the stress and pressure equilibrium in the underlying strata.
Sedimentary basins consisting of relatively undisturbed flat-lying or gently
dipping sediments generally maintain a balanced pressure equilibrium and
therefore exhibit low constant stress.  Where tectonic forces have compressed,
folded, faulted, or fractured the sedimentary package, a balanced mechanical
equilibrium is not maintained, and these areas exhibit stresses in one or more
directions depending upon the geology and the geometry of the deformation.  In
other areas where the regional strata is characterized by non-uniform geologic
layering, particularly areas containing abrupt major sedimentation changes such
as buried reefs, channels, and erosional edges, these appear to exhibit higher
residual stress than the adjacent regional strata.

                                      -5-
<PAGE>

What Are Subsurface Hydraulic Stresses

Hydraulic stresses are caused by the presence of fluids (liquids and gases),
such as water, oil and natural gas, within the strata and, more particularly,
the inherent and directional pressures resulting from the relative buoyancy of
the fluids. A simple illustration of buoyancy is the effect of submerging a
beach ball in a swimming pool. When a beach ball is submerged it attempts to
rise to the top of the pool because the air in the beach ball is less dense than
the surrounding water. This upward pressure, which displaces the water above the
beach ball as it rises to the surface, is called buoyancy. Oil and gas exhibit
the same properties when formed underground--they will percolate upwards through
the strata by way of fractures or permeable strata until they either reach the
surface or are stopped or "trapped" by a non-porous barrier, in which case they
will continue to exert pressure against the trapping barrier.

How Does Our SFD Technology Interact with Subsurface Stress Fields

The principal components of our SFD technology are passive transducers, which we
refer to as the "SFD Sensors," which create and maintain quantum fields.  As we
fly our SFD technology over an exploration area, the SFD Sensors interact with
the varying stress fields that are generated by and within the subsurface
strata.  Our SFD technology interacts with these dynamic energy patterns and
converts them into electrical digital signals which we record and later
interpret using known geologic phenomena and oil and gas accumulations as
analogies.

Operational Practices In Conducting SFD Surveys

How We Acquire SFD Data

In operational practice, our SFD Survey System is flown over pre-selected
exploration areas at varying altitudes and from different directions.  As the
SFD Sensors interact with the fields created by stresses, they register a
multitude of responses that we record in the form of digital signals, which we
refer to as "SFD Signals."  Our proprietary data acquisition system acquires and
records these signals and marks their geographic location with global
positioning satellites using "GPS" coordinates. These integrated signals are now
referred to as "SFD Data."  Our technical crew aboard the aircraft can also
monitor these signals in real time, which allows them to immediately identify
areas of particular interest for further investigation.

How We Interpret SFD Data

Once SFD Datasets acquired from our airborne survey operations are returned to
our home offices, our geological and geophysical interpretive staff process the
data, plot the flight lines, and produce computer-generated maps.  We then
commence the following screening and interpretation process:

  .   First, we screen the SFD Data for "anomalous" signals on the flight line,
      which we refer to as "SFD Anomalies." These SFD Anomalies include signals
      from both unknown or non-producing areas that we survey as well as signals
      obtained over known oil and gas pool crossings.

  .   Once we have identified the SFD Anomalies on a given flight line, we then
      isolate and distinguish SFD Anomalies which have signal characteristics
      indicative of subsurface mechanical conditions, which we refer to as
      "structural signals," and subsurface hydraulic conditions, which we refer
      to as "hydrocarbon signals." At this point, we will contrast these new
      structural and hydrocarbon signals with those signals found over known oil
      and gas accumulations in the area. This comparative process, which we
      discuss in greater detail below, is very similar to that used in seismic
      interpretation.

  .   Our geological team then puts each identified SFD Anomaly into subsurface
      context using our in-house geological database. The SFD Anomaly may then
      become a "SFD Lead," if the structural and hydrocarbon signals of the SFD
      Anomaly appear to coincide in proper geologic context. In other words we
      answer the question, does the anomaly make sense where it appears in the
      sedimentary basin? Where we have sufficiently qualified an SFD Lead with
      further SFD Data acquired from additional surveys, we reclassify the lead
      as a "Recommended SFD Prospect" and tender it to our joint venture partner
      for its further geological and geophysical evaluation.

                                      -6-

<PAGE>

  In reaching its conclusion as to the coincidence of favorable geology and
structural or hydrocarbon signals, our geological team will evaluate the
following factors in the overall context of its understanding of the local
geology:


  .  "Templating" Signals With Those Of Known Oil And Gas Accumulations

     Our geological team compares or "templates" the anomalous structural and
     hydrocarbon signals with those of known oil and gas accumulations since oil
     and gas exploration is, by its inherent nature, a "comparative" process.
     Geologists and geophysicists constantly compare data for exploration areas
     to that from known producing regions that are either nearby or exhibit
     similar subsurface characteristics. Our process is similar in that we
     compare the structural or hydrocarbon signals from our anomalies to those
     signals from a nearby producing field or other known fields that exhibit
     similar patterns.


                                      -7-
<PAGE>


  .  Signals Characteristics

     The most common and reliable SFD signals are structural signals, which
     indicate the existence of potentially seismically-identifiable subsurface
     mechanical conditions such as structural traps, strata types and other
     geologic features and characteristics that commonly trap oil and gas
     accumulations ("seismically-identifiable structures"). Our experience is
     that our SFD technology recognizes seismically-identifiable structural
     traps and other geologic features with a high degree of accuracy.

     While the rate of corroboration is fairly high, the mere existence of
     seismically-identifiable structures does not mean that oil and gas is
     present. Rather, it merely infers that oil and gas may be present, since
     these geologic features and characteristics represent common trapping
     mechanisms. Industry experience has proven, for example, that the majority
     of seismically-identifiable structures do not trap commercial quantities of
     oil and gas. This is what makes "wildcat" exploration--where test wells are
     drilled in unproven areas distant from existing known pools usually based
     upon seismic interpretations or geological mapping--so risky. For example,
     the current oil industry rate of success in drilling productive wells in
     true wildcat exploration areas, based upon the ability of the well to
     produce sufficient hydrocarbons to repay its drilling costs and provide
     some return on equity, is only 10% to 20%, or one well out of five to ten
     wildcat wells drilled.

     The hydrocarbon signals are less common than structural signals. However,
     when hydrocarbon signals are present, they are complimentary to, and in
     some cases more probative than, our structural signals since:

     .  Hydrocarbon signals directly indicate oil and gas accumulations, while
        the structural signals only infer oil and gas accumulations for the
        reasons indicated above;

     .  The confluence of both structural and hydrocarbon signals, when present,
        enhances our comfort level in a commercial trap; and

     .  The hydrocarbon signal alone lends itself to the potential
        identification of an abundant number of oil and gas accumulations that
        are "stratigraphically trapped" which are generally less susceptible to
        detection by seismic methods.

     The major drawback to date of our hydrocarbon signal is its relative
     inability on its own to indicate the depth of hydrocarbon accumulations or
     the number of oil and gas bearing zones, which we attempt to address
     through the templating process described above.

     While we believe based upon our experience that our SFD technology is
     fairly effective in identifying oil and gas pools, and particularly large
     fields, this belief will only be proven by drilling results from a
     representative group of stratigraphic pools that do not carry structural
     signals.

                                       8

<PAGE>

What Happens When We Tender Recommended SFD Prospects To Our Joint Venture
Partners

Once we tender a Recommended SFD Prospect to one of our joint venture partners,
they conduct whatever conventional geological, geophysical and economic
evaluations of the prospect they may deem prudent in making a decision to
proceed with drilling. If the joint venture partner decides to drill a
Recommended SFD Prospect, the prospect is characterized as an "Accepted SFD
Prospect," in which case we can elect to either receive our 5% to 8% overriding
royalty or to participate in the drilling and production of the prospect through
our working interest election.

How Fast Can We Acquire And Interpret SFD Data

We are able to fly our SFD Survey System at 150 to 200 mph, and can survey 600
to 800 linear miles in a four-hour day of recording. For each day of recording,
it takes our staff between one to five days of data processing and
interpretation--including plotting flight routes, screening and analyzing
anomalies, putting the anomalies in geologic context, and ranking the
anomalies--to sufficiently identify and recommend the SFD Prospects from that
flight line. The actual amount of time required is ultimately determined by the
following factors:

  .  The number and types of SFD Anomalies identified on the flight line;

  .  The quality of the SFD Data;

  .  The complexity of the subsurface geology under the flight line;

  .  The amount of available geological information; and

  .  The amount of SFD Data available from other SFD survey flights intercapting
     the potential prospect.

As a consequence, we are able to record and interpret 800 linear miles of SFD
Data acquired in one SFD survey flight over a period of only a few days at a
cost of $5 to $10 per mile. By way of comparison, traditional land-based seismic
crews record up to five linear miles of 2D seismic per day, depending on
acquisition parameters, at costs of approximately $5,000 to $20,000 per mile.
Two or more weeks are then required to process the data, followed by another
several weeks for interpretation. As a result, it can take a minimum of six
months to record and interpret 1,000 linear miles of new 2D seismic data, at a
total cost of $5 million to $20 million. Greatly adding to these direct seismic
expenses are the obvious opportunity costs of allowing aggressive competitors
with comparable seismic capabilities an equal chance to record data during the
same six month interpretation period. With our SFD technology, opportunity costs
due to time lag are negligible.

We identify approximately twenty SFD Leads on average for each four-hour day of
surveying, and ultimately tender, on average, two or 10% of these leads to our
joint venture partners as Recommended SFD Prospects for further evaluation. The
SFD Prospects which we tender can be pool to field-sized targets that could
require two to ten wells or more to exploit depending upon accumulation. At our
current projected annual rate of six to eight survey days per month per ten
months of airplane annual operational availability, we anticipate we can
identify 120 to 160 Recommended SFD Prospects per year assuming no excessive
downtime. We anticipate that we will increase our monthly flying rate at some
future date as we increase our efficiencies, which would result in a
corresponding increase in the number of Recommended SFD Prospects we identify.
The actual number of these Recommended SFD Prospects that are accepted and
ultimately drilled by our joint venture partners will, however, be dependent
upon any number of competitive, geological and environmental variables.

Longer-Term Issues That Effect The Timing Of SFD Surveys And Interpretation

Before we tender a Recommended SFD Prospect to a joint venture partner, we will
typically interpret two or more SFD Data sets for the prospect, which requires
in turn a corresponding number of SFD survey

                                      -9-
<PAGE>

flights to acquire the data. If we are not able to acquire sufficient quality
SFD Data for an SFD Lead from a single survey project, then we will be able in
many instances to evaluate this information and tender the Recommended SFD
Prospect to the joint venture partner in a matter of days following commencement
of the interpretation process. However, in many cases we must perform additional
survey flights over a target zone at a later date due to a number of factors,
including delays attributable to weather, a need to acquire more definitive SFD
Data, and requests by the joint venture partner to further define the Prospect
or its surrounding area. Also, since we acquire SFD Data during our entire
flight rather than limiting the data acquisition process to our targeted zones,
we typically encounter new SFD Leads outside these zones which will require
additional SFD Data for their further evaluation. It may take several weeks or
even months to perform follow-up surveys on these SFD Leads due to impending
survey and interpretation obligations to current joint venture partners, as well
as weather conditions which may impede our ability to fly. We anticipate that
a number of these timing issues will be addressed as we augment our current
operational capacity with additional survey aircraft and interpretation staff.

Longer-Term Issues That Effect The Timing Of Land Acquisition And Drilling

We believe that our joint venture partners will not only be more successful in
their drilling programs as a result of their reliance on our SFD technology, but
also be capable of accessing superior opportunities more quickly than their
competitors. However, the time it may take for a joint venture partner to get to
the drilling stage of an SFD Prospect can still be lengthy depending upon any
number of factors, including the following:

  .  Regardless of the quality of SFD Data we have to support our recommendation
     in tendering a Recommended SFD Prospect, it currently remains necessary for
     our joint venture partners to conduct further geological and geophysical
     evaluations, including 2D or 3D seismic surveys where warranted, of each
     Recommended SFD Prospect. Because our SFD technology is a reconnaissance
     instrument, this must be done to determine the optimum drilling location
     and potential pay zone depth.

  .  In some cases our joint venture partners may have the ability to conduct
     their geologic and geophysical evaluation relatively quickly, such as in
     circumstances where they have or can obtain sufficient quality commercial
     or proprietary local seismic data. However, in many cases, particularly
     those where we identify promising SFD Prospects outside target survey areas
     in which our joint venture partners already own drilling rights, local
     seismic data will not be existent or available. Seismic surveying,
     especially 3D seismic, requires governmental and environmental permits,
     satisfied surface land owners, and competent recording crews, among other
     things, and usually takes several months to acquire and process.

  .  If our joint venture partners do not own mineral and drilling rights to a
     specific prospect, they must obtain these rights in order to drill.
     Negotiating deals with current mineral owners can be complicated, time
     consuming and frustrating, particularly when the prospective mineral rights
     lie in a highly competitive exploration area, or are already held by an oil
     & gas company. Some of the factors which influence our joint venture
     partners' ability to acquire the mineral and drilling rights at all, or the
     cost they must pay to acquire these rights, include:

       .  whether the prospect lies in an active and competitive exploration
          area;

       .  current oil & gas prices and their perceived direction;

       .  the duration of the remaining term of a mineral lease;

                                      -10-
<PAGE>

       .  the size and configuration of the mineral holdings sought (contiguous
          land positions are more valuable and therefore more expensive to
          acquire than patchwork holdings); and

       .  the proximity of oil and gas gathering and processing infrastructure.

       Also, our joint venture partners might be required, in the case of a
       farm-in, to first participate in the drilling of a location outside of
       our prospect in order to earn the right to later drill at the site of the
       prospect. This is done occasionally to earn valuable acreage "through the
       drill bit."

  .  When mineral rights are held by the federal or state government, or held by
     the Crown (Canada), these lands may be acquired by posting for sale, but
     remain subject to the uncertainties of the bidding or auction process, and
     may require a considerable lead time before being offered for bid.

Our Business And Geographic Segments

We currently operate in only one business segment, oil and natural gas
exploration, insofar as we intend to develop all oil and natural gas exploration
prospects identified using our proprietary "SFD" remote-sensing airborne survey
technology either directly for our account or indirectly for our account through
working interest or overriding royalty interests through our joint venture
partners. We do not currently sell or market our SFD Data as a separate product
to third parties. For geographical segment information, see note 18 to our
consolidated financial statements included in Item 14 of this annual report.

Joint Venture Partners

Canadian Exploration Joint Venture With Encal Energy Ltd.

Our Canadian joint venture partner is Encal Energy Ltd., located in Calgary,
Alberta, Canada. Encal is an intermediate Canadian exploration company listed on
the Toronto and New York Stock Exchanges. As of December 31, 1999, Encal had
total assets of Cdn. $775 million and 103,567 mboe of total proved reserves. For
1999, Encal averaged 13,862 barrels per day of oil and natural gas liquid
production and 153 million cubic feet per day of natural gas production.

Our current relationship with Encal is governed by the terms of an Exploration
And Joint Venture Agreement entered into in September 1997, and which expires on
September 15, 2000. This agreement replaced two prior joint venture agreements
entered into with Encal during 1996 and 1997. We are currently in negotiations
with Encal relative to extending the term of our current joint venture
agreement, and modifying some of its terms to comport with our current business
practices.

The material terms of the joint venture agreement with Encal/1/ are summarized
as follows:

  .  We are required to conduct SFD surveys on selected "exploration areas"
     identified by Encal of up to 2,400 square miles, and Encal is required to
     reimburse us for 50% of all daily aircraft rental, pilot salary, food and
     accommodation costs we incur to conduct these surveys. We retain the right
     to reject any presented exploration area for any bona fide reason,
     including safety or technical concerns.

  .  When we have completed our survey, screening and interpretation activities
     with respect to an exploration area, we are required to present Encal a
     written report listing our Recommended SFD Prospects and a summary of our
     interpretations for the flight lines within the exploration area, as

_____________________

/1/ The terminology or defined terms we use in this section comports with our
    current nomenclature instead of that used in the Encal joint venture
    agreement in order to avoid confusion.

                                      -11-
<PAGE>

     well as a map of flight lines and locations of all SFD Anomalies from the
     flight within the exploration area. We are also obligated to give Encal the
     opportunity to review the SFD Data in our offices.

  .  Once we have tendered our report to Encal, it will have 90 days to conduct
     conventional geological and geophysical evaluation of each Recommended SFD
     Prospect tendered to it in order to determine whether it will accept the
     prospect for potential drilling. If Encal accepts the exploratory prospect,
     it will become an Accepted SFD Prospect. If Encal rejects the prospect, we
     will attempt to agree on a procedure for its joint exploitation. If we
     cannot reach agreement with Encal on a mechanism to exploit the prospect,
     it will become our exclusive property and we may deal with it in any manner
     we deem appropriate, subject to a two year confidentiality restriction if
     the prospect is located on specified Encal lands.

   . If Encal elects to drill a test well on an Accepted SFD Prospect, we will
     have the right, at that time, to elect to either participate in drilling
     the prospect on a working interest basis along the lines discussed below,
     or receive a sliding scale overriding royalty on Encal's share of
     production from the prospect on the lines discussed below. If we elect to
     participate on a working interest basis on any Accepted SFD Prospect, we
     will later be given a second election, to be exercised after Encal acquires
     drilling rights for the prospect but before Encal spuds its first test well
     on the prospect, to convert our working interest in the prospect into an
     overriding royalty interest.

  .  Should we elect to participate on a working interest basis, we will be
     obligated to bear 45% of Encal's land acquisition, drilling and development
     costs for that well (unless it is a farm-in well which is fixed at 40%),
     and will be entitled to receive a commensurate percentage of all revenues
     received by Encal after the deduction of royalties, severances taxes and
     production and marketing costs.

  .  Should we elect an overriding royalty, we will receive a minimum of 5% and
     a maximum 8% of Encal's net revenues for crude oil, depending on the
     productivity of the well, and a flat 8% of Encal's net revenues for all
     other petroleum substances, including natural gas.

  .  We are obligated, whenever the number of active Recommended SFD Prospects
     is less than fifteen, to devote at least 50% of our worldwide survey
     capacity to identify prospects for Encal, until the amount or "inventory"
     of active Recommended SFD Prospects reaches eighteen. For purposes of the
     foregoing, the following exploration prospects are not included in the
     "inventory" of active Recommended SFD Prospects:

       .  Any Recommended SFD Prospect for which Encal is unable to obtain
          drilling rights;

       .  Any Recommended SFD Prospect on which Encal drills a test well; and

       .  Any Recommended SFD Prospect rejected by Encal.

  .  We have also agreed that:

       .  we will have no more than two additional joint venture partners in
          Canada, although there are no restrictions on the number of joint
          venture partners we may utilize outside of Canada;

       .  we will not grant larger or more numerous exploration areas to any
          other joint venture partners than those granted to Encal;

       .  Encal will have the exclusive right for SFD surveys in the Province of
          British Columbia, and at least 50% of the aggregate area in selected
          regions of the Province of Alberta; and

       .  Encal will be afforded a first opportunity to participate in any
          transaction utilizing our SFD technology to explore for petroleum
          substances outside of Canada, where, in our sole judgment, there is an
          opportunity for Encal to participate as operator or a participant
          provided

                                      -12-
<PAGE>

          that role is available; and also provided that we believe it is
          appropriate for Encal to perform that role.

  .  Encal will be the operator, and will make all decisions relating to and
     control for all prospects developed by the joint venture. In this regard,
     Encal will be responsible for

       .  conventional oil and gas exploration, operation, development and
          management of the joint venture and any of its oil and gas properties;
          and

       .  the production and marketing of any petroleum substances which are
          produced from the joint venture.

  .  Should production be processed through Encal's production facilities, we
     will pay Encal a reasonable proportional fee for the use of these
     facilities. If production is processed through a third-party's production
     facilities, we will be charged our portion of the actual costs for services
     performed.

It should be noted that as of the date of this annual report our company and
Encal are not strictly following the prospect tendering and prospect evaluation
time periods mandated in the Encal joint venture agreement insofar as we are
currently working on the processes inherent in meeting these periods due to the
evolving nature of the SFD identification and interpretation processes. We are
also using a combination working interest/overriding royalty election in lieu of
that specified in the Encal joint venture agreement.

United States Exploration Joint Venture With CamWest Exploration LLC

Our United States-based joint venture partner is CamWest Exploration LLC, a
privately held oil and gas exploration company located in Denver, Colorado, and
McKinney, Texas. CamWest is principally owned by Stephens Group, Inc., a private
company headquartered in Little Rock, Arkansas, which invests primarily in
energy, media, telecommunications and investment banking companies, and which
has invested $8.5 million in our company through CamWest's affiliates.

Our current relationship with CamWest is governed by the terms of a Joint
Exploration And Development Agreement which we entered into in April 1998, and
which expires in March, 2003. This agreement was originally entered into with an
affiliate of CamWest, CamWest Limited Partnership. However, CamWest Limited
Partnership assigned its rights and obligations under the joint venture
agreement to CamWest on January 29, 1999, in order to establish an entity
dedicated solely to SFD exploration and drilling activities.

The material terms of the joint venture agreement with CamWest/2/ are as
follows:

  .  We are required to conduct SFD surveys on selected "exploration areas" in
     the United States or internationally outside of Canada identified by
     CamWest of up to 2,400 square miles, and CamWest is required to reimburse
     us for 100% of all daily aircraft rental, pilot salary, food and
     accommodation costs we incur to conduct these surveys. We retain the right
     to reject any presented exploration area for any bona fide reason,
     including safety or technical concerns.

  .  When we have completed our survey screening and interpretation activities
     with respect to an exploration area, we are required to present CamWest a
     written report listing our Recommended SFD Prospects and a summary of our
     interpretations for the flight lines within the exploration area,

_____________________

/2/ The terminology or defined terms we use in this section comports with our
    current nomenclature instead of that used in the Encal joint venture
    agreement in order to avoid confusion.

                                      -13-
<PAGE>

     together with a map of flight lines and locations of all SFD Anomalies from
     the flight within the exploration area.

  .  Once we have tendered our report to CamWest, it will have 90 days, at its
     sole cost, to conduct conventional geological and geophysical evaluation of
     each Recommended SFD Prospect tendered to it in order to determine whether
     it will drill a test well on the prospect. If CamWest decides to drill the
     exploratory prospect, it will become an Accepted SFD Prospect. If CamWest
     declines to drill, the prospect will be deemed rejected, in which case it
     will be tendered to a limited liability company which will be managed by
     CamWest, and owned 50% by us and 50% by CamWest, for joint exploitation.

  .  Once CamWest elects to drill a test well on any Accepted SFD Prospect, we
     will be deemed to have a 45% working interest in that well along the lines
     discussed below; provided, however, we shall have the right, for a period
     of 15 days after CamWest notifies us it intends to drill, or 48 hours after
     notice that a drilling rig is located on the test well site if sooner, to
     reconsider our election. In this case we may either choose to either retain
     our 45% working interest, or reduce our working interest to a percentage
     less than 45%, or convert our entire interest to an overriding royalty
     along the lines discussed below.

  .  Should we elect to participate on a working interest basis, we will be
     obligated to bear our elected percentage (i.e., 45% or less) of CamWest's
     land acquisition, drilling and development costs for that well, and will be
     entitled to receive a commensurate percentage of all revenues receives by
     CamWest after the deduction of royalties, severances taxes and production
     and marketing costs.

  .  Should we elect an overriding royalty, we will receive a 5% royalty of
     CamWest net revenues if production is less than 1,000 barrels of oil or oil
     equivalents per month, and an 8% royalty when production equals or exceeds
     1,000 barrels of oil or oil equivalents per month.

  .  We are obligated, whenever the "inventory" of active Recommended SFD
     Prospects is less than 31, to commence and continue SFD surveying until
     there are again 36 Recommended SFD Prospects in active inventory.

  .  We have also agreed that:

       .  whenever the number of active Recommended SFD Prospects in active
          inventory for CamWest is below the minimum requirement, we will
          dedicate at least 50% of our worldwide SFD survey capacity toward
          CamWest's requirements, unless we have obligations under three or more
          other joint venture agreements, in which case we must dedicate at
          least 25% of our worldwide SFD survey capacity to CamWest; and

       .  CamWest will have the exclusive rights for SFD surveys in 2,400 square
          mile "exclusive areas" selected by CamWest outside of Canada;
          provided, however, that these areas are limited to a total of
          1,000,000 square miles within the United States and an additional
          1,000,000 square miles outside of the United States and Canada.

  .  CamWest will be the operator, and will make all decisions relating to
     management and control of, all Recommended SFD Prospects developed under
     the joint venture. In this regard, CamWest will be responsible for

       .  conventional oil and gas exploration, operation, development and
          management of the joint venture and any of its oil and gas properties;
          and

       .  the production and marketing of any petroleum substances which are
          produced from the joint venture

                                      -14-
<PAGE>

  .  Should production be processed through CamWest's production facilities, we
     will pay CamWest a reasonable proportional fee for the use of these
     facilities. If production is processed through a third-party's production
     facilities, we will be charged our portion of the actual costs for services
     performed.

It should be noted that as of the date of this annual report our company and
CamWest are not strictly following the prospect tendering and prospect
evaluation time periods mandated in the CamWest joint venture agreement insofar
as we are currently working on the processes inherent in meeting these periods
due to the evolving nature of the SFD identification and interpretation
processes. We are also using a combination working interest/overriding royalty
election in lieu of that specified in the CamWest joint venture agreement.

Renaissance Energy Survey Agreements

We had previously entered into several short-term survey agreements with another
Canadian exploration company, Renaissance Energy Ltd., whereby we survey
designated exploration blocks and tendered Recommended SFD Prospects to
Renaissance for drilling with specified timeframes. Although we tendered several
Recommended SFD Prospects to Renaissance, they did not drill exploratory wells
on these prospects principally for economic reasons given low oil and gas prices
at that time, and the last of the agreements lapsed without renewal in December
1999.

Competition

Since we use our SFD technology for wide-area oil and gas reconnaissance
exploration, our "competition" would generally be described as other
technologies used for wide-area oil and gas reconnaissance exploration. The
principal competitive technology in this regard would be seismic, which is well
accepted in the industry and has, in fact, been used since 1919. While there are
numerous industry competitors of all sizes which offer seismic services, the
largest industry competitors to our knowledge are Baker Hughes Inc.,
Schlumberger Limited, Compagnie Generale de Geophysique, S.A, Seitel, Inc.,
Veritas DGC Inc. and Petroleum Geo-Services A.S.A.

There are also a number of other technologies used in the industry for "passive"
wide-area oil and gas reconnaissance exploration, including aeromagnetic,
gravity, ground or surface radar, satellite surveys, telemetrics and spectrum
analyzers, however, we do not believe that any of these technologies have been
accepted in the industry as a highly predictive general exploration tool.

To our knowledge there are no other companies in the oil and gas exploration
industry who employ any quantum physics-based technology similar to our SFD
technology.

While the technologies noted above are competitive to ours in the sense that all
are used for wide-area reconnaissance exploration, you should note that there is
no direct competition in the sense that we do not offer the use of our SFD
technology to the industry on a fee-for-service basis as is ordinarily the case
with respect to the providers of these other technologies. Consequently, we do
not have any customers for our SFD technology other than our two present joint
venture partners.

Employees

As of December 31, 1999, we had fifteen full time employees. None of these
employees are covered by collective bargaining agreements. Of these employees,
five devote their full time and one devotes one-half of his time to SFD survey
operations and SFD Data interpretation, and three devote their full time and one
devotes one-half of his time to research and development. The balance provide
administrative, information management and accounting support for all
operations. We believe we have a favorable relationship with all of our
employees. We have employment contracts with our four senior executives.

                                      -15-
<PAGE>

Research and Development

Our research and development activities to date have focused on developing,
improving and testing our SFD Survey System and related components. Our research
and development expenses amounted to $272,489, $57,823 and $103,079 for our
1999, 1998 and 1997 fiscal years, respectively. Our research and development
budget for fiscal 2000 is $400,000.

Manufacturing Capacity and Suppliers

All components of our SFD technology, other than readily available computer
hardware and software, are fabricated at our facilities by either Momentum
Resources Corporation or our company, using readily available materials,
pursuant to Momentum's or our specifications. We are not dependent upon any
third party contract manufacturers or suppliers to satisfy our manufacturing
requirements.

Governmental And Environmental Regulation

SFD Survey Flight Operations

The operation of our business, namely, conducting aerial SFD surveys and
interpreting SFD Data, is not subject to material governmental or environmental
regulation with the exception of flight rules promulgated by the Federal
Aviation Administration and Transport Canada governing the use of private
aircraft, including rules relating to low altitude flights.

Oil And Gas Exploration And Development Projects

The oil and natural gas industry in general is subject to extensive controls and
regulations imposed by various levels of the federal and state governments in
the United States and federal and provincial governments in Canada. In
particular, oil and gas exploration and production is subject to laws and
regulations governing environmental quality and pollution control, limits on
allowable rates of production by well or proration unit, and other similar
regulations. Laws and regulations generally are intended to prevent waste of oil
and natural gas; protect rights to produce oil and natural gas between owners in
a common reservoir, control the amount of oil and natural gas produced by
assigning allowable rates of production; and control contamination of the
environment. Environmental regulations affect our operations on a daily basis.
Public interest in the protection of the environment has increased dramatically
in recent years. Drilling in certain areas has been opposed by environmental
groups and, in certain areas, has been restricted. We believe that the trend of
more expansive and stricter environmental legislation and regulations will
continue.

We do not expect that any of these government controls or regulations will
affect projects in which we participate in a manner materially different than
they would affect project of similar size or scope of operations. All current
legislation is a matter of public record and we are not able to accurately
predict what additional legislation or amendments may be enacted. Governmental
regulations may be changed from time to time in response to economic or
political conditions. Any laws enacted or other governmental action taken which
prohibit or restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and gas
industry in general would have a material adverse effect on our business,
results of operations and financial position.

Operating Hazards

SFD Survey Flight Operations

The operation of our SFD survey aircraft is subject to the usual hazards
incident to general and low level flight operations. These hazards can cause
personal injury and loss of life, as well as severe damage to and destruction of
property. While we maintain insurance coverage against some, but not all,
operating risks associated with the operation of our aircraft, we cannot predict
the continued availability of insurance coverage or the availability of
insurance at premium levels that justify its purchase, nor can we give any
assurance that any claim would not exceed our policy limits. If we were unable
to procure insurance for our flight operations at an acceptable cost, the
occurrence of significant adverse aircraft accident not fully insured or
indemnified against could have a material, adverse effect on our business,
financial condition

                                      -16-
<PAGE>

and operating results. Similarly, a judgment or settlement in excess of our
policy limits could also have a material, adverse effect on our business,
financial condition and operating results.

Oil And Gas Exploration And Development Projects

The oil and gas exploration and development projects in which we participate
through our joint venture partners will also be subject to the usual hazards
incident to the drilling of oil and gas wells, including the risk of fire,
explosions, blow-out, pipe failure, casing collapse, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases. In addition to the foregoing, offshore operations are
subject to the additional hazards of marine operations, such as capsizing,
collision and adverse weather and sea conditions. These hazards can cause
personal or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations.

The project operator will, in accordance with prevailing industry practice,
maintain insurance against some, but not all, of these risks. The insurance
maintained by the project operator generally would not cover claims relating to
failure of title to oil and gas leases, trespass during survey acquisition or
surface damage attributable to seismic operations, or business interruption, nor
would it protect against loss of revenues due to well failure. There can be no
assurance that any insurance obtained by the project operating covering claims
related to worker's compensation, comprehensive general liability for bodily
injury and property damage, comprehensive automobile liability and pollution,
cleanup, underground blowout and evacuation will be adequate to cover any losses
or liabilities which may be incurred within projects in which we participate. We
also cannot predict the continued availability of insurance coverage or the
availability of insurance at premium levels that justify its purchase.

Since we do not act as operator on any projects in which we may participate, we
are dependent upon our partners to conduct operations in a manner so as to
minimize these operating risks.

In cases where we have direct liability as a result of our participation on a
working interest basis, the failure or inability of the project operator to
procure insurance at an acceptable cost or the occurrence of a significant
adverse event not fully insured or indemnified against could have an direct
material, adverse effect on our business, financial condition and operating
condition. In these cases our exposure will be commensurate with our
participation percentage.

While we would have no direct liability in cases where our participation is
limited to an overriding royalty interest, the failure or inability of the
project operator to procure insurance at an acceptable cost or the occurrence of
a significant adverse event not fully insured or indemnified against could have
an indirect material, adverse effect on our business, financial condition and
operating results to the extent it adversely affects our joint venture partner's
ability to complete current projects or explore for and develop additional
projects.

Our SFD Technology License

We do not own our SFD technology, but instead have an exclusive world-wide
license to use the SFD Data acquired by the SFD Sensor for hydrocarbon
identification and exploration purposes (the "SFD Technology License") which was
granted to us by Momentum Resources Corporation, which is the owner of the SFD
technology. We do, however, own our data acquisition systems used with the SFD
Sensor.

The terms of our license are governed by a Restated Technology Agreement which
was entered into on August 1, 1996 by Pinnacle, Pinnacle U.S. and Momentum, and
subsequently amended on April 3, 1998. Momentum is a Bahamas corporation which
is indirectly owned and controlled by Messrs. George Liszicasz and R. Dirk
Stinson, who were also parties to the SFD Technology License. Mr. Liszicasz, who
is the inventor of the SFD technology, is also our largest stockholder and the
Chief Executive Officer and a director of our company. Mr. Stinson is our second
largest stockholder and one of our directors.

The material terms of the SFD Technology License, as amended, are summarized as
follows:

                                      -17-
<PAGE>

  .  Momentum is obligated to make the SFD Sensor available to our company for
     use on our SFD surveys in conjunction with our data acquisition and
     interpretation equipment, and must also provide all SFD Data acquired from
     each survey to our company for our exclusive use for hydrocarbon
     identification and exploration purposes.

  .  Mr. Liszicasz is obligated to:

       .  provide at least 500 man-hours per year to generate SFD Data, and

       .  interpret and analyze all raw SFD Data.

  .  We will have 180 days after the designation of a "Prospect" to use our best
     efforts to commercially and economically exploit the Prospect for its
     hydrocarbon potential, subject to specified exceptions.

  .  We are obligated to pay Momentum certain amounts which will be contingent
     on the commercial exploitation of the Prospects by our company,
     specifically, 1% of any "prospect profits" we may actually receive on or
     before December 31, 2000, and 5% of any "prospect profits" we may actually
     receive after December 31, 2000. For purposes of the foregoing:

       .  the term "prospect profits" means "prospect revenues" less "prospect
          expenses;",

       .  the term "prospect revenues" means as the aggregate of all gross
          revenues we may receive with respect to the commercial exploitation of
          all Prospects under the SFD Technology License, whether through cash
          flows of a joint venture, sale of "leads" for Prospects, or revenues
          from our direct ownership and sale of hydrocarbons from Prospects; and

       .  the term "prospect expenses" being defined as all project expenses
          actually paid by our company with respect to the commercial
          exploitation of all SFD Prospects.

  .  In addition to the noted payments, commencing on January 1, 2001, we will
     become obligated to grant Momentum warrants to purchase 16,000 shares of
     our common stock for each month in which Prospect production exceeds 20,000
     barrels of hydrocarbons. The exercise price for these warrants will be the
     "fair market value" of our common stock as determined by reference to the
     closing price on the last business day of the quarter of the calculation.

  .  Momentum is prohibited during the term of the SFD Technology License from
     engaging in the identification or exploitation of hydrocarbons for its own
     account, and cannot grant any license or sublicense to any third party
     to use the SFD Sensor or the SFD Data for the identification or
     exploitation of hydrocarbons.

  .  The initial term of the SFD Technology License expires on December 31,
     2005, however, it will renew automatically for additional one year terms
     unless we give written notice to Momentum, no later than 60 days prior to
     the expiration of the pending term, of our election not to automatically
     renew the SFD Technology License.

  .  Momentum, in turn, reserves the right to terminate the SFD Technology
     License upon the occurrence of any of the following events:

       .  Our failure to make any payment required under the SFD Technology
          License.

       .  Our abandonment or discontinuance of the conduct of the oil and gas
          exploration business;

       .  Our dissolution or liquidation;

                                      -18-
<PAGE>

       .  Our assignment of our assets for the benefit of our creditors, or our
          filing bankruptcy, or the appointment of a receiver for our business
          or property; or

       .  Our failure to perform any other material covenant, agreement or term
          of the SFD Technology License.

  .  Momentum may also terminate the SFD Technology License upon the occurrence
     of a "Change in Control" with respect to our company. For the purposes of
     the foregoing, the term "Change in Control" is defined as any of the
     following events:

       .  an acquisition whereby immediately after the acquisition, a person
          holds beneficial ownership of more than 50% of the total combined
          voting power of our then outstanding voting securities; or

       .  if in any period of three consecutive years after the date of the SFD
          Technology License, our incumbent Board of Directors at the beginning
          of that period ceases to constitute a majority of the Board of
          Directors for reasons other than:

            [_]     voluntary resignation,

            [_]     refusal by one or more Board members to stand for election,
                    or

            [_]     removal of one or more Board members for good cause,
                    provided that:

                      .  if the nomination or election of any new director was
                         approved by a vote of at least a majority of the
                         incumbent board, then such new director shall be deemed
                         a member of the incumbent board, and

                      .  no individual shall be considered a member of the
                         incumbent board if such individual initially assumed
                         office as a result of either an actual or threatened
                         "election contest" (as described in Rule 14a-11
                         promulgated under the Securities Exchange Act of 1934);
                         or

       .  our Board of Directors or stockholders approve:

            [_]     our merger, consolidation or reorganization;

            [_]     our complete liquidation or dissolution; or

            [_]     the agreement for the sale or other disposition of all or
                    substantially all of our assets;

       .  provided, however, a Change in Control shall not be deemed to occur in
          the event of any of the following:

            [_]     our redemption of our stock; or

            [_]     a "non-control transaction" in which our stockholders
                    immediately before a transaction, directly or indirectly own
                    immediately after the transaction at least a majority of the
                    total combined voting power of the outstanding voting
                    securities of the surviving corporation, in substantially
                    the same proportion as those stockholders' ownership of our
                    voting securities immediately before such transaction.

                                      -19-
<PAGE>

We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD
Technology

As noted above, we have the exclusive right to utilize SFD Data for hydrocarbon
exploration pursuant to the terms of our Restated Technology Agreement with
Momentum Resources Corporation. While Momentum claims common law ownership of
the SFD Technology, it has not obtained patent or copyright protection for the
SFD Technology. Based in part on an opinion of patent counsel, Momentum and our
company each believe that the disclosure risks inherent in patent or copyright
registration far outweigh any legal protections which might be afforded by such
registration. In the absence of significant patent or copyright protection, we
may be vulnerable to competitors who attempt to imitate our SFD technology, or
to develop functionally similar technologies.

Although we believe that we have all rights necessary to market our services
without infringing upon any patents or copyrights held by others, we cannot give
you any assurance that conflicting patents or copyrights do not exist. We rely
upon trade secret protection and confidentiality and non-disclosure agreements
with our employees, consultants, joint venture partners and others to protect
our proprietary rights. Furthermore, we do not believe, were Momentum to apply
for and receive patent protection, that patent protection would necessarily
protect Momentum or our company from competition. Momentum and our company
therefore anticipate continued reliance upon contractual rights and on common
law to protect our trade secrets. The steps taken by our company and Momentum to
protect our respective rights may not be adequate to deter misappropriation, or
to preclude an independent third party from developing functionally similar
technology.

We cannot give you any assurance that others will not independently develop
substantially equivalent proprietary information and techniques, or otherwise
gain access to the Momentum's or our trade secrets, or otherwise disclose
aspects of the SFD technology, or that we will be able to meaningfully protect
our trade secrets. We also cannot give you any assurance that Momentum or our
company will not be required to defend against litigation or to enforce or
defend intellectual property rights relating to our SFD technology. Legal and
accounting costs relating to prosecuting or defending intellectual property
rights may be substantial.

Item 2.   Properties

Leased Premises

Our principal executive office space consists of 13,325 square feet located at
Suite 750, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, T2P 3G2, which
we have leased for a five-year term extending through January 31, 2003. Our
combined obligations for base lease payments and building operating cost and
other pass-through items under this lease as of the date of this annual report
is Cdn. $21,862 per month, which translates into U.S. $15,015 per month based
upon the closing conversion rate as of December 31, 1999. We have the option
under our lease, at the expiration of the five year term, to renew the lease if
we have had no defaults under the lease. We believe that these facilities are
adequate for our needs for the near future. We also maintain hangar facilities
for our survey aircraft which we rent on a monthly basis, as well as executive
office facilities in Las Vegas, Nevada, for United States operational
requirements which we rent on a quarterly basis.

Petroleum Properties

We have no producing properties or oil and gas revenues or proven reserves for
any of our most recent three fiscal years ended December 31, 1999.

Summarized below is information relating to the exploratory wells in which we
have or had either a working interest or an overriding royalty interest in the
United States or Canada that have been spudded, drilled or completed as of
December 31, 1999 and as of the date of this annual report:

                                      -20-
<PAGE>

  .  Exploratory Wells Drilled In The United States

       .  Leucite Hills South Prospect

          In September 1999, we elected through Pinnacle U.S. to participate on
          a working interest basis with CamWest in drilling an exploration well
          on a ten square mile prospect in the Green River Basin in Sublette
          County, Wyoming. As a consequence of that election, we acquired a
          combination 11.25% overall working interest and a 1.6% overall net
          overriding royalty interest in the original earning section, which we
          refer to as our "Leucite Hills South" prospect.

          This exploratory well, which was spudded in September 1999, was
          drilled by a third-party operator, and cased and completed as a
          natural gas discovery in September 1999. This well will not, however,
          be placed into production by the operator until a sufficient number of
          additional wells are drilled on the exploratory block and can be tied
          into a gathering system. No additional step-out wells have been
          scheduled for drilling as of the date of this annual report. The
          potential estimated or proven reserves of the reservoir has not been
          ascertained.

       .  Poblano Prospect

          In October 1999, we elected through Pinnacle U.S. to participate on a
          working interest basis with CamWest in drilling an exploration well on
          a ten square mile prospect in the Green River Basin in Sublette
          County, Wyoming. As a consequence of that election, we acquired a
          combination 16.875% overall working interest and a 2.49% overall net
          overriding royalty interest on the exploration block, which we refer
          to as our "Poblano" prospect.

          The exploratory well, which was spudded in October 1999, was drilled,
          cased and completed in January 2000 as a natural gas discovery.
          Production from this well will commence pending completion of a twelve
          mile pipeline which will tie the well into an existing sales system.
          The potential estimated or proven reserves of the reservoir has not
          been ascertained.

          Based upon the results of the first exploratory well, CamWest spudded
          a second step-out exploration well on the Poblano exploration block in
          March 2000, and drilling continues as of the date of this annual
          report. Our working interest and overriding royalty on this
          exploration well is identical to that which we hold with respect to
          the initial exploration well.

       .  Poblano South Prospect

          In October 1999, we elected through Pinnacle U.S. to participate on a
          working interest basis with CamWest in drilling an exploration well on
          a ten square mile prospect in the Green River Basin in Sublette
          County, Wyoming. This exploratory block adjoins our Poblano
          exploratory block. As a consequence of that election, we acquired a
          combination 5.625% overall working interest and a 0.8% overall net
          overriding royalty interest on the exploration block, which we refer
          to as our "Poblano South" prospect.

          The exploratory well, which was spudded in October 1999, was drilled,
          cased and completed in January 2000. This well has been shut-in by the
          operator pending further evaluation of its completion program. The
          potential estimated or proven reserves of the reservoir has not been
          ascertained.

  .  Exploratory Wells Drilled In Canada

       .  Shoal Point Prospect

          One exploration well spudded in early 1999 by a third-party operator
          at Shoal Point, Newfoundland, was drilled, evaluated and determined to
          be a dry hole. Pinnacle Canada

                                      -21-
<PAGE>

          elected a royalty interest through Encal with respect to this
          prospect. Due to the expiration of the underlying mineral lease, we do
          not believe that Encal has any current working interest in this
          prospect at this date.

       .  Carbon Prospect

          In December 1999, we elected through Pinnacle Canada, to accept an
          overriding royalty interest from Encal with respect to an exploration
          well it would drill in southern Alberta. As a consequence of this
          election, we acquired a 2.5% overall overriding royalty interest on
          the exploration block, which we refer to as our "Carbon" prospect.

          The exploratory well, which was spudded in December 1999, was drilled,
          cased and completed in January 2000 as a natural gas discovery. This
          well is currently suspended pending further completion activity by the
          operator. The potential estimated or proven reserves of the reservoir
          has not been ascertained.

       .  Monarch Prospect

          In November 1999, we elected through Pinnacle Canada, to participate
          on a working interest basis with Encal in drilling an exploration well
          on an SFD Prospect in southern Alberta. As a consequence of that
          election, we acquired a combination 22.5% overall working interest and
          a 3.1% overall net overriding royalty interest on lands Encal acquired
          in the exploration block, which we refer to as our "Monarch" prospect.
          The exploratory well was spudded in March 2000, and is currently cased
          and awaiting completion.

Item 3.   Legal Proceedings

As of the date of this annual report, there are no material legal proceedings
pending or, to the knowledge of our management, contemplated or threatened, to
which to our company or properties are or may become a party. As of the date of
this annual report, there are, to the knowledge of our management, no material
proceedings to which any director, officer of affiliate of our company is a
party adverse to our company or has a material interest adverse to our company.

Item 4.   Submission Of Matters To A Vote Of Securities Holders

There were no matters submitted to a vote of our security holders during our
fourth quarter ended December 31, 1999.

                                    Part II
                                    -------

Item 5.   Market Price Of And Dividends On Our Common Stock And Related
          Stockholder Matters

Market Information

Our common stock trades over-the-counter on the NASD OTC Bulletin Board under
the trading symbol "PSFD." The following table lists, by calendar quarter, the
volume of trading and the high and low sales prices of our common stock on the
NASD OTC Bulletin Board for our three most recent fiscal years ended December
31, 1999.

                                      -22-
<PAGE>

<TABLE>
<CAPTION>
                                                                  Sales Price
                                                           ------------------------
           Period                           Volume           High             Low
           ------------------------        --------        -------          -------
           <S>                           <C>             <C>                <C>
           1999:
           Fourth Quarter..........        715,500        $ 29.000          $13.063
           Third Quarter...........        358,700          14.688           10.500
           Second Quarter..........        754,800          20.000           11.375
           First Quarter...........        506,100          19.000           10.000

           1998:
           Fourth Quarter..........      2,361,600        $ 19.375          $ 3.500
           Third Quarter...........      1,194,700          14.625            6.500
           Second Quarter..........      2,236,472          15.250            9.125
           First Quarter...........      4,770,148          14.375            7.375

           1997:
           Fourth Quarter..........      4,667,954        $ 13.250          $ 6.500
           Third Quarter...........      4,155,507          15.000            7.688
           Second Quarter..........      3,155,612           9.375            4.375
           First Quarter...........      3,896,838           7.438            3.813
</TABLE>

The closing price for our common stock as of March 28, 2000 was $38.

On March 29, 2000, the shareholders' list provided by our transfer agent showed
60 registered shareholders and 12,870,016 shares of common stock outstanding.
We estimate, based upon information provided by our stock transfer agents for
our last annual meeting of stockholders held in September 1999, that there are
approximately 1,300 beneficial holders of our common stock.

As of March 29, 2000, there were also outstanding 800,000 shares of our series
"A" convertible preferred stock, held by one stockholder, for which no trading
market presently exists. These shares are each convertible into one share of
common stock. There are also outstanding as of March 29, 2000, options and
warrants entitling the holders to purchase 1,760,800 and 200,000 shares of our
common stock, respectively. These warrants to purchase 200,000 shares of our
common stock were fully exercised and paid on April 3, 2000.

Dividend Policy

We have never paid any cash dividends on shares of our capital stock, and we do
not anticipate that we will pay any dividends in the foreseeable future. Our
current business plan is to retain any future earnings to finance the expansion
of our business. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors as our
Board of Directors may deem relevant at that time.

Item 6.   Selected Consolidated Financial Information

The following table presents selected historical consolidated financial data
derived from our consolidated financial statements. The selected statement of
loss data set forth below for our three fiscal periods ended December 31, 1999,
December 31, 1998 and December 31, 1997, and the selected balance sheet data set
forth below as of December 31, 1999 and December 31, 1998, have been audited by
Deloitte & Touche LLP, independent auditors, as indicated in their report
contained in the consolidated financial statements included in Item 14 of this
annual report. The selected statement of loss data set forth below for the
fiscal periods ended December 31, 1996 and December 31, 1995, and the selected

                                      -23-
<PAGE>

balance sheet data set forth below at December 31, 1997, December 31, 1996 and
December 31, 1995, are derived from our audited consolidated financial
statements not included in this annual report.

The following selected financial data should be read in conjunction with:

  .  our consolidated financial statements and the notes to our consolidated
     financial statements included in Item 14 of this annual report; and

  .  Item 7 of this annual report captioned "Management's Discussion and
     Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                                                           Oct. 20, 1995
                                                                                                          (Inception) to
                                                           Twelve Months Ended December 31,                   Dec. 31,
                                                ------------------------------------------------------
Consolidated Statement of Loss Data:                1999          1998          1997          1996             1995
                                                -----------   -----------   -----------    -----------    --------------
<S>                                             <C>           <C>           <C>            <C>            <C>
Operating Revenues............................  $        --   $        --   $        --    $        --    $           --

Operating expenses:
   Administrative.............................    1,132,390       979,119       742,438        355,391            53,024
   Amortization and depreciation..............      171,494        71,919        25,474         24,435               672
   Research and development...................      272,489        57,823       103,079             --                --
   Survey support.............................      287,632       193,759       120,588        101,010                --
   Survey operations and data analysis, net
     of reimbursements by joint venture
     partners ................................       30,354        30,026       114,686             --                --
   Write-down of assets.......................          588            --        17,074             --                --
                                                -----------   -----------   -----------    -----------    --------------
      Total operating expenses................    1,894,947     1,332,646     1,008,653        480,836            53,696

Operating loss................................   (1,894,947)   (1,332,646)   (1,008,653)      (480,836)          (53,696)

Other income (expenses):
   Interest income............................      360,434       209,906        47,832          5,258                --
   Interest expense on promissory notes.......           --       (14,299)     (110,000)            --                --
   Other income...............................           --        19,231            --             --                --
   Settlement of damages......................           --            --       157,500             --                --
                                                -----------   -----------   -----------    -----------    --------------
      Total other income (expenses)...........      360,434       214,638        95,332          5,258                --

Net loss for the period.......................  $(1,534,513)  $(1,117,808)  $  (913,321)   $  (475,578)   $      (53,696)
                                                ===========   ===========   ===========    ===========    ==============

Other comprehensive loss:
  Foreign currency translation adjustments....      (29,403)          --             --             --                --
                                                ------------  -----------   -----------    -----------    --------------
Comprehensive loss for the period.............  $(1,563,916)  $(1,117,808)  $  (913,321)   $  (475,578)   $      (53,696)
                                                ===========   ===========   ===========    ===========    ==============

Basic and diluted loss per share..............  $     (0.12)  $     (0.35)  $     (0.08)   $     (0.04)   $        (0.01)
                                                ===========   ===========   ===========    ===========    ==============

Weighted average shares outstanding...........   12,684,289    12,392,011    11,979,385     11,472,992        10,090,675
                                                ===========   ===========   ===========    ===========    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                            As Of December 31,
                                                ------------------------------------------------------------------------
Consolidated Balance Sheet Data:                    1999          1998          1997          1996             1995
                                                -----------   -----------   -----------    -----------    --------------
<S>                                             <C>           <C>           <C>            <C>            <C>
Working capital..............................   $ 8,656,695   $ 4,685,238   $   680,820    $   339,118    $      (87,208)
Current assets...............................     9,259,016     4,862,588       969,957        534,156            49,517
Total assets.................................    10,729,926     5,566,205     1,179,862        639,508            88,029
Current liabilities..........................       602,321       177,350       289,137        195,032           136,725
Total liabilities............................       602,321       177,350     1,482,165        195,032           136,725
Shareholders' equity (deficit)...............    10,127,605     5,388,855      (296,054)       444,476           (48,696)
</TABLE>

                                      -24-
<PAGE>

Item 7.   Management's Discussion And Analysis Of Financial Condition And
          Results Of Operations

The following discussion of our consolidated financial condition and the results
of our operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included in
Item 14 of this annual report.

Overview

We are a technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We conduct our reconnaissance exploration activities, as well as
land acquisition, drilling, completion and production activities to exploit
prospects identified using our SFD technology, through our two wholly-owned
operating subsidiaries, Pinnacle U.S. which focuses on United States-based
exploration, and Pinnacle Canada which focuses on Canadian-based exploration.
Pinnacle, in turn, concentrates on research and development efforts to improve
the efficacy of our SFD Survey System.

Our United States exploration efforts to date have been conducted for CamWest
Exploration LLC under a joint venture agreement pursuant to which we conduct
aerial surveys to identify prospects in exploration areas in the United States
selected by CamWest. Our Canadian exploration efforts to date have been
conducted primarily for Encal Energy Ltd. under a joint venture agreement
pursuant to which we conduct aerial surveys to identify prospects in exploration
areas in Canada selected by Encal. We have also commenced conducting exploration
activities in western Canada for our own account.

The joint venture agreements we have entered into with our joint venture
partners generally entitle us to elect to receive one of the two following
payment streams for each SFD-identified prospect accepted and drilled under the
applicable agreement:

  .  a capital investment and generally risk-free overriding royalty of 5% to 8%
     of oil or natural gas revenues received by the joint venture partner with
     respect to the prospect. In any situation where we elect to receive this
     royalty, our joint venture partner will be responsible, at its own cost and
     risk, to acquire the necessary drilling rights for the prospect if it has
     not already done so, and to conduct all drilling, production and marketing
     activities necessary to exploit the prospect.

  .  a working interest of up to 45% of the joint venture partner's revenues
     with respect to the prospect. In any situation where we elect to
     participate on a working interest basis, we must bear our share of the
     mineral rights and drilling acquisition (if necessary), drilling and
     production costs incurred with respect to the prospect based upon our
     working interest percentage. Although we will bear our share of these
     costs, our joint venture partner will nevertheless remain responsible for
     conducting and managing all drilling, production and marketing activities
     to exploit the prospect.

Our U.S. joint venture partner is also required under the terms of its joint
venture agreement to reimburse us for 100% of the expenses we incur in
conducting aerial surveys for that partner, while our Canadian joint venture
partner is required under the terms of its joint venture agreement to reimburse
us for 50% of the expenses we incur in conducting aerial surveys for that
partner.

Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty.

Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum Resources Corporation a fee equal to
1% of

                                      -25-
<PAGE>

any "prospect profits" (as that term is defined in the license) which we may
receive on or before December 31, 2000, and 5% of any prospect profits which we
may receive after December 31, 2000.

As of December 31, 1999 and the date of this annual report:

  .  One exploration well spudded in early 1999 by a third-party operator at
     Shoal Point, Newfoundland, was drilled, evaluated and determined to be a
     dry hole. Pinnacle Canada elected a royalty interest through Encal with
     respect to this prospect.

  .  One exploration well in September 1999 by at third-party operator at our
     Leucite Hills South prospect in Wyoming, was drilled, cased and completed
     in September 1999 as a natural gas discovery. This well will not be placed
     into production by the operator, however, until a sufficient number of
     additional wells are drilled on the exploratory block and can be tied into
     a gathering system. Pinnacle U.S. elected a combination working interest
     and overriding royalty interest with respect to this prospect.

  .  One exploration well spudded by CamWest in October 1999 at our Poblano
     prospect in Wyoming, was drilled, cased and completed in January 2000 as a
     natural gas discovery, and production will commence upon completion of a
     twelve-mile pipeline that will tie the well into a sales system. CamWest
     spudded a step-out exploratory well on this prospect in March 2000, which
     is still in the process of being drilled as of the date of this annual
     report. Pinnacle U.S. elected a combination working interest and overriding
     royalty interest with respect to this prospect.

  .  One exploration well spudded by at third-party operator in October 1999 at
     our Poblano South prospect in Wyoming, was drilled, cased and completed in
     January 2000. This well has been shut-in by the operator pending further
     evaluation of its completion program. Pinnacle U.S. elected a combination
     working interest and overriding royalty interest with respect to this
     prospect.

  .  One exploration well spudded in December 1999 in southern Alberta by Encal
     at our Carbon prospect in southern Alberta, was drilled, cased and
     completed in January 2000 as a natural gas discovery. This well is
     currently suspended pending further completion activity by the operator.
     Pinnacle Canada elected an overriding royalty interest with respect to this
     prospect.

  .  One exploration well spudded in March 2000 by Encal at our Monarch prospect
     in southern Alberta. This well is currently cased and is awaiting
     completion. Pinnacle Canada elected a combination working interest and
     overriding royalty interest with respect to this prospect.

We anticipate that two to four exploration wells will be spudded on other
prospects by our joint venture partners or third-party operators by June 30,
2000.

Since we have not generated operating revenues to date, we should be considered
a development stage enterprise.

Capital Requirements

We have not generated operating revenues to date, although we have one completed
well at our Poblano Prospect which we anticipate will commence production as
soon as a twelve-mile pipeline is completed which will connect the prospect to a
sales system. We anticipate the pipeline will be laid upon completion of our
first step-out exploratory well on our Poblano Prospect. Assuming no unforseen
delays or changes in production plans, production will commence by our third
quarter in fiscal 2000. We are also drilling several additional exploratory
wells in fiscal 1999, including the noted step-out exploratory well on the
Poblano Prospect, which should add to any revenues we generate.

Absent revenues, our sole source of cash to fund our operational and capital
investment needs are monies we have raised through the private placement of our
securities and exercise of employee options.

                                      -26-
<PAGE>

For further information regarding these transactions, see "--Liquidity And
Capital Resources--Sources Of Cash" below.

We have budgeted the following level of expenditures over the twelve-month
period ended December 31, 2000:

  .  Approximately $2,500,000 for continuing operations including SFD research
     and development activities; and

  .  Up to $3,500,000 in capital expenditures to acquire and outfit an
     additional survey aircraft and invest in working interests with our joint
     venture partners or acquire drilling interests for our own account,
     although the overall amount of these capital expenditures may be
     significantly reduced or increased depending upon the success of our joint
     venture partners' drilling efforts over the next six to twelve months.

After taking into consideration the $8,656,695 in working capital we had
available as of December 31, 1999, and an additional $1,500,000 in working
capital we raised subsequent to December 31, 1999 as a consequence of the
exercise of warrants previously sold in August 1998, we have sufficient working
capital on hand to fund our current level of operations, including research and
development but excluding capital investments in working interests beyond that
amount budgeted for the next twelve months as described above, through mid 2002.
Our ability in the longer term to continue as a going concern will be dependent
upon our ability to either:

  .  raise additional capital through private or public placements of our
     securities, or

  .  our receipt of meaningful amounts of revenues from our joint venture
     partners or through our own exploration efforts, which, in either case,
     will be dependent upon successful exploration and production activities.

Results Of Consolidated Operations

Operating Revenues

We had no oil and gas working interest or royalty revenues for our twelve-month
fiscal periods ended December 31, 1999, December 31, 1998 and December 31, 1997
("fiscal 1999," fiscal 1998," and "fiscal 1997," respectively).

Operating Loss

We incurred an operating loss of $894,947 for fiscal 1999, as compared to
$1,323,646 and $1,008,653 for fiscal 1998 and fiscal 1997, respectively.

  .  Fiscal 1999 Compared to Fiscal 1998

     The 42.2% increase in our operating loss for fiscal 1999 over fiscal 1998
     was primarily attributable to the following changes in expense:

       .  a $214,666, or 371.2%, increase in research and development expense
          from $57,823 to $272,489;

       .  a $153,271 or 15.7%, increase in administrative expense from $979,119
          to $1,132,390;

       .  a $99,575, or 138.5%, increase in amortization and depreciation from
          $71,919 to $171,494; and

                                      -27-
<PAGE>

       .  a $93,873, or 48.4%, increase in survey support expense from $193,759
          to $287,632.

  .  Fiscal 1998 Compared to Fiscal 1997

     The 32.1% increase in our operating loss for fiscal 1998 over fiscal 1997
     was primarily attributable to the following changes in expense:

       .  a $236,681, or 31.9%, increase in administrative expenses from
          $742,438 to $979,119;

       .  a $73,171, or 60.7%, increase in survey support expense from
          $120,588 to $193,759; and

       .  a $46,445, or 132.3%, increase in amortization and depreciation from
          $25,474 to $71,919; and

       .  a $30,026 increase in net survey and data analysis expense from $0 to
          $30,026; and

       partially offset by:

       .  a $45,256, or 43.9%, decrease in research and development expense from
          $103,079 to $57,823.

  .  Relative Changes In Administrative Expense

     The $153,271 increase in administrative expense for fiscal 1999 was
     primarily attributable to across-the-board net increases in costs to
     support our increased level of business activities in fiscal 1999, the most
     significant of which were increases of $166,395 in wages and benefits;
     partially offset by a $111,739 decrease in legal expense. The $236,681
     increase in administrative expense for fiscal 1998 was primarily
     attributable to across-the-board net increases in costs to support our
     increased level of business activities in fiscal 1998, the most significant
     of which were increases of $134,321 in wages and benefits, $57,823 in rent
     expense as the result of our moving into permanent premises necessary to
     support our increased level of operations, $54,218 in consulting fees and
     $44,064 in shareholder communication costs; partially offset by a decline
     of $213,742 in legal fees paid.

  .  Relative Changes In Research and Development Expense

     Research and development expense generally relates to the cost--including
     allocable salaries--to develop, improve and test our SFD Survey System and
     related components. The $214,666 increase in research and development
     expense for fiscal 1999 was principally attributable to salaries associated
     with additional research and development staffing as we focused increased
     efforts to improve the operation and efficacy of our SFD Survey System. The
     $45,256 decrease in research and development expense for fiscal 1998 was
     principally attributable to our completion of significant research and
     development projects in 1997, including the adaptation of our SFD
     technology to an airborne platform incorporating a global positioning
     system.

  .  Relative Changes In Amortization and Depreciation

     The $99,575 increase in amortization and depreciation for fiscal 1999 was
     primarily attributable to $57,139 in additional depreciation arising as the
     result of our purchase of our survey aircraft in late 1998 and $49,083 in
     additional depreciation and amortization arising in connection with our
     acquisition of additional computer equipment and software, partially offset
     by reduced depreciation occurring as the result of the disposition of a
     vehicle. The $46,445 increase in amortization and depreciation for fiscal
     1998 was primarily attributable to $19,968 in additional depreciation and
     amortization arising in connection with our acquisition of additional
     computer equipment and software, $16,471 in additional depreciation arising
     as the result of our purchase of our survey aircraft in late 1998, $16,188
     in additional depreciation arising as the result of our investment in

                                      -28-
<PAGE>

     leasehold improvements in 1998, and $15,488 in additional depreciation
     arising as the result of our purchase of a vehicle in 1998.

  .  Relative Changes In Survey Support Expense

     Survey support expense generally relates to the cost--including allocable
     salaries--to:

       .  conduct field evaluations designed by our joint venture partners to
          evaluate our SFD technology (after netting any costs which our joint
          venture partners are required to reimburse us for); and

       .  develop, organize, staff and train our survey and interpretation
          operational functions.

     The $93,873 increase in survey support expense for fiscal 1999 was
     primarily attributable to across-the-board net increases in costs to
     support our increased level of survey operations, the most significant of
     which were increases of $97,014 in salaries associated with additional
     support staffing and $42,947 in additional aircraft improvement expenses,
     partially offset in the elimination of airplane charter costs of $70,498 as
     a result of the purchase of our aircraft. The $73,171 increase in survey
     support expense for fiscal 1998 was primarily attributable to our
     commencement of full commercial SFD survey activities in early 1998.

  .  Relative Changes In Survey And Data Analysis Expense

     Survey and data analysis expenditures consist primarily of any costs we
     incur conducting commercial SFD survey activities. These costs can be
     generally broken down into the following two components:

       .  aircraft operating costs, travel expenses and allocable salaries of
          our personnel while on survey assignment (after netting any costs our
          joint venture partners are required to reimburse us for); and

       .  allocable salaries incurred by our personnel interpreting SFD Data.

     Our total survey and data analysis expense, before taking any joint venture
     partner reimbursement into account, was $151,806 is fiscal 1999, as
     compared to $174,422 and $0 in fiscal 1998 and fiscal 1997, respectively.
     The decline in total survey and data analysis expense was primarily
     attributable to our reduction in charter costs as the result of our
     acquisition of our own aircraft in late 1998, as opposed to a reduction in
     the overall level of survey activities.

     Our net survey and data analysis expense--after taking into consideration
     joint venture partner reimbursements of $121,452, $144,396 and $0 in fiscal
     1999, fiscal 1998 and fiscal 1997, respectively--was $30,534 in fiscal 1999
     as compared to $30,026 and $0 in fiscal 1998 and fiscal 1997, respectively.
     The reduction in reimbursable amounts for fiscal 1999 as compared to fiscal
     1998 was principally attributable to new methods of calculating
     reimbursable costs as a result of the acquisition of our aircraft. The
     increase in reimbursable amount for fiscal 1998 as compared to fiscal 1997
     was principally attributable to our commencement of full commercial SFD
     survey activities in early 1998.

  .  Expectations Relative To Future Expense Levels

     We effectively doubled our company staff during fiscal 1999 through the
     hiring of key professionals, including executive, geological, geophysical,
     scientific, information technology and aviation

                                      -29-
<PAGE>

     personnel, and we anticipate that we will continue to hire similar
     personnel over the next year. We anticipate that our total operating
     expenses will continue to significantly increase on a quarterly basis
     through the end of fiscal 2000 as a result of the additional wages and
     employee benefits to be paid to any additional personnel we may hire as
     well as an increased level of operations which will be facilitated by
     recent and anticipated hirings.

Other Income And Expense

  .  Interest Income

     We earned $360,434 in interest income for fiscal 1999, as compared to
     $209,906 and $47,832 for fiscal 1998 and fiscal 1997, respectively. The
     increase in interest income for fiscal 1999 was attributable to higher cash
     balances in our accounts as a result of a $6,000,000 private placement
     of our common stock in May 1999, while the increase for fiscal 1998 was
     attributable to higher cash balances as a result of a $6,000,000 private
     placement of our series "A" preferred stock and warrants in April 1998.

  .  Interest Expense

     We incurred $14,299 in interest expense in fiscal 1998, as compared to
     $110,000 in fiscal 1997. The noted expense primarily represents interest
     accrued on $1 million in loans made to our company in January of 1997 by
     Messrs. R. Dirk Stinson and George Liszicasz. These loans were converted
     into our common stock on February 1, 1998. Interest expense for fiscal 1998
     was lower than the amount incurred for fiscal 1997 insofar as the loan
     balances were carried for only one month in fiscal 1998, as compared to
     eleven months in fiscal 1997.

Liquidity And Capital Resources

  .  Sources of Cash

     Our cash flow requirements from our inception as Pinnacle U.S. (October 20,
     1995) through December 31, 1999 were funded principally from:

       .  a private placement in May 1996 of 975,000 shares of our common stock
          for total gross proceeds of $975,000,

       .  loans to our company by Messrs. Liszicasz and Stinson in the amount of
          $1,000,000 in January 1997, and the subsequent conversion of the
          outstanding balance of principal and accrued interest of these loans
          in the amount of $1,120,000 into 411,764 shares of our common stock in
          February 1998;

       .  a private placement in April 1998 of 800,000 shares of our convertible
          series "A" preferred stock and 200,000 common stock purchase warrants
          for total gross proceeds of $6,000,000; and

       .  a private placement in May 1999 of 400,000 shares of our common stock
          for total gross proceeds of $6,000,000.


Subsequent to December 31, 1999, the holder of warrants to purchase 200,000
shares of our common stock at an exercise price of $7.10 per share exercised
those warrants on April 3, 2000, resulting in gross proceeds to our company of
$1,500,000.

                                     -30-
<PAGE>

  .  Cash Position and Sources And Uses Of Cash

     Our cash position as of December 31, 1999 was $9,068,723, as compared to
     $4,713,822 and $848,339 as of December 31, 1998 and 1997, respectively. The
     bulk of our cash is maintained in a United States government and
     government-backed securities money-market account.

     The $4,354,901 increase in our cash position for fiscal 1999 was
     attributable to $6,302,631 in cash raised through financing activities,
     partially offset by $885,973 in cash used in operating activities,
     $1,032,354 in cash used in investing activities, and a $29,403
     comprehensive loss due to the effect of exchange rate changes. The
     $3,865,483 increase in our cash position for fiscal 1998 was attributable
     to $5,542,447 in cash raised through financing activities, partially offset
     by $1,050,059 in cash used in operating activities and $626,905 in cash
     used in investing activities.

     Our operating activities required cash in the amount of $885,973 for fiscal
     1999, as compared to cash requirements of $1,050,059 for fiscal 1998. The
     $885,973 in cash used in operating activities for fiscal 1999 reflected our
     net loss of $1,534,513 for that period, as decreased for non-cash
     deductions and a net increase in non-cash working capital balances. The
     $1,050,059 in cash used in operating activities for fiscal 1998 reflected
     our net loss of $1,117,808 for that period, as decreased for non-cash
     deductions and a net increase in non-cash working capital balances.

     We raised $6,302,631 in cash from financing activities for fiscal 1999, as
     compared to $5,542,447 in cash raised from financing activities in fiscal
     1998. The $6,302,631 in cash raised through financing activities in fiscal
     1999 was principally comprised of $6,000,0000 in gross proceeds from the
     private placement of our common stock and $303,979 in gross proceeds from
     the exercise of employee stock options. The $5,542,447 in cash raised
     through financing activities in fiscal 1998 was comprised of $6,000,0000 in
     gross proceeds from the private placement of our series "A" convertible
     preferred stock and common stock purchase warrants.

     We used cash in the amount of $1,032,354 for investing activities in fiscal
     1999, as compared to $626,905 in cash used for investing activities in
     fiscal 1998. The principal use of cash in fiscal 1999 was to acquire
     drilling rights in exploratory blocks pursuant to working interest
     elections ($775,159) and to acquire property, equipment and computer
     software ($258,058), while the principal use of cash in fiscal 1998 was to
     acquire property, equipment and computer software ($591,492).

Other Matters

Foreign Exchange

We recorded a $29,403 foreign currency translation loss in fiscal 1999 as a
comprehensive loss item on our statements of loss and stockholders' equity
(deficit) in consolidating our books for financial reporting purposes as a
result of the fluctuation in United States--Canadian currency exchange rates
during that period. We anticipate that our exposure to significant foreign
currency gains or losses on our books will increase as we invest a greater
portion of our United States-dollar denominated cash reserves into our Canadian
operations and properties through intercompany advancements. We cannot give you
any assurance that our future operating results will not be similarly adversely
affected by currency exchange rate fluctuations. See Item 7A of this annual
report captioned "Quantitative and Qualitative Disclosure About Market Risk,"
for a description of other aspects of our company that may be potentially
affected by foreign exchange fluctuations.

Effect Of Inflation

We do not believe that our operating results have been adversely affected at any
time over the last three fiscal periods by inflation or changing prices.

                                      -31-
<PAGE>

Year 2000 Compliance

During fiscal 1999 we reviewed our internal computer systems and software
products for Year 2000 problems, and found them to be generally Year 2000
compliant, and have had no Year 2000 complications as of the date of this annual
report.

Uncertainties And Risk Factors That May Affect Our Future Results And Financial
Condition

We have described below a number of uncertainties and risks which, in addition
to uncertainties and risks presented elsewhere in this annual report, may affect
our future results of operations or financial condition. The uncertainties and
risks enumerated below as well as those presented elsewhere in this annual
report should be considered carefully in evaluating our company and our business
and the value of our securities.

Uncertainties and Risk Factors Generally Relating To Our Company And Our
Business

  .  We Are A Development Stage Enterprise Which Has Accumulated Losses Since
     Our Inception, And We Anticipate That We Will Continue To Incur Operating
     Losses For The Near Future

     We are a developmental stage enterprise since we have not received any oil
     or gas revenues to date, and have, as a consequence of our lack of
     revenues, incurred a net loss in the amount of $4,094,916 from our
     inception in October 1995 through December 31, 1999. Our ability to
     generate revenues and profits will depend primarily upon the successful
     implementation of our business plan, which is dependent at this point in
     time upon one or more of our joint venture partners successfully drilling
     and producing commercially viable quantities of oil or natural gas from SFD
     Prospects we identify. We do not anticipate that we will receive any oil or
     gas revenues until the third quarter of fiscal 2000, at the earliest,
     assuming our current contemplated drilling program is successful and there
     are no complications in drilling or completing the wells or tying them into
     a sales or gathering system. We anticipate that we will continue to incur
     significant losses on a month-to-month basis for at least twelve to
     eighteen months going forward from the date of this annual report,
     notwithstanding our receipt of oil and gas revenues based upon our internal
     projections, due to our significant monthly operating and research and
     development costs.

  .  Our Limited Operating History Could Adversely Affect Our Business

     We are a recently organized development stage enterprise with an unproven
     technology and a limited operating history. Our activities through the date
     of this annual report have encompassed:

       .  developing our business plan;

       .  obtaining license rights to our SFD technologies;

                                      -32-
<PAGE>

     . establishing administrative offices and laboratory facilities, and
       engaging executive, administrative, scientific, geological, geophysical,
       scientific, information technology and aviation personnel;

     . developing our SFD technology to a commercial stage;

     . acquiring joint venture partners;

     . conducting commercial SFD surveys on behalf of our joint venture
       partners; and

     . successfully drilling oil and gas wells identified through our SFD
       technology.

     We are subject to all the risks and issues inherent in the establishment
     and expansion of a new business enterprise including, among others,
     problems of using new and unproven technologies, hiring and training
     personnel, acquiring reliable facilities and equipment, and implementing
     operational controls. In general, startup businesses are subject to risks
     and or levels of risk that are often greater than those encountered by
     companies with established operations and relationships. Startups often
     require significant capital from sources other than operations. The
     management and employees of startup businesses shoulder the burdens of the
     business operations and a workload associated with company growth and
     capitalization that is disproportionately greater than that for an
     established business. Our limited operating history makes it difficult, if
     not impossible, to predict future operating results. We cannot give you any
     assurance that we will successfully address these risks. Our failure to
     successfully address these risks could have a material, adverse effect on
     our business, financial condition and operating results.

  .  Our Future Success Is Dependent Upon Our Ability, Through Utilization Of
     Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations
     For Development By Our Joint Venture Partners.

     Our future success is dependent upon our ability, through utilization of
     our SFD technology, to locate commercially viable hydrocarbon accumulations
     for development by our joint venture partners. Based on our business plan,
     we will be dependent on:

       .  the efficacy of our SFD technology in locating SFD Prospects; and

       .  the cooperation of, and capital investment by, our joint venture
          partners in exploiting these prospects.

     Although the results of our SFD technology as a geologic structural
     identification tool have been satisfactorily tested by our joint venture
     partners, we cannot give you any assurances that our SFD technology will be
     able to consistently locate hydrocarbons or oil and gas prospects, or that
     these prospects will be commercially exploitable. We also cannot give you
     any assurances that we will be able to discover commercial quantities of
     oil and gas, or that our joint venture partners will successfully acquire
     and drill properties at low finding costs.

  .  We Are Reliant Upon Our Joint Venture Partners For Opportunities To
     Participate In Exploration Prospects

     We will be reliant, at least in the near-term, upon our joint venture
     partners for opportunities to participate in exploration prospects, through
     overriding royalties or equity participation on a working interest basis
     from producing SFD Prospects. We exclusively focus on exploration and the
     review and identification of viable prospects through our SFD technology,
     and rely upon our joint venture partners to provide and complete all other
     project operations and responsibilities, including land acquisition,
     drilling, marketing and project administration. As a result, we have only a
     limited ability to exercise control over the selection of prospects for
     development, drilling or production operations, or the associated costs of
     such operations. The success of each project will be dependent upon a

                                      -33-
<PAGE>

     number of factors which are outside our control, or controlled by our joint
     venture partners as the project operator, in accordance with the applicable
     agreements between our company and the joint venture partners. These
     factors include:

       .  the selection and approval of prospects for lease/acquisition and
          exploratory drilling;

       .  obtaining favorable leases and required permitting for projects;

       .  the availability of capital resources of the joint venture partner for
          land acquisition and drilling expenditures;

       .  the timing of drilling activity, and the economic conditions at such
          time, including then prevailing prices for oil and gas; and

       .  the timing and amount of distributions from the production.

     Our reliance on our joint venture partners, and our limited ability to
     directly control project operations, costs and distributions could have a
     material adverse effect on the realization of return from our interest in
     projects, and on our overall financial condition.

  .  Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success
     Of Drilling And Production From Prospects In Which We Participate Through
     Agreements With Our Joint venture partners

     Pursuant to our business plan, our revenues and cash flow will, at least in
     the near-term, be principally dependent upon the success of drilling and
     production from prospects in which we participate through agreements with
     our joint venture partners in the form of an overriding royalty or a
     working interest or other participation right. The success of these
     prospects will be determined by the location, development and production of
     commercial quantities of hydrocarbons. Exploratory drilling is subject to
     numerous risks, including the risk that no commercially productive oil and
     gas reservoirs will be encountered. The cost to our joint venture partners
     to drill, complete and operate wells is often uncertain, and drilling
     operations may be curtailed, delayed or canceled as a result of a variety
     of factors including unexpected formation and drilling conditions, pressure
     or other irregularities in formations, equipment failures or accidents, as
     well as weather conditions, compliance with governmental requirements and
     shortages or delays in the delivery of equipment. Our partners' inability
     to successfully locate and drill wells that produce commercial quantities
     of oil and gas would have a material adverse effect on our business,
     financial position and results of operations.

  .  Our Future Operating Results May In The Future Fluctuate Significantly

     Our operating results may in the future fluctuate significantly depending
     upon a number of factors including industry conditions, prices of oil and
     gas, rate of drilling success, rates of production from completed wells and
     the timing of capital expenditures. This variability could have a material
     adverse effect on our business, financial condition and results of
     operations. In addition, any failure or delay in the realization of
     expected cash flows from initial operating activities could limit our
     future ability to continue exploration and to participate in economically
     attractive projects.

  .  Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse
     Effect On Our Business

     It is impossible to predict future oil and natural gas price movements with
     any certainty, as they have historically been subject to wide fluctuations
     in response to a variety of market conditions, including:

                                      -34-
<PAGE>

       .  relatively minor changes in the supply and demand for oil and natural
          gas,

       .  economic, political and regulatory developments, and

       .  competition from other sources of energy.

     Any extended or substantial decline in oil and gas prices would have a
     material adverse effect on:

       .  our ability to negotiate favorable joint ventures with viable industry
          participants;

       .  the volume of oil and gas that could be economically produced by the
          joint ventures in which we participate;

       .  our cash flow; and

       .  our access to capital.

     We do not currently intend to engage in hedging activities, and may be more
     adversely affected by fluctuations in oil and gas prices than other
     industry participants that do engage in such activities. Our business,
     results of operations and financial condition would be materially and
     adversely affected by adverse changes in prevailing oil and gas prices. See
     Item 7A, captioned "Quantitative And Qualitative Disclosures About Market
     Risk," for additional discussion of market risks relating to oil and gas
     price fluctuations.

  .  The Intense Competition That Is Prevalent In The Oil And Gas Industry Could
     Have A Material Adverse Effect On Our Business

     We compete directly with independent, technology-driven oil and gas
     exploration service companies, and indirectly (through our joint venture
     partnerships) with major and independent oil and gas companies in our
     exploration for and development of commercial oil and gas properties. We
     will experience competition from numerous oil and gas exploration
     competitors offering a wide variety of geological and geophysical services.
     Many of these competitors have substantially greater financial, technical,
     sales, marketing and other resources than we do, and may be able to devote
     greater resources to the development, promotion and sales of their services
     than our company. We cannot give you any assurance that our competitors
     will not develop exploration services that are superior to our SFD
     technology, or that these technologies will not achieve greater market
     acceptance than our SFD technology. Increased competition could impair our
     ability to attract viable industry participants, and to negotiate favorable
     participations and joint ventures with such parties, which could materially
     and adversely affect our business, operating results and financial
     condition.

     The oil and gas industry is highly competitive. Many companies and
     individuals are engaged in the business of acquiring interests in and
     developing oil and gas properties in the United States and Canada, and the
     industry is not dominated by any single competitor or a small number of
     competitors. Our joint venture partners will compete with numerous industry
     participants for the acquisition of land and rights to prospects, and for
     the equipment and labor required to operate and develop such prospects.
     Many of these competitors have financial, technical and other resources
     substantially in excess of those available to us or our joint venture
     partners. These competitive disadvantages could adversely affect our or our
     joint venture partners' ability to participate in projects with favorable
     rates of return.

                                      -35-
<PAGE>

  .  There Is Limited Market Acceptance For Our SFD Technology, And It Must
     Compete With Established Geological And Geophysical Technologies Which Have
     Already Achieved Market Acceptance.

     There is limited market acceptance for our SFD technology, and it must
     compete with established geological and geophysical technologies which have
     already achieved market acceptance. As is typical in the case of any new
     technology, demand and market acceptance for our SFD technology is subject
     to a high level of uncertainty and risk. Because the market for exploration
     services using our SFD technology is new and evolving, it is difficult to
     predict the future growth rate, and the size of the potential market. We
     cannot give you any assurance that a market for our exploration services
     will develop, or be sustainable. If the market fails to develop, or if our
     exploration services do not achieve or sustain market acceptance, our
     business, results of operations and financial condition would be materially
     and adversely affected.

  .  Technological Advancements In The Oil And Gas Industry Could Have A
     Material Adverse Effect On Our Business

     The oil and gas industry is characterized by rapid technological
     advancements and the frequent introduction of new products, services and
     technologies. As new technologies develop, we may be placed at a
     competitive disadvantage, and competitive pressures may force us to improve
     or complement our SFD technology, or to implement additional technologies
     at substantial cost. In addition, other oil and gas exploration companies
     may implement new technologies before us, and these companies may be able
     to provide enhanced capabilities and superior quality. We cannot give you
     any assurance that we will be able to respond to these competitive
     pressures and implement or enhance our SFD technology on a timely basis, or
     at an acceptable cost. In such case, our business, financial condition and
     results of operations could be materially adversely affected.

  .  Our Inability To Retain Our Key Managerial, Geological and Geophysical, and
     Research and Development Personnel Could Have A Material Adverse Effect On
     Our Business

     Our success depends to a significant extent on the continued efforts of our
     senior management team, which currently is composed of a small number of
     individuals, including Mr. George Liszicasz, the inventor of our SFD
     technology who is our Chief Executive Officer and who is responsible for
     the continuing development of our SFD technology and the interpretation of
     SFD Data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our
     President/Chief Operations Officer and our Executive Vice President of
     Operations, respectively.

     The loss of Mr. Liszicasz's services would be extremely difficult to
     replace since he is the inventor of, and has intimate knowledge of, the
     theoretical basis of the SFD technology, and has also developed the
     methodologies used to interpret SFD Data, and the loss of his services
     would likely have a material adverse effect on our business, results of
     operations and financial condition. While we are presently training
     personnel to operate our SFD technology and to interpret SFD Data, we
     cannot give you any assurance that these personnel could fully replace Mr.
     Liszicasz with respect to these functions, at least in the short-term.
     Moreover, we do not know if we would be able to successfully replicate the
     SFD technology in the event of the loss of Mr. Liszicasz.

     The loss of Messrs. Topolinsky's and Ehret's services would also be
     extremely difficult to replace due to their management skills and their
     core knowledge of our SFD technology and business as a result of their
     association with our company over the past several years, and their loss
     would also likely have a material adverse effect on our business, results
     of operations and financial condition.

     While we have entered into employment agreements with our senior management
     team, Mr. Liszicasz is not obligated--and as a result of his relationships
     with Momentum Resources Corporation may in the future be unable--to devote
     his entire undivided time and effort to or for our

                                      -36-
<PAGE>

     benefit. While we currently carry a key person life insurance on Mr.
     Liszicasz, we do not carry any key person life insurance policies on any of
     our other executive officers.

     Our success also depends, to a lesser extent, on the continued efforts of
     our geological interpretive and research and development teams, which are
     composed of a small number of individuals. While there are professionals
     who could replace these individuals, none of these professionals have any
     theoretical or working knowledge of how to interpret SFD Data or how our
     SFD technology operates, and it would take a significant period of time to
     train any replacement personnel. Until such time as we have a fully trained
     complement of geological interpretive and research and development teams,
     the loss of any members of these teams could adversely affect the pace at
     which we interpret SFD Data or effect improvements to our SFD technology,
     which could adversely impact our business and results of operations and
     financial condition.

  .  We May Be Unable To Attract The Qualified Managerial, Geological and
     Geophysical, and Research and Development Personnel Required To Implement
     Our Longer-Term Growth Strategies

     Our ability to implement our longer-term growth strategies depends upon our
     continuing ability to attract and retain highly qualified geological,
     technical, scientific, information management and administrative personnel.
     Competition for these types of personnel is intense and we cannot give you
     any assurance that we will be able to retain our key managerial,
     professional and/or technical employees, or that we will be able to attract
     and retain additional highly qualified managerial, professional and/or
     technical personnel in the future. Our inability to attract and retain the
     necessary personnel could impede our growth.

  .  We May Be Unable To Effectively Manage Our Expected Growth

     Our success will depend upon the rapid expansion of our business. Expansion
     will place a significant strain on our financial, management and other
     resources, and will require us, among other things, to:

       .  change, expand and improve our operating, managerial and financial
          systems and controls; and

       .  improve coordination between our various corporate functions.

     We cannot give you any assurance that we will be able to manage the
     expansion of our business effectively. Our inability to effectively manage
     our growth, including the failure of any new personnel we hire to achieve
     anticipated performance levels, would have a material adverse effect on our
     business, results of operations and financial position.

  .  Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory,
     Political And Other Risks Associated with International Transactions

     We currently operate within the United States and Canada and anticipate we
     will also operate outside of these countries in the foreseeable future.
     These operations will subject us to several potential risks, including
     risks associated with:

       .  fluctuating exchange rates,

       .  the regulation by the governments of the United States and Canada as
          well as foreign governments of fund transfers and export and import
          duties and tariffs; and

       .  political instability.

                                      -37-
<PAGE>

     We cannot give you any assurance that any of these risks will not have a
     material adverse effect upon our business. We do not currently engage in
     activities to mitigate the effects of foreign currency fluctuations. If
     earnings from international operations increase, our exposure to
     fluctuations in foreign currencies may increase, and we may utilize forward
     exchange rate contracts or engage in other efforts to mitigate foreign
     currency risks. We can give you no assurance as to the effectiveness of
     these efforts in limiting any adverse effects of foreign currency
     fluctuations on our international operations and our overall results of
     operations.

  .  Our Statements About Anticipated Events Or Future Trends May Prove To Be
     Inaccurate

     In this annual report we have made a number of statements, which we refer
     to as "forward-looking statements," generally relating to our expectations
     or speculations as to future events and our observations as to trends and
     factors that may impact our future operating results. You can generally
     identify any forward-looking statements contained in this annual report
     through words such as "anticipate," "believe," "estimate," "expect,"
     "budget" "project" and similar expressions. Forward-looking statements that
     may be contained in this annual report would, for example, include
     statements relating to:

       .  the timing of our SFD survey activities and the amount of SFD Data we
          may acquire including, by way of example and not limitation, those
          statements contained in that section in Item of this annual report
          captioned "Business--Operational Practices In Conducting SFD Surveys--
          How Fast Can We Acquire And Interpret SFD Data?;"

       .  the timing and likelihood of success of our SFD Data interpretation
          activities including, by way of example and not limitation, those
          statements contained in that section in Item 1 of this annual report
          captioned "Business--Operational Practices In Conducting SFD Surveys--
          How We Interpret SFD Data?;"

       .  the timing and likelihood of success of our drilling and production
          plans including, by way of example and not limitation, those
          statements contained in that section in Item 1 of this annual report
          captioned "Business--Status Of Our Exploration Efforts" and Item 2 of
          this annual report captioned "Properties--Petroleum Properties?;"

       .  the amount and character of future oil and gas revenues we may
          receive, the timing of receipt of revenues, and the timing of break-
          even, including, by way of example and not limitation, those
          statements contained in that section in Item 1 of this annual report
          captioned "Business--Status Of Our Exploration Efforts;" Item 2 of
          this annual report captioned "Properties--Petroleum Properties?;" Item
          7 of this annual report captioned "Management's Discussion And
          Analysis of Financial Condition And Results Of Operations--Overview;"
          and Item 7 of this annual report captioned "Management's Discussion
          And Analysis Of Financial Condition And Results Of Operations--Capital
          Requirements;"

       .  the amount and character of expenses we may incur, and the timing of
          these expenditures including, by way of example and not limitation,
          those statements contained in those sections in Item 7 of this annual
          report captioned "Management's Discussion And Analysis Of Financial
          Condition And Results Of Operations--Capital Requirements" and
          "Management's Discussion And Analysis Of Financial Condition And
          Results Of Operations--Results Of Consolidated Operations--
          Expectations Relative To Future Expense Levels;"

       .  the amount and composition of our capital expense budget, and the
          timing of these capital outlays including, by way of example and not
          limitation, those statements contained in those sections in Item 7 of
          this annual report captioned "Management's Discussion And Analysis Of
          Financial Condition And Results Of Operations--Capital Requirements"
          and

                                      -38-
<PAGE>

          "Management's Discussion And Analysis Of Financial Condition And
          Results Of Operations--Results Of Consolidated Operations--
          Expectations Relative To Future Expense Levels;" and

       .  our corporate objectives and growth strategies including, by way of
          example and not limitation, those statements contained in that section
          in Item 1 of this Annual Report captioned "Business--Corporate
          Objective."

     Whenever you read any forward looking statement contained in this annual
     report, you should be aware of and take into consideration that:

       .  the forward-looking statement merely reflects the current expectations
          and speculation of our management as to anticipated events or
          observations relating to future trends based, in part, upon currently
          available information and our current business plan, and

       .  actual results from these future events may differ materially from the
          results expected or speculated or trends observed as expressed in, or
          implied by, the forward-looking statement, as a result of changes in
          circumstances and events and other uncertainties and risks, including:

            [_]     changes in our business plan and corporate strategies or
                    that of our joint venture partners;

            [_]     delays in our ability to conduct and complete SFD surveys or
                    interpret SFD Data,

            [_]     delays on the part of our joint venture partners in planning
                    SFD survey activities, in conducting geologic and
                    geophysical evaluations of recommended anomalies, in
                    acquiring drilling rights, in conducting exploratory
                    drilling activities and completing wells, and in connecting
                    producing wells to pipelines and other production
                    infrastructure; or

            [_]     the occurrence of the various types of uncertainties and
                    risk factors described above in this section as well as
                    those described in Item 7A of this annual report captioned
                    "Quantitative and Qualitative Disclosure About Market Risk;"
                    and

       .  the forward-looking statement must, in any event, be considered in
          context with the various disclosures made by our company in this
          annual report about our business.

     We are not obligated to update or revise any forward looking statement
     contained in this annual report to reflect new events or circumstances. You
     are also cautioned that we intend for all forward-looking statements
     contained in this annual report to be construed as "forward-looking
     statements" within the meaning Section 21E of the United States Securities
     Exchange Act of 1934, which establishes a safe-harbor from private actions
     for forward-looking statements as defined in that statute.

  .  The Observations, Beliefs And Opinions Expressed In This Annual Report
     Relating To The Scientific Basis And Principles Of Our SFD Technology
     Represent Those Of Pinnacle Alone

     The observations, beliefs and opinions we express in this annual report
     relating to the scientific basis and principles of our SFD technology, and
     the ability of our SFD Technology to detect subsurface hydraulic and
     mechanical conditions, represent those of our company and our management
     alone, and should not be construed as representing those of any third
     party, including our joint venture partners and any professional geologists
     and engineers we may engage, except to the extent expressly stated in this
     annual report. We maintain the scientific and operating principles and
     mechanics of our SFD technology in strict confidence. While our joint
     venture partners and any professional geologists and engineers we may
     engage from time-to-time have observed the operations of our SFD technology
     while on survey assignment, and are given access to the results

                                      -39-
<PAGE>

     of selected interpreted SFD Leads in connection with our recommendations,
     they have not been given any information relating to the scientific and
     operating principles and mechanics of our SFD technology other than general
     information consistent with the general observations, beliefs and opinions
     we express in this annual report. Our joint venture partners and any
     professional geologists and engineers we may engage do not hold themselves
     out as being experts in or otherwise having specific knowledge as to our
     SFD technology and its scientific basis and principles.

Matters Relating To Our Common Stock

  .  There Is Only A Limited Public Market For Our Common Stock

     There is only a limited public market for our common stock on the NASD OTC
     Electronic Bulletin, and we cannot give you any assurance that a broader or
     more active public trading market for our common stock will develop or be
     sustained. We are under no obligation to take any action to improve the
     public market for our securities including, without limitation, filing an
     application to list our common stock on any stock exchange or any other
     over the other counter market.

  .  Our Stock Price Is Extremely Volatile

     The market price for our common stock is extremely volatile and subject to
     significant price and volume fluctuations in response to a variety of
     external and internal factors. This is especially true with respect to
     emerging companies such as ours. Examples of external factors, which can
     generally be described as factors that are unrelated to the operating
     performance or financial condition of any particular company, include
     changes in interest rates and worldwide economic and market conditions, as
     well as changes in industry conditions, such as changes in oil and gas
     prices, oil and gas inventory levels, regulatory and environment rules, and
     announcements of technology innovations or new products by other companies.
     Examples of internal factors, which can generally be described as factors
     that are directly related to our operating performance or financial
     condition, would include release of reports by securities analysts and
     announcements we may make from time-to-time relative to our operating
     performance, drilling results, advances in technology or other business
     developments.

     Because we are a development stage enterprise with a limited operating
     history and no revenues or profits, the market price for our common stock
     will be more volatile than that of a seasoned issuer. Changes in the market
     price of our common stock may have no connection with our operating results
     or prospects. No predictions or projections can be made as to what the
     prevailing market price for our common stock will be at any time.

  .  You May Become Subject To The Penny Stock Rules If Our Stock Price Declines
     To Less Than $5

     Since our common stock is not listed on a national stock exchange or quoted
     on the Nasdaq Market, it will become subject, in the event the market price
     for these shares declines to less than $5 per share, to a number of
     regulations known as the "penny stock rules." The penny stock rules require
     a broker-dealer to deliver a standardized risk disclosure document prepared
     by the Securities and Exchange Commission, to provide the customer with
     additional information including current bid and offer quotations for the
     penny stock, the compensation of the broker-dealer and its salesperson in
     the transaction, monthly account statements showing the market value of
     each penny stock held in the customer's account, and to make a special
     written determination that the penny stock is a suitable investment for the
     purchaser and receive the purchaser's written agreement to the transaction.
     To the extent these requirements may be applicable they will reduce the
     level of trading activity in the secondary market for our common stock and
     may severely and adversely affect the ability of broker-dealers to sell our
     common stock.

                                      -40-
<PAGE>

  .  Our Common Stockholders Should Not Expect To Receive A Liquidation
     Distribution

     If we were to wind-up or dissolve our company and liquidate and distribute
     our assets, the holders of our common stock would share ratably in our
     assets only after we satisfy any amounts we would owe to our creditors and
     any amounts we would owe to our series "A" preferred stockholders as a
     liquidation preference ($7.50 per share, or $6,000,000 in the aggregate).
     If our liquidation or dissolution were attributable to our inability to
     profitably operate our business, then it is likely that we would have
     material liabilities at the time of liquidation or dissolution.
     Accordingly, we cannot give you any assurance that sufficient assets will
     remain available after the payment of our creditors and preferred
     stockholders to enable you to receive any liquidation distribution with
     respect to any shares of our common stock you may hold.

  .  Two Of Our Principal Stockholders Control Our Company

     Messrs. George Liszicasz and R. Dirk Stinson, our two principal
     stockholders and two of our directors, beneficially own over two-thirds of
     our common stock, and will therefore have the power, as a group, to elect a
     majority of our Board of Directors. Our Board, in turn, has the power to
     appoint our officers and to determine, in accordance with their fiduciary
     duties and the business judgment rule, our direction, objectives and
     policies, such as:

       .  our business expansion or acquisition policies;

       .  whether we should raise additional capital through financing or equity
          sources, and in what amounts;

       .  whether we should retain our cash reserves for future product
          development, or distribute them as a dividend, and in what amounts;

       .  whether we should sell all or a substantial portion of our assets, or
          should merge or consolidate with another corporation; and

       .  transactions which may cause or prevent a change in control or the
          winding up and dissolution of our company.

     An investment in our common stock will entail entrusting these and similar
     decisions to our present management subject, of course, to their fiduciary
     duties and the business judgment rule.

  .  There Is An Inherent Conflict In Interest Arising As a Result Of the
     Relationship Between Our Two Principal Stockholders And The Licensor Of Our
     SFD Technology

     Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control
     both our company and Momentum Resources Corporation, which has granted us
     an exclusive license to identifying oil and natural gas prospects using
     SFD Data while reserving the exclusive right to use the SFD technology for
     purposes other than oil and natural gas exploration. Although Mr. Liszicasz
     has entered into an employment agreement with us he is not obligated, and
     as a result of his relationship with Momentum may in the future not be
     able, to devote his entire undivided time and effort to or for our benefit.
     As a result of the foregoing relationships, certain conflicts of interests
     between our company and one or more of Momentum and Messrs. Liszicasz and
     Stinson may directly or indirectly arise, including the following:

       .  Mr. Liszicasz's potential inability to devote his undivided time and
          attention to our affairs; and

       .  the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary
          duties on our behalf as directors and controlling stockholders of our
          company in connection with any matters concerning Momentum such as, by
          way of example and not limitation:

                                      -41-
<PAGE>

          [_]  disputes regarding the validity, scope or duration of the SFD
               Technology License;

          [_]  the exploitation of corporate opportunities;

          [_]  rights to proprietary property and information;

          [_]  maintenance of confidential information as between entities; and

          [_]  potential competition between our company and Momentum.

     While Messrs. Liszicasz and Stinson and our company have each executed
     certain disclosures and consents relating to these conflicts, these
     disclosures and consents will not remediate these conflicts, but will
     merely release Messrs. Liszicasz and Stinson from liability as a result of
     the conflicts so long as they use reasonable efforts to minimize the
     conflicts. In the event any of these conflicts prove to be irreconcilable,
     Messrs. Liszicasz and Stinson may be forced to resign their positions with
     our company.

Item 7a.  Quantitative and Qualitative Disclosure About Market Risk

Oil And Gas Price Fluctuations

Our primary market risks will be related to market changes in oil and gas
prices. Since our prospective royalty revenues will be tied to the price at
which our joint venture partners sell oil and gas on the world market, any
fluctuations in these prices will directly and proportionately impact our
royalty income base. For example, a 1% increase or decrease in oil or gas prices
would result in a corresponding 1% increase or decrease in our oil or gas
royalties. Should we elect a working interest in lieu of a royalty interest, our
working interest revenue base would be similarly affected, except that this
affect would not necessarily be proportional since production and marketing
costs would most likely remain the same. For example, in the case of a decline
in oil and gas prices where production and marketing costs are unaffected, the
decline in our working interest revenues would most likely be greater, in
percentage terms, than the decline in oil and gas prices.

We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations--such as forcing our company or our joint
venture partners to slow down or cut-back SFD survey or interpretation
operations or staffing levels--insofar as a primary benefit of the SFD
technology is to reduce finding costs, which benefit becomes more important as
oil and gas prices decline. A decline in oil and gas prices could, however,
force our joint venture partners to curtail exploration drilling operations
since these operations are ordinarily funded out of available cash flow which,
in turn, is dependent upon oil and gas prices. This eventuality would adversely
affect our future cash flows since these prospects would not be drilled until
our joint venture partner obtained sufficient capital. Even if exploration
activities are curtailed, however, a decline in oil and gas prices raises
opportunities to acquire and "bank" SFD-qualified prospects at lower acquisition
prices, which can then be drilled when oil and gas prices increase.

A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well, which would likely be a "marginal
producing well," on the basis that the decline in price no longer makes the well
economic to operate. In such an event we would no longer receive royalty or
working interest revenues from the shut-in well.

For further information on market risks, see Item 7, captioned "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations--Uncertainties And Other Factors That May Affect Our Future Results
And Financial Condition--Uncertainties And Risk Factors Generally Relating To
Our Company And Our Business--Volatility Of Oil And Natural Gas Prices."

                                      -42-
<PAGE>

Oil And Gas Price Fluctuations

Our primary market risks will be related to market changes in oil and gas prices
(See Item 7, captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Uncertainties And Other Factors That May
Affect Our Future Results And Financial Condition--Risks Relating To The Company
And Its Business--Volatility Of Oil And Natural Gas Prices"). Since our
prospective royalty revenues will be tied to the price at which our joint
venture partners sell oil and gas on the world market, any fluctuations in these
prices will directly and proportionately impact our royalty income base (i.e., a
1% increase or decrease in oil or gas prices would result in a corresponding 1%
increase or decrease in our oil or gas royalties). Should we elect a working
interest in lieu of a royalty interest, our working interest revenue base would
be similarly affected, except that this affect would not necessarily be
proportional since production and marketing costs would most likely remain the
same. For example, in the case of a decline in oil and gas prices where
production and marketing costs are unaffected, the decline in our working
interest revenues would most likely be greater, in percentage terms, than the
decline in oil and gas prices.

We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations (i.e., force our company or our joint venture
partners to slow down or cut-back SFD survey or interpretation operations or our
staff) insofar as a primary benefit of the SFD technology is to reduce finding
costs, which benefit becomes more important as oil and gas prices decline. A
decline in oil and gas prices could, however, force our joint venture partners
to curtail exploration drilling operations since these operations are ordinarily
funded out of available cash flow which, in turn, is dependent upon oil and gas
prices. This eventuality would adversely affect our future cash flows since
these prospects would not be drilled until the joint venture partner obtained
sufficient capital. (Even if exploration activities are curtailed, however, a
decline in oil and gas prices raises opportunities to acquire and "bank"
SFD-qualified prospects at lower acquisition prices, which can then be drilled
when oil and gas prices increase).

A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well (primarily "marginal producing wells") on
the basis that the decline in price no longer makes the well economic to
operate. In such an event we would no longer receive royalty or working interest
revenues from the shut-in well.

Currency Fluctuations

An additional significant market risk relates to foreign currency fluctuations
between American and Canadian dollars. Since our royalty or working interest
revenues generated by our Canadian-based joint venture partners will be
denominated in Canadian currency, our financial position could be adversely
affected by American-Canadian currency fluctuations. We have not previously
engaged in activities to mitigate the effects of foreign currency fluctuations
due to the absence of Canadian revenues to date, and we anticipate that the
exchange rate between the American and Canadian dollar will remain fairly
stable.

If earnings from our Canadian operations increase, our exposure to fluctuations
in the American-Canadian exchange rate will increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate these foreign
currency risks. We cannot give you any assurance that the use of exchange rate
contracts or other mitigation efforts would effectively limit any adverse
effects of foreign currency fluctuations on our Company's international
operations and our overall results of operations.

Interest Rate Fluctuations

We currently maintain the bulk of our available cash in money-market accounts in
U.S. dollars. Our interest income from these short-term investments could be
adversely affected by any material changes in interest rates within the United
States.

                                      -43-
<PAGE>

Item 8.   Financial Statements And Supplementary Data

Financial Statements and the Report of Independent Auditors are filed with this
annual report on Form 10-K in a separate section following Part IV, as shown on
the index under Item 14(a) of this annual report.

Item 9.   Changes In And Disagreements With Accountants On Accounting And
          Financial Disclosure

Not applicable.

                                   Part III

Item 10.  Our Directors And Executive Officers

Information relating to our directors and executive officers required by this
item will be contained in our definitive proxy statement to be distributed later
this year pursuant to the rules of the Securities and Exchange Commission in
advance of our Annual Meeting of Stockholders. Pursuant to the rules of the
Securities and Exchange Commission, the information relating to our directors
and executive officers contained in our definitive proxy statement to be
distributed later this year in advance of our Annual Meeting of Stockholders is
hereby incorporated into this annual report by reference.

Item 11.  Executive Compensation

Information relating to executive compensation required by this item will be
contained in our definitive proxy statement to be distributed later this year
pursuant to the rules of the Securities and Exchange Commission in advance of
our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and
Exchange Commission, the information relating to executive compensation
contained in our definitive proxy statement to be distributed later this year in
advance of our Annual Meeting of Stockholders is hereby incorporated into this
annual report by reference.

Item 12.  Ownership Of Our Securities by Beneficial Owners And Management

Information relating to the ownership of our securities by beneficial owners and
our management required by this item will be contained in our definitive proxy
statement to be distributed later this year pursuant to the rules of the
Securities and Exchange Commission in advance of our Annual Meeting of
Stockholders. Pursuant to the rules of the Securities and Exchange Commission,
the information relating to the ownership of our securities by beneficial owners
and our management contained in our definitive proxy statement to be distributed
later this year in advance of our Annual Meeting of Stockholders is hereby
incorporated into this annual report by reference.

Item 13.  Certain Relationships And Related Transactions

Information relating to certain relationships and related transactions involving
our beneficial owners, management and agents required by this item will be
contained in our definitive proxy statement to be distributed later this year
pursuant to the rules of the Securities and Exchange Commission in advance of
our Annual Meeting of Stockholders. Pursuant to the rules of the Securities and
Exchange Commission, the information relating to certain relationships and
related transactions involving our beneficial owners, management and agents
contained in our definitive proxy statement to be distributed later this year in
advance of our Annual Meeting of Stockholders is hereby incorporated into this
annual report by reference.

                                      -44-
<PAGE>

                                    Part IV

Item 14.  Exhibits, Financial Statements, Schedules And Reports On Form 8--K

(a)(1) Financial Statements:

<TABLE>
         <S>                                                                                                     <C>
         Report of Independent Auditors (Deloitte & Touche LLP).............................................     F-1

         Consolidated Balance Sheets at December 31, 1999 and 1998..........................................     F-2

         Consolidated Statements of Loss and Comprehensive Loss for the twelve-month periods ended
         December 31, 1999, 1998 and 1997...................................................................     F-3

         Consolidated Statements of Stockholders' Equity (Deficit) from inception (October 20, 1995)
         through December 31, 1999..........................................................................     F-4

         Consolidated Statements of Cash Flows for the twelve-month periods ended December 31, 1999, 1998
         and 1997...........................................................................................     F-6

         Notes to Consolidated Financial Statements.........................................................     F-7
</TABLE>

(a)(2) Schedules required by Regulation S--X are filed as an exhibit to this
       report:

         Independent Auditors' Report on Schedules and Consent

         Schedules not listed above have been omitted because the information
         required to be set forth therein is not applicable or is shown in the
         financial statements notes thereto


(b)    Exhibits

       2.1      Reorganization Plan dated September 28, 1994 between Mega-Mart,
                Inc. and Auric Mining Corporation (1)

       2.2      Reorganization Plan dated December 31, 1995 between Auric Mining
                Corporation and Fiero Mining Corporation (1)

       2.3      Reorganization Plan dated January 20, 1996 between Auric Mining
                Corporation and Pinnacle Oil Inc. (1)

       3.1      Articles of Incorporation for Auric Mining Corporation (1)

       3.2      Amended Bylaws for Pinnacle Oil International, Inc. (1)

       3.3      Certificate of Amendment of Articles of Incorporation of
                Pinnacle Oil International, Inc. (1)

       4.1      Specimen Common Stock certificate (1)

       1.2      Specimen Series A Preferred Stock certificate (1)

       1.3      Form of Non-Qualified Stock Option Agreement for grants to
                directors (1)

       1.4      1997 Pinnacle Oil International, Inc. Stock Plan (1)

       1.5      Form of Incentive Stock Option Certificate for grants to
                employees (3)

       1.6      Warrant certificate for 200,000 Common Shares issued to SFD
                Investment LLC (1)

       9.1      Stockholder Agreement dated April 3, 1998 among Pinnacle Oil
                International, Inc., R. Dirk Stinson, George Liszicasz and SFD
                Investment LLC (1)

       10.1     Partnership Agreement of Messrs. Liszicasz and Stinson dated
                September 1, 1995 (1)

                                      -45-
<PAGE>

         10.2     Agreement between Pinnacle Oil Inc. and Mr. Liszicasz dated
                  January 1, 1996 (1)

         10.3     Momentum Transfer Agreement dated June 18, 1996 (1)

         10.4     Restated Technology Agreement dated August 1, 1996 (1)

         10.5     Amendment to Restated Technology Agreement dated April 3, 1998
                  (1)

         10.6     Letter Agreement with Encal Energy Ltd. dated December 13,
                  1996 (1)

         10.7     Exploration Joint Venture Agreement with Encal Energy Ltd.
                  dated February 19, 1997 (1)

         10.8     Exploration Joint Venture Agreement with Encal Energy Ltd.
                  dated September 15, 1997 (1)

         10.9     Letter Agreement with Renaissance Energy Ltd. dated April 16,
                  1997 (1)

         10.10    SFD Survey Agreement with Renaissance Energy Ltd. dated
                  November 1, 1997 (1)

         10.11    SFD Survey Agreement with Renaissance Energy Ltd. dated
                  February 1, 1998 (Prospect Lands #1) (1)

         10.12    SFD Survey Agreement with Renaissance Energy Ltd. dated
                  February 1, 1998 (Prospect Lands #2) (1)

         10.13    Joint Exploration and Development Agreement with CamWest
                  Limited Partnership dated April 3, 1998 (1)

         10.14    Assignment of Joint Exploration and Development Agreement with
                  CamWest Exploration LLC dated January 29, 1999 (3)

         10.15    Canadian Data License Agreement with Pinnacle Oil Canada Inc.
                  dated April 1, 1997 (1)

         10.16    American Data License Agreement with Pinnacle Oil Inc. dated
                  April 1, 1997 (1)

         10.17    Cost Recovery Agreement with Pinnacle Oil Canada Inc. dated
                  April 1, 1997 (1)

         10.18    Assignment Agreement with Pinnacle Oil Canada Inc. dated
                  September 15, 1997 (1)

         10.19    Assignment Agreement with Pinnacle Oil Canada Inc. dated April
                  1, 1997 (1)

         10.20    Assignment Agreement with Pinnacle Oil Canada Inc. dated
                  November 1, 1997 (1)

         10.21    Employment Agreement dated April 1, 1997 with Mr. Dirk Stinson
                  (1)

         10.22    Employment Agreement dated April 1, 1997 with Mr. George
                  Liszicasz (1)

         10.23    Unsecured Convertible Promissory Note ($500,000) in favor of
                  Mr. Liszicasz (1)

         10.24    Unsecured Convertible Promissory Note ($500,000) in favor of
                  Mr. Stinson (1)

         10.25    Promissory Notes of Pinnacle Oil Inc. in favor of Messrs.
                  Liszicasz and Stinson dated October 21, 1995 (1)

         10.26    Registration and Participation Rights Agreement dated April 3,
                  1998 between Pinnacle Oil International, Inc. and SFD
                  Investment LLC (1)

         10.27    Form of Indemnification Agreement between Pinnacle Oil
                  International, Inc. and each Director (1)

         10.28    Lease Agreement between Phoenix Place Ltd. and Pinnacle Oil
                  International, Inc. dated November 25, 1997 (1)

         10.29    Employment Agreement dated July 9, 1998 with John M. Woodbury,
                  Jr. (2)

         10.30    Assignment of Joint Exploration and Development Agreement
                  between CamWest Limited Partnership and CamWest Exploration
                  LLC dated January 29, 1999

         10.31    Settlement Agreement dated April 27, 1999

         10.32    Employment Agreement dated May 1, 1999 with Daniel C.
                  Topolinsky.

         10.33    Employment Agreement dated July 1, 1999 with James R. Ehrets.

         21.      List of significant subsidiaries

         23.      Consent of Independent Auditors--Deloitte & Touche LLP

                                              -46-
<PAGE>

         24.      Powers of Attorney

         27.      Financial Data Schedules

         99.1     Report captioned "Evaluation of Stress Field Detector
                  Technology--Implications for Oil and Gas Exploration in
                  Western Canada" dated September 30, 1996 prepared by Rod
                  Morris, P. geologist, A.P.E.G.G.A. (1)

         99.2     Report regarding "Stress Field Detector Technology" dated May
                  22, 1998 prepared by Encal Energy Ltd. (1)

         99.3     Report captioned "SFD Data Summary" dated August 26, 1998
                  prepared by CamWest, Inc. (2)

         99.4     Report captioned "Pinnacle Oil International Inc.--Stress
                  Field Detector Documentation of Certain Exploration and
                  Evaluation Activities" dated February 27, 1998 prepared by
                  Gilbert Laustsen Jung Associates Ltd. (1)

            (1)   Previously filed by our company as part of our Registration
                  Statement on Form 10 filed on June 29, 1998 (SEC File No. 0-
                  24027)

            (2)   Previously filed by our company as part of our Amendment No. 1
                  to Registration Statement on Form 10 filed on August 31, 1998

            (3)   Previously filed by our company as part of our Annual Report
                  on Form 10-K filed on March 31, 1999

                                      -47-
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
  1934, the registrant has duly caused this report to be signed on its behalf by
  the undersigned, thereunto duly authorized on April 14, 2000.

  Calgary, Alberta, Canada

                              PINNACLE OIL INTERNATIONAL, INC.


                              By: /s/ George Liszicasz
                                  ----------------------------------------------
                                      George Liszicasz
                                      Chief Executive Officer
                                      (principal executive officer)


                              By: /s/ Daniel C. Topolinsky
                                  ----------------------------------------------
                                      Daniel C. Topolinsky,
                                      President and Chief Operating Officer
                                      (principal executive officer)

                              By: /s/ John M. Woodbury, Jr.
                                  ---------------------------------------------
                                      John M. Woodbury, Jr.
                                      Chief Financial Officer
                                      (principal accounting and financial
                                      officer)

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
  report has been signed below by the following persons on behalf of the
  registrant on April 14, 2000, and in the capacities indicated.

    /s/ George Liszicasz                Chief Executive Officer and Chairman
--------------------------------
        George Liszicasz


    /s/ Daniel C. Topolinsky            President and Chief Operating Officer
--------------------------------
        Daniel C. Topolinsky            and Director


    /s/ John M. Woodbury, Jr.           Chief Financial Officer (principal
--------------------------------
        John M. Woodbury, Jr.           accounting and financial officer) and
                                        Secretary


    /s/ R. Dirk Stinson*                Director
--------------------------------
        R. Dirk Stinson


    /s/ Lorne W. Carson*                Director
--------------------------------
        Lorne W. Carson


    /s/ Jon E.M. Jacoby *               Director
--------------------------------
        Jon E.M. Jacoby


    /s/ K. Rick Turner *                Director
--------------------------------
        K. Rick Turner


    /s/ Dennis R. Hunter *              Director
--------------------------------
        Dennis R. Hunter


    /s/ John A. Thomson *               Director
--------------------------------
        John A. Thomson


   */s/ Daniel C. Topolinsky
--------------------------------
        Daniel C. Topolinsky
        (Attorney in Fact)

                                      -48-
<PAGE>

         Consolidated Financial Statements


                       Pinnacle Oil International, Inc.

                                   (A Development Stage Enterprise)
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------


To the Board of Directors and Shareholders of
Pinnacle Oil International, Inc.

We have audited the accompanying Consolidated Balance Sheets of Pinnacle Oil
International, Inc. (a development stage enterprise) as of December 31, 1999 and
1998, and the related Consolidated Statements Of Loss And Comprehensive Loss,
Shareholders' Equity (Deficit) and Cash Flows for each of the three years in the
period ended December 31, 1999, and for the period from October 20, 1995 (date
of inception) to December 31, 1999.  These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.  The Company's consolidated financial statements for the period October
20, 1995 (date of inception) through December 31, 1996, were audited by other
auditors whose report, dated March 15, 1997, expressed an unqualified opinion on
those statements, and included an explanatory paragraph describing matters that
raised a substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements for the period October 20, 1995
(date of inception) through December 31, 1996 reflect a net loss of $529,274 of
the related total. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts involved for such prior period, is
based solely on the report of such other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards required that we plan and perform an audit
to obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of another auditor, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1999 and 1998, in the
period and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, and for the
period from October 20, 1995 (date of inception) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.



                                                       /s/ Deloitte & Touche LLP


Chartered Accountants
Calgary, Alberta, Canada
February 18, 2000, except for
note 17 which is dated
April 4, 2000

                                      F-1
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                          Consolidated Balance Sheets
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                             At December 31,
                                                                                     ---------------------------------
                                                                                        1999                   1998
                                                                                     -----------           -----------
<S>                                                                                  <C>                   <C>
                                     ASSETS

Current assets:
   Cash and cash equivalents....................................................     $ 9,068,723           $ 4,713,822
   Accounts receivable..........................................................         101,731               120,100
   Due from officers and employees..............................................           3,219                 1,335
   Prepaid expenses and other...................................................          85,343                27,331
                                                                                     -----------           -----------
     Total current assets.......................................................       9,259,016             4,862,588

Note receivable from officer [note 4]...........................................          34,550                35,413

Deferred costs [note 5].........................................................            --                  93,014

Unproved oil and natural gas properties [notes 2(g) and 6]......................         775,159                  --

Unproven petroleum properties, net of accumulated
   depletion of $0 [note 2(g)]..................................................         661,412                  --

Other property and equipment, net of accumulated depreciation and
   amortization of $292,363 and $90,664, respectively [notes 2(h) and 7]........         661,201                575,190
                                                                                     -----------           ------------
        Total assets............................................................     $10,729,926           $  5,566,205
                                                                                     ===========           ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Trade payables...............................................................     $    32,716           $    141,426
   Wages and employee benefits payable..........................................         132,685                 17,290
   Accrued oil and natural gas property costs...................................         382,386                   --
   Other accrued liabilities....................................................          54,534                 18,634
                                                                                     -----------           ------------
     Total current liabilities..................................................         602,321                177,350

Shareholders' equity:
   Series "A" convertible preferred stock; par value $0.001 per share,
   liquidation preference $7.50 per share:
     800,000 shares authorized and 800,000 shares issued as of
     December 31, 1999 and December 31, 1998 [note 9]..........................             800                    800
   Common stock, par value $0.001 per share:
     50,000,000 shares authorized;
     12,856,816 shares issued as of December 31, 1999;
     12,421,983 shares issued as of December 31, 1998 [note 8]..................          12,857                 12,427
   Warrants [notes 9 and 10]...................................................       1,132,000              1,132,000
   Additional paid-in capital...................................................      16,330,692             10,040,031
   Accumulated deficit during the development stage.............................      (7,319,341)            (5,796,403)
   Accumulated other comprehensive loss.........................................         (29,403)                  --
                                                                                     -----------           ------------
     Total shareholders' equity.................................................      10,127,605              5,388,855
                                                                                     -----------           ------------
        Total liabilities and shareholders' equity..............................     $10,729,926           $  5,566,205
                                                                                     ===========           ============
</TABLE>

          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets

                                      F-2
<PAGE>

                        PINNACLE OIL INTERNATIONAL, INC.
                        (A Development Stage Enterprise)

            Consolidated Statements Of Loss and Comprehensive Loss
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                             October 20,
                                                                                                                 1995
                                                                                                            (inception) to
                                                             Twelve Months Ended December 31,                    1999
                                                        --------------------------------------------------
                                                             1999             1998                 1997      (cumulative)
                                                        ------------      ------------         -----------  ---------------
<S>                                                     <C>               <C>                  <C>          <C>
Operating expenses:
   Administrative..................................     $  1,132,390      $    969,119         $   742,438    $   3,262,362
   Amortization and depreciation [note 2(h)].......          171,494            71,919              25,474          293,994
   Research & development [note 2(i)]..............          272,489            57,823             103,079          534,401
   Survey support..................................          287,632           193,759             120,588          601,979
   Survey operations and data analysis, net of
     amounts reimbursable by joint venture
     partners of $121,453 and $144,396 and $0
     respectively [note 2(j)]......................           30,354            30,206                --             60,380
   Write-down of assets............................              588              --                17,074           17,662
                                                        ------------      ------------         -----------    -------------
      Total operating expenses.....................        1,894,947         1,332,646           1,008,653        4,770,778

Operating loss.....................................       (1,894,947)       (1,332,646)         (1,008,653)      (4,770,778)

Other income (expenses):
   Interest income.................................          360,434           209,906              47,832          623,430
   Interest expense on promissory notes............             --             (14,299)           (110,000)        (124,299)
   Other income....................................             --              19,231                --             19,231
   Settlement of damages...........................             --                --               157,500          157,500
                                                        ------------      ------------         -----------    -------------
      Total other income (expenses)................          360,434           214,838              95,147          675,862

Net loss for the period............................     $ (1,534,513)     $ (1,117,808)        $  (913,321)   $  (4,094,916)

Other comprehensive loss:
   Foreign currency translation adjustments........          (29,403)             --                  --            (29,403)
                                                        ============      ============         ===========    =============
Comprehensive loss for the period..................     $ (1,563,916)     $ (1,117,808)        $  (913,321)   $  (4,124,319)
                                                        ============      ============         ===========    =============

Basic and diluted loss per share [note 2(m)].......     $      (0.12)     $      (0.35)/(1)/   $     (0.08)
                                                        ============      ============         ===========

Weighted average shares outstanding................       12,684,289        12,392,011          11,979,385
                                                        ============      ============         ===========
</TABLE>

(1)  Basic and diluted loss per share for the twelve-month period ended December
     31, 1998 includes an adjustment for a deemed distribution attributable to a
     beneficial conversion feature for series "A" preferred stock. See notes
     2(m) and 9.

        The accompanying notes to consolidated financial statements are
           an integral part of these consolidated statements of loss

                                      F-3
<PAGE>

                        PINNACLE OIL INTERNATIONAL, INC.
                        (A Development Stage Enterprise)

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                       Accumulated                               Series "A"
                                                         Other                                  Convertible
                                                         Compre-         Common Stock         Preferred Stock
                                                         hensive      -------------------    -----------------
                                                         Income        Shares      Amount    Shares     Amount
                                                       -----------    ---------   -------    ------     ------
<S>                                                    <C>            <C>         <C>        <C>        <C>
  1995:
  Issued at inception for cash at $0.001 per share
     on October 20, 1995.............................           --    5,000,000   $ 5,000        --     $   --
  Net loss for fiscal 1995...........................           --           --        --        --         --
  Net other comprehensive loss for fiscal 1995.......           --           --        --        --         --
                                                       -----------    ---------   -------    ------      -----
       Balance -- December 31, 1995..................           --    5,000,000     5,000        --         --

  1996:
  Issued on reverse acquisition on January 30, 1996..           --    5,968,281     5,968        --         --
  Issued for cash at $1 per share on May 29, 1996....           --      975,000       975        --         --
  Net loss for fiscal 1996...........................           --           --        --        --         --
  Net other comprehensive loss for fiscal 1996.......           --           --        --        --         --
                                                       -----------    ---------   -------    ------      -----
       Balance -- December 31, 1996..................                11,943,281    11,943        --         --

  1997:
  Issued for services at $2.31 1/2 per share on
    July 1, 1997.....................................           --       71,938        72        --         --
  Net loss for fiscal 1997...........................           --           --        --        --         --
  Net other comprehensive loss for fiscal 1997.......           --           --        --        --         --
                                                       -----------    ---------   -------    ------      -----
       Balance -- December 31, 1997..................                12,015,219    12,015        --         --

<CAPTION>
                                                                                                     Deficit
                                                               Common Stock                        Accumulated
                                                                 Warrants           Additional     During the
                                                          --------------------        Paid-in      Development
                                                          Number       Amount         Capital         Stage
                                                          ------       -------      ---------      -----------
<S>                                                       <C>          <C>          <C>            <C>
  1995:
  Issued at inception for cash at $0.001 per share
     on October 20, 1995.............................        --        $    --      $      --      $        --
  Net loss for fiscal 1995...........................        --             --             --               --
  Net other comprehensive loss for fiscal 1995.......        --             --             --          (53,696)
                                                         -------      ---------    ----------        ---------
       Balance -- December 31, 1995..................        --             --             --          (53,696)

  1996:
  Issued on reverse acquisition on January 30, 1996..        --             --         (5,968)              --
  Issued for cash at $1 per share on May 29, 1996....        --             --        967,775               --
  Net loss for fiscal 1996...........................        --             --             --               --
  Net other comprehensive loss for fiscal 1996.......        --             --             --         (475,579)
                                                         -------      ---------    ----------        ---------
       Balance -- December 31, 1996..................        --             --        961,807         (529,274)

  1997:
  Issued for services at $2.31 1/2 per share on              --             --        166,469               --
    July 1, 1997.....................................
  Net loss for fiscal 1997...........................        --             --             --               --
  Net other comprehensive loss for fiscal 1997.......        --             --             --         (913,521)
                                                         -------      ---------    ----------        ---------
       Balance -- December 31, 1997..................        --             --      1,128,276       (1,442,595)
</TABLE>

                          [continued on next page]

                                     F-4
<PAGE>

                       PINNACLE OIL, INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                          (Expresses in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<S>                                                    <C>              <C>        <C>        <C>       <C>         <C>
  1998:
  Issued on conversion of promissory notes at $2.72
     per share on February 1, 1998 (1), net of
     offering costs..................................          --        411,764       412         --         --         --
  Issued for cash at $7.50 per share on April 3, 1998          --             --        --    800,000        800         --
  Issued with series "A" preferred stock on April 3,
     1998............................................          --             --        --         --         --    200,000
  Net loss for fiscal 1998...........................          --             --        --         --         --         --
  Net other comprehensive loss for fiscal 1998.......          --             --        --         --         --         --
                                                       ----------     ----------   -------    -------     ------    -------
       Balance -- December 31, 1998..................                 12,426,983    12,427    800,000        800    200,000

  1999:
  Issued for cash at $15 per share on May 17, 1999,
     net of issuance costs...........................          --        400,000       400         --         --         --

  Options exercised for cash at prices between
     $8.12 1/2 and $9.50 per share during 1999                 --         35,000        35         --         --         --
  Cancelled on October 14, 1999......................          --         (5,167)       (5)        --         --         --
  Net loss for fiscal 1999...........................          --             --        --         --         --         --
  Net other comprehensive loss for fiscal 1999.......     (29,403)            --        --         --         --         --
                                                       ----------     ----------   -------    -------     ------    -------
       Balance -- December 31, 1999..................     (29,403)    12,856,816   $12,857    800,000      $ 800    200,000
                                                       ==========     ==========   =======    =======     ======    =======

<CAPTION>
<S>                                                    <C>           <C>            <C>
  1998:
  Issued on conversion of promissory notes at $2.72
     per share on February 1, 1998 (1), net of                 --      1,119,588    $       --
     issuance costs..................................
  Issued for cash at $7.50 per share on April 3, 1998          --      7,792,167    (2,104,000)
  Issued with series "A" preferred stock on April 3,    1,132,000             --    (1,132,000)
     1998............................................
  Net loss for fiscal 1998...........................          --             --    (1,117,808)
  Net other comprehensive loss for fiscal 1998.......          --             --            --
                                                       ----------    -----------    ----------
       Balance -- December 31, 1998..................   1,132,000     10,040,031    (5,796,403)

  1999:
  Issued for cash at $15 per share on May 17, 1999,
     net of issuance costs...........................          --      5,998,252            --

  Options exercised for cash at prices between
     $8.12 1/2 and $9.50 per share during 1999                 --        303,979            --
  Cancelled on October 14, 1999......................          --        (11,570)           --
  Net loss for fiscal 1999...........................          --             --        11,575
  Net other comprehensive loss for fiscal 1999.......          --             --    (1,534,513)
                                                       ----------    -----------   -----------
       Balance -- December 31, 1999..................  $1,132,000    $16,330,692   $(7,319,341)
                                                       ==========    ===========   ===========
</TABLE>

               The accompanying notes to consolidated financial
             statements are an integral part of these consolidated
                      statements of shareholders' equity

                                      F-5
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                     Consolidated Statements Of Cash Flows
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                 October 20,
                                                                                                                    1995
                                                                                                                 (inception)
                                                                                                                     to
                                                                           Twelve Months Ended                   December 31,
                                                                               December 31,                         1999
                                                                 1999             1998                1997      (cumulative)
                                                            ------------    -----------------    -----------   -------------
<S>                                                         <C>             <C>                  <C>           <C>
Operating activities:
   Net loss for the period................................  $ (1,534,513)   $    (1,117,808)     $ (913,321)   $ (4,094,916)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
       Amortization of property and equipment.............       171,494             71,919          25,474         293,994
       Write-down of property and equipment...............           588                 --          17,074          17,682
       Amortization of deferred costs.....................        93,014             61,273              --         154,267
       Changes in non-cash working capital:
         Accounts receivable..............................        24,783            (31,996)        (80,044)        (95,317)
         Due from officers and employees..................        (1,884)            (1,335)          4,832          (3,219)
         Prepaid expenses.................................       (58,012)             6,183         (31,877)        (85,343)
         Trade payables...................................      (108,296)           (48,213)         (5,393)         32,716
         Wages and employee benefits......................       115,395            (18,716)         36,006          132,685
         Accrued oil and natural gas property costs.......       382,386                 --              --          382,386
         Accrued liabilities..............................        35,900             18,634              --           54,534
         Deferred financing through license fee offset....        (6,414)                --              --           (6,414)
         Deferred financing for insurance premium.........            --                 --           7,766            7,766
         Consulting costs settled by issuance of common
           stock..........................................            --                 --         166,541          166,541
         Interest costs settled by issuance of common
           stock..........................................            --             10,000          10,000          120,000
                                                            ------------     ----------------    -----------   -------------
            Net cash used in operating activities.........      (885,973)        (1,050,059)       (662,942)      (2,922,638)

Financing activities:
   Funds borrowed from affiliates.........................            --                 --       1,000,000        1,100,000
   Repayment of funds borrowed from affiliates............            --                 --              --         (100,000)
   Funds raised through the sale of common stock,
     net of issuance costs................................     5,998,652                 --                        6,972,402
   Funds raised through the sale of preferred stock
     and warrants, net of issuance costs..................            --          5,688,967              --        5,688,967
   Funds raised through the exercise of options...........       303,979                 --              --          303,979
   Repayment of deferred financing for insurance premium..            --           (146,520)                        (146,520)
                                                            ------------    -----------------    -----------   -------------
          Net cash generated by financing activities......     6,302,631          5,542,447        1,000,000      13,818,828

Investing activities:
   Funds invested in property and equipment...............      (258,058)          (591,492)         (8,340)        (988,355)
   Funds invested in petroleum properties.................      (775,159)                --              --         (775,159)
   Funds borrowed by an employee..........................            --            (35,760)             --          (35,760)
   Repayment of funds borrowed by an employee.............           863                347              --            1,210
                                                            ------------    -----------------    -----------   -------------
          Net cash used in investing activities...........    (1,032,354)          (626,905)          (8,340)     (1,798,064)

Effect of net other comprehensive loss....................       (29,403)                --             --           (29,403)

Net cash inflow...........................................     4,354,901          3,865,483        328,718         9,068,723

Cash position, beginning of period........................     4,713,822            848,339         519,621               --
                                                            ------------    -----------------    -----------   -------------
Cash position, end of period..............................  $  9,068,723    $     4,713,822      $  848,339    $   9,068,723
                                                            ============    =================    ===========   =============
</TABLE>

    Supplemental Disclosure Of Non-Cash Investing And Financing Activities

On February 1, 1998, Pinnacle satisfied $1,000,000 in principal and $120,000 in
accrued interest with respect to funds borrowed from an affiliate through the
exercise of its right to convert the underlying notes into 411,764 shares of
common stock. See note 8.

                    The accompanying notes to consolidated
                   financial statements are an integral part
                 of these consolidated statements of cash flows

                                      F-6
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

1.   Organization And Operations

     (a)  Our Company

          Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle"),
          a development stage enterprise, was incorporated under the laws of the
          State of Nevada on September 27, 1994, under the name "Auric Mining
          Corporation," and subsequently changed its name to Pinnacle Oil
          International, Inc. on February 23, 1996. We have two wholly owned
          subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S."), which was
          incorporated under the laws of the State of Nevada on October 20,
          1995, and Pinnacle Oil Canada, Inc. ("Pinnacle Canada"), which was
          incorporated under the federal laws of Canada on April 1, 1997.

     (b)  Our Business

          We are a technology-based reconnaissance exploration company which
          utilizes our proprietary stress field detection or "SFD" remote-
          sensing airborne survey technology, which we refer to as our "SFD
          Survey System," to quickly and inexpensively identify and high-grade
          oil and natural gas prospects. We conduct our reconnaissance
          exploration activities, as well as land acquisition, drilling,
          completion and production activities to exploit prospects identified
          using our SFD technology, through our two subsidiaries, Pinnacle Oil
          Inc. which focuses on United States-based exploration, and Pinnacle
          Oil Canada, Inc. which focuses on Canadian-based exploration.
          Pinnacle, in turn, focuses on research and development efforts to
          improve the efficacy of our SFD Survey System.

          Since we have not generated operating revenues to date, we should be
          considered a development stage enterprise. Although we have sufficient
          working capital as of December 31, 1999 to fund our current level of
          operations for several years assuming we make minimal investments in
          petroleum properties, our ability to continue as a going concern in
          the longer term will nevertheless be dependent upon our ability,
          either through our joint venture arrangements or for our own account,
          to successfully identify hydrocarbon bearing prospects, and to
          finance, develop, extract and market oil and natural gas from these
          prospects for a profit. We anticipate that we will continue to incur
          further operating losses until such time as we receive revenues from
          our joint venture partners with respect to prospects currently in the
          development stage, or through prospects we identify and exploit for
          our own account.

2.   Significant Accounting Policies

     (a)  Basis of Presentation

          We have prepared these consolidated financial statements in accordance
          with accounting principles generally accepted in the United States for
          annual financial reporting.

                                      F-7
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     (b)  Consolidation

          We have consolidated the accounts of our wholly owned subsidiaries
          with those of Pinnacle in the course of preparing these consolidated
          financial statements. All significant intercompany balances and
          transactions amongst Pinnacle and its subsidiaries have been
          eliminated as a consequence of the consolidation process, and are
          therefore not reflected in these consolidated financial statements.

     (c)  Reclassifications

          We have changed the manner of presentation in these consolidated
          financial statements and, as a consequence, have reclassified certain
          accounts and amounts reflected in our prior annual consolidated
          financial statements to conform to this change in presentation.

     (d)  Estimates and assumptions

          The preparation of these consolidated financial statements in
          conformity with generally accepted accounting principles in the United
          States requires our management to make estimates and assumptions that
          affect the reported amounts of assets and liabilities and disclosure
          of contingent assets and liabilities at the date of these consolidated
          financial statements and the reported amount of revenues and expenses
          during the reporting periods. Actual results may differ from those
          estimates.

     (e)  Cash and Cash Equivalents

          For purposes of preparing the consolidated balance sheets and
          statements of cash flow contained in these consolidated financial
          statements, we consider all investments with original maturities of
          ninety days or less to constitute "cash and cash equivalents."

     (f)  Fair Value of Financial Instruments

          Our financial instruments consist of cash, accounts receivable, notes
          receivable, accounts payable and accrued liabilities. The fair value
          of these financial instruments approximates their carrying values on
          our consolidated

                                      F-8
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

          financial statements due to their short-term to maturity and
          similarity to current market rates. It is the opinion of our
          management that we are not exposed to significant interest, currency
          or credit risks arising from these financial instruments

     (g)  Oil and Natural Gas Properties

          We follow the full cost method of accounting for oil and natural gas
          properties and equipment whereby we capitalize all costs relating to
          our acquisition of, exploration for and development of oil and natural
          gas reserves. These capitalized costs include land acquisition costs,
          geological and geophysical costs, costs of drilling both productive
          and non-productive wells, production equipment and related facilities
          and various costs associated with evaluating petroleum and natural gas
          properties for potential acquisition. Commencing upon production,
          these capitalized costs will also include SFD survey and data analysis
          costs. See note 2(k). We only capitalize overhead that is directly
          identified with acquisition, exploration or development activities.
          All costs related to production, general corporate overhead and
          similar activities are expensed as incurred.

          Under the full cost method of accounting, capitalized costs are
          accumulated into cost centers on a country-by-country basis. These
          costs, plus a provision for future development costs (including
          estimated dismantlement, restoration and abandonment costs) of proved
          undeveloped reserves, are then depleted and depreciated using the unit
          of-production method, based on estimated proved oil and gas reserves
          as determined by independent engineers where significant. For purposes
          of the depletion and depreciation calculation, proved oil and gas
          reserves are converted to a common unit of measure on the basis of
          their approximate relative energy content.

          In applying the full cost method of accounting, capital costs in each
          cost center less accumulated depletion and depreciation and related
          deferred income taxes are restricted from exceeding an amount equal to
          the sum of the present value of their related estimated future net
          revenues discounted at 10% less estimated future expenditures, and the
          lower of cost or estimated fair value of unproved properties included
          in the costs being amortized, net of related tax effects. Should this
          comparison indicate an excess carrying value, a write-down would be
          recorded.

          The carrying values of unproved properties, which are excluded from
          the depletion calculation, are assessed on a quarterly basis to
          ascertain whether any impairment in value has occurred. This
          assessment typically includes a determination of the anticipated
          future net cash flows based upon reserve potential and independent
          appraisal where warranted. Impairment is recorded if this assessment
          indicates the future potential net cash flows are less than
          capitalized costs.

          All recoveries of costs through the sale or other disposition of oil
          and gas properties and equipment are accounted for as adjustments to
          capitalized costs, with no gain or loss recorded, unless the sale or
          disposition involves a significant change in the relationship between
          costs and the value of proved reserves or the underlying value of
          unproved property, in which case the gain or loss is computed and
          recognized.

          Our company conducts oil and natural gas exploration, drilling,
          development and production activities through our joint venture
          partners. These consolidated financial statements reflect only our
          proportionate interest in these activities.

     (h)  Other Property and Equipment

          We carry our other capitalized property and equipment at cost. We
          depreciate or amortize our other capitalized property and equipment
          over their estimated service lives using the declining balance method
          as follows:

                                      F-9
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------


             Airplane...................................       25%
             Computer equipment.........................       30%
             Computer software..........................      100%
             Equipment..................................       20%
             Furniture and fixtures.....................       20%
             Leasehold improvements.....................       20%
             Tools......................................       20%
             Vehicles...................................       30%


          When we retire or otherwise dispose of our other capitalized property
          and equipment, we remove their cost and related accumulated
          depreciation or amortization from our accounts, and record any
          resulting gain or loss in the results of operations for the period.
          Our management periodically reviews the carrying value of our property
          and equipment to ensure that any permanent impairment in value is
          recognized and reflected in our results of operations.

     (i)  Research and Development Expenditures

          We expense all research and development expenditures we incur to
          develop, improve and test our SFD Survey System and related
          components, including allocable salaries.

     (j)  Survey Support Expenditures

          We expense all survey support expenditures we incur, after netting
          costs which are reimbursable by our joint venture partners. Survey
          support expenditures consist primarily of the cost, including
          allocable salaries, to:

           .    conduct field evaluations designed by our joint venture partners
                to evaluate the SFD Survey System (after netting costs which are
                reimbursable by our joint venture partners); and

           .    develop, organize, staff and train our survey and interpretation
                operational functions.

     (k)  Survey and Data Analysis Expenditures

          We expense all survey and data analysis costs we incur, after netting
          costs which are reimbursable by our joint venture partners. Survey and
          data analysis expenditures consist primarily of:

           .    aircraft operating costs, travel expenses and allocable salaries
                of our personnel while on survey assignment (after netting costs
                which are reimbursable by our joint venture partners); and

           .    allocable salaries of our personnel while interpreting SFD Data.

          Although we currently expense our survey and data analysis costs, we
          will, in the future, commencing on the earliest date that any of our
          initial exploration wells commence production, capitalize and amortize
          these costs using the unit of production method as a component of
          petroleum properties in accordance with the full cost method of
          accounting for oil and gas.

     (l)  Foreign Currency Translation

          We use the United States dollar as our reporting currency. With
          respect to our subsidiaries whose functional currency is in Canadian
          dollars, we use the following methodology to convert their Canadian
          dollar denominated accounts and transactions into U.S. dollars for
          consolidation purposes:

           .    all asset and liability accounts are translated into U.S.
                dollars at the rate of exchange in effect as of the end of the
                fiscal year;

           .    all shareholders' equity accounts are translated into U.S.
                dollars using historical exchange rates; and

           .    all revenue and expense accounts are translated into U.S.
                dollars at the average rate of exchange for the fiscal year.

                                      F-10
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

           We record the cumulative gain or loss arising from the conversion of
           the noted Canadian dollar denominated accounts and transactions into
           U.S. dollars as a foreign currency translation adjustment as a
           component of accumulated other comprehensive income or loss for that
           period.

     (m)   Basic And Diluted Loss Per Common Share

           Our basic loss per share is computed in accordance with Statement of
           Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS
           No. 128"), by dividing the net loss for the period attributable to
           holders of our common stock by the weighted average number of shares
           of our common stock outstanding for the period. Our diluted loss per
           share is computed, also in accordance with SFAS No. 128, by including
           the potential dilution that could occur if holders of our dilutive
           securities were to exercise or convert these securities into our
           common stock.

           In calculating our diluted loss per share, we take into consideration
           deemed distributions analogous to the declaration of a dividend
           attributable to the beneficial conversion features affording a
           discount or benefit to the holders of our securities. See note 9.

     (n)   Stock-based compensation

           In accounting for our employee and director stock options, we have
           elected to follow Accounting Principles Board No. 25, "Accounting for
           Stock Issued to Employees," ("APB 25"), and related interpretations.
           Pursuant to APB 25, we have not recorded any compensation expense for
           any period in these consolidated financial statements insofar as the
           exercise price for all options we have granted to date to our
           employees and directors have equaled the market price of the
           underlying common shares on the effective date of grant. See note
           11.

                                      F-11
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     (o)   Recent pronouncements

           In June 1998, the FASB issued SFAS No. 133, "Accounting for
           Derivative Instruments and Hedging Activities," which as subsequently
           amended by SFAS No. 137, established accounting and reporting
           standards requiring that every derivative instrument, including
           certain derivative instruments embedded in other contracts, be
           recorded in the balance sheet as either an asset or liability
           measured at its fair value for fiscal quarters of fiscal years
           beginning after June 15, 2000. Our management has not had the
           opportunity to evaluate the impact of the adoption of SFAS Nos. 133
           and 137 on consolidated financial position, results of operations or
           cash flows as we do not hold derivatives.

                                      F-12
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

3.   Reverse Acquisition

     We acquired what is now our wholly-owned subsidiary, Pinnacle U.S., on
     January 20, 1996, in a transaction accounted for as a "reverse
     acquisition". This acquisition was effected through the issuance of
     10,090,675 common shares of our company (then known as Auric Mining
     Corporation), constituting approximately 92% of its outstanding shares at
     that date, in exchange for all of the outstanding shares of Pinnacle U.S.
     As a result of the application of the noted accounting principles governing
     Reverse Acquisitions, Pinnacle U.S. (and not Auric Mining Corporation) was
     treated as the "acquiring" or "continuing" entity for financial accounting
     purposes.

     We have accounted for the Pinnacle U.S. acquisition as an issuance of stock
     by Pinnacle U.S. in exchange for the tangible net assets of Auric Mining
     Corporation, valued at fair value, which approximate historical costs. As a
     result, our consolidated statements of loss and shareholders' equity
     (deficit) included in these consolidated financial statements are deemed to
     be a continuation of Pinnacle U.S.'s financial statements, and therefore
     reflect:

       .  Pinnacle U.S.'s operations from the date of its formation (October 20,
          1995) through the effective date of the Reverse Acquisition (January
          20, 1996); and

       .  our consolidated operations after the effective date of the Reverse
          Acquisition (January 20, 1996).

4.   Note Receivable From Officer

     In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760) to one
     of our officers in connection with his relocation to Calgary, Alberta.
     Pursuant to the terms of an underlying promissory note, the officer is
     required to repay the loan on a monthly basis, with a balloon payment due
     on October 3, 2003. The amount of the monthly payments is calculated on the
     basis of a 300-month amortization rate, principal plus interest, using a
     variable interest rate computed at our cost of funds, which we define as
     our floating interest rate for liquid investments (presently 5 1/2%).

                                      F-13
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

5.   Deferred Costs

     On November 20, 1997, we purchased a three-year insurance policy, and
     financed the premium pursuant to a loan agreement in the original principal
     amount of $150,000, bearing interest at 6.44% per annum. We were obligated
     to make monthly payments of principal and interest in the amount of $4,884
     to a maturity date of May 22, 1999, however, we elected to pay the
     outstanding balance in full in June 1998.

6.   Oil And Natural Gas Properties

     Summarized below are the oil and natural gas property costs we capitalized
     for our fiscal years ended December 31, 1999 and December 31, 1998:

<TABLE>
<CAPTION>
                                                         Twelve Months Ended
                                                             December 31,
                                                     --------------------------
          <S>                                        <C>             <C>
                                                       1999             1998
                                                     --------        ----------
          Acquisition costs..............            $404,585        $     --
          Exploration costs..............             370,574              --
          Development costs..............                  --              --
          Capitalized interest...........                  --              --
                                                     --------        ----------
                                                     $775,159        $     --
                                                     ========        ==========
</TABLE>

     Since all of our oil and gas properties as of December 31, 1999 were either
     not yet producing or still in the drilling stage, we have classified all of
     these properties as unproved properties. Consequentially, we did not record
     any depletion to date for these properties for the year ended December 31,
     1999.

     Following the close of our year ended December 31, 1999, our management
     performed a property assessment with respect to each of our unproved
     properties as of December 31, 1999 to determine if any of these properties
     had been subject to any impairment in value, and concluded that no
     impairment had occurred. This assessment included a determination of the
     future production potential based upon SFD data, seismic data and
     exploration results. Our company is currently conducting active exploration
     and development programs with respect to each of these unproved oil and gas
     properties, and we anticipate that all of these properties will be
     evaluated and the associated costs transferred into the amortization base
     or impaired over the next five years.

7.   Other Property And Equipment

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                 ------------------------------
                                                                                   1999                 1998
                                                                                 ---------            ---------
       <S>                                                                       <C>                  <C>
       Airplane ............................................................     $ 238,653            $ 220,092
       Computer equipment ..................................................       189,586               73,145
       Computer software ...................................................        71,174               15,165
       Equipment ...........................................................        62,749               41,201
       Furniture and fixtures ..............................................       165,274              132,425
       Leasehold improvements ..............................................       102,761               72,793
       SFD Survey System (including software) ..............................        59,169               47,918
       Tools................................................................         1,704                  890
       Vehicle .............................................................        62,494               62,495
                                                                                 ---------            ---------
           Property and equipment...........................................       953,564              666,124
       Less accumulated depreciation and amortization ......................      (292,363)             (90,664)
                                                                                 ---------            ---------
           Net property and equipment ......................................     $ 661,201            $ 575,460
                                                                                 =========            =========
</TABLE>

  8. Common Stock

     On January 31, 1997, two of our executive officer-directors at that time
     each loaned our company the sum of $500,000, for total loan proceeds of
     $1,000,000. These loans were extended by these officer-directors pursuant
     to unsecured, convertible promissory notes due January 31, 1998, together
     with interest accrued at a rate of 12% per annum. Each promissory note
     contained identical conversion provisions pursuant to which:

       .  each officer-director could elect to convert any or all of the
          outstanding balance of his loan into common stock based upon a ratio
          of one share per $4.07 in converted principal and interest at any
          time; and

       .  our company could convert any or all of the outstanding balance of
          either loan into common stock based upon a ratio of one share per
          $2.72 in converted principal and interest should we be unable to repay
          that amount by the January 31, 1998 due date.

     We exercised our right to convert the notes into 411,764 shares of common
     stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate
     principal and accrued interest which became due on January 31, 1998.

                                      F-14
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     On May 17, 1999, we raised $6,000,000 in gross proceeds through a private
     placement of 400,000 shares of our common stock at $15 per share. Net
     proceeds to our company from this offering were $5,998,652, after deducting
     $1,348 in offering expenses.

     During 1999, we raised $303,979 in gross proceeds through our employees'
     exercise of incentive stock options entitling them to purchase 35,000
     shares of our common stock at exercise prices between $8.25 and $9.50 per
     share.

9.   Preferred Stock And Warrants

     On April 3, 1998, we completed a series of transactions pursuant to which:

       .   Pinnacle U.S. entered into a joint venture agreement, and

       .   we concurrently raised $6,000,000 in gross proceeds from an affiliate
           of the joint venture partner through the private placement to that
           party of 800,000 shares of our series "A" convertible preferred
           stock, and warrants to purchase 200,000 shares of our common stock at
           an exercise price of $7.50 per share.

     The net proceeds of this private placement were $5,688,867, after deducting
     $311,833 in offering expenses, including the cost of becoming a reporting
     company with the Securities and Exchange Commission.

     Each share of preferred stock is convertible into one common share at the
     election of the holder, and carries a $7.50 liquidation preference should
     our company wind-up and dissolve. We have reserved the right to redeem the
     preferred stock at a price of $7.50 per share if it has not been converted
     into common stock by April 3, 2000, and the holder forgoes a final
     opportunity to exercise his conversion rights to avoid redemption. The
     preferred shares are not entitled to payment of any dividends, although
     they are entitled under certain circumstances to participate in dividends
     on the same basis as if converted into common shares. Each warrant carries
     a $7.50 per share exercise price, and lapses to the extent not exercised by
     April 3, 2000.

     Insofar as the preferred shares and warrants contained beneficial
     conversion features affording a discount or benefit to the purchaser of
     these securities, we recorded a deemed distribution analogous to the
     declaration of a dividend to that purchaser. This deemed distribution
     resulted in:

       .   an increase in additional paid-in capital of $2,104,000 to record
           the intrinsic value of the beneficial conversion feature of the
           preferred shares, i.e., the discount in the purchase price of these
           securities relative to the public trading price as of the date of
           issuance of the underlying common shares into which these preferred
           shares could be converted, without adjustment for discounts or
           restrictions;

       .   a newly created warrant capital account to record the fair value of
           the warrants in the amount of $1,132,000, including the value of
           their beneficial conversion feature, as determined by the Black-
           Scholes method of valuation; and

       .   a counterbalancing charge against our accumulated deficit capital
           account in the amount of $3,236,000.

                                      F-15
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     We also made appropriate adjustment for the deemed distribution in
     calculating our basic loss per common share. See note 2(m).

10.  Performance Warrants

     On August 1, 1996, we granted a performance-based contractual right to be
     granted warrants to the licensor of our SFD technology, Momentum Resources
     Corporation, in connection with the amendment of our exclusive SFD
     technology license with Momentum to use the SFD technology for hydrocarbon
     exploration. The primary purpose of the amendment was to indefinitely
     extend the termination date of the license. Pursuant to this contractual
     right, Momentum Resources Corporation is entitled to a separate grant of
     warrants entitling it to purchase 16,000 shares of our common stock at the
     then current trading price for each month after December 31, 2000 in which
     production from SFD-identified prospects during that month exceeds 20,000
     barrels of hydrocarbons. Momentum has not earned any warrants under the SFD
     technology license as of December 31, 1999.

11.  Options

     Through December 31, 1999, we have granted options to selected employees
     and directors of our company pursuant to the following separate
     arrangements or plans (the "Plans"):

       .   Separate free-standing directors options which we granted to selected
           directors as compensation for serving on our Board of Directors;

       .   The 1997 Pinnacle Oil International, Inc. Stock Plan, pursuant to
           which 1,000,000 shares of our common stock were reserved for issuance
           to employees, directors and consultants in the form of stock options
           or outright stock grants; and

       .   The 1999 Pinnacle Oil International, Inc. Executive Option Plan,
           pursuant to which 1,000,000 shares of our common stock were reserved
           for issuance to executive officers in the form of stock options.


                                      F-16
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------



                                      F-17
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     We have summarized below all transactions involving option grants under the
     Plans, including those option grants described above, for our three fiscal
     years ended December 31, 1999:

<TABLE>
<CAPTION>
                                                       1999                      1998                       1997
                                              ----------------------    ----------------------     ----------------------
                                                Common     Weighted       Common     Weighted        Common     Weighted
                                                Shares     Average        Shares     Average         Shares     Average
                                                Under      Exercise        Under     Exercise        Under      Exercise
                                               Options      Price         Options     Price         Options      Price
                                              --------     ---------    ---------    ---------      -------     --------
    <S>                                       <C>          <C>          <C>          <C>            <C>         <C>
    Outstanding at beginning of year            500,000     $  7.47       215,000     $  6.43              0       $ --
        Granted..........................     1,275,000       14.05       285,000        8.25        215,000        6.43
        Exercised........................       (35,000)       8.68             0           0              0           0
        Cancelled or lapsed..............       (25,000)       8.25             0           0              0           0
                                              ---------                 ---------                    -------
    Outstanding at end of year...........     1,715,000       12.33       500,000        7.47        215,000        6.43
                                              =========                 =========                    =======

    Exercisable at end of year...........       232,500                   150,000                     55,000
                                              =========                 =========                    =======

    Available for grant at end of year          460,000                   710,000                    950,000
                                              =========                 =========                    =======
</TABLE>

                                      F-18
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     We have summarized below all outstanding options under the Plans as of
     December 31, 1999:

<TABLE>
<CAPTION>
                                                                                          December 31, 1999
                                               Grant              Exercise          ----------------------------
               Type of Option                   Date               Price            Outstanding          Vested
     -----------------------------------      --------           ---------          -----------          -------
     <S>                                      <C>                <C>                <C>                  <C>
     Director Non-qualified.............       5-12-97            $ 5.81                75,000            75,000
     Director Non-qualified.............       5-20-97              5.25                90,000            90,000
     Employee Incentive.................      11-24-97              9.50                37,500             7,500
     Director Non-qualified.............       3-10-98              8.31                45,000            30,000
     Employee Incentive.................       5-12-98              8.25                40,000            20,000
     Employee Incentive.................       8-24-98              8.25               132,500            10,000
     Employee Incentive.................       10-1-98              8.12 1/2            20,000                 0
     Employee Non-qualified.............        5-1-99             14.00             1,016,670                 0
     Employee Incentive.................        5-1-99             15.00                33,330                 0
     Employee Incentive.................       5-12-99             17.00                20,000                 0
     Employee Incentive.................        7-2-99             14.06                20,000                 0
     Employee Incentive.................       9-21-99             13.62 1/2           100,000                 0
     Employee Incentive.................      11-16-99             14.12 1/2            85,000                 0
                                                                                     ---------           -------
                                                                                     1,715,000           232,500
                                                                                     =========           =======
</TABLE>

     The director options outstanding as of December 31, 1999 vest one-third on
     date of grant, and an additional one-third each on the first anniversary
     and second anniversaries of the grant date, respectively, subject to the
     re-election of each such director at each annual meeting of the Company or
     of its subsidiary. The employee options outstanding as of December 31, 1999
     vest over three to five years from the grant date, depending upon the
     recipient, based upon the continued provision of services as an employee.
     Both the director and employee options generally lapse, if unexercised,
     five years from the date of vesting.

     Had we elected to follow the alternative fair value accounting provided for
     under Statement of Financial Accounting Standards No. 123, "Accounting for
     Stock-Based Compensation," ("SFAS 123"), we would have recorded additional
     compensation costs of approximately $3,253,147, $343,200 and $68,000 for
     the twelve-month periods ended December 31, 1999, December 31, 1998 and
     December 31, 1997, respectively. These amounts are determined using an
     option pricing model using the following assumptions:

          .   no dividends are paid,

          .   an average vesting period of four and one-half years,

          .   a weighted average annualized volatility of our common
              share price of 63%; and

          .   a weighted average annualized risk free interest rate at
              6.67%.

     The following pro forma financial information presents the net loss for the
     period and loss per common share for these twelve-month periods had we
     adopted SFAS 123:

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                    -----------------------------------------------
                                                                        1999              1998              1997
                                                                    -----------       -----------        ----------
           <S>                                                      <C>               <C>                <C>
           Net loss for the period as reported................      $ 1,534,513       $(1,117,808)       $ (913,321)
           Compensation expense computed under
           SFAS No. 123.......................................        3,253,147          (343,200)          (68,000)
           Deemed distribution to holders of preferred
           stock and warrants.................................            --           (3,236,000)/(1)/       --
                                                                    -----------       -----------        ----------

           Pro forma net loss for the period..................      $ 4,787,660       $(4,697,008)       $ (981,321)
                                                                    -----------       -----------        ----------

           Pro forma basic and diluted loss per common share..      $     (0.38)      $     (0.38)       $    (0.08)
                                                                    ===========       ===========        ==========
</TABLE>

(1)  This amount has been included to depict the impact of the valuation expense
     related to an adjustment for a deemed distribution attributable to a
     beneficial conversion feature for these instruments in the computation of
     pro forma loss and loss per common share. See notes 2(m) and 9.

12   Income Taxes

     (a)  Net Operating Loss Carryforwards

          As of December 31, 1999, the following net operating loss
          carryforwards were available to reduce our taxable income in future
          years:

<TABLE>
<CAPTION>
                                      Country                                    Amount           Expiration Date
           ----------------------------------------------------------          ----------         ---------------
           <S>                                                                 <C>                <C>
           United States.............................................          $ 1,762,145           2010--2019
           Canada....................................................          $ 2,202,880           2004--2006
</TABLE>

                                      F-19
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------


     (b)  Deferred Assets

          As of December 31, 1999, our accounts contained the following deferred
          assets:

<TABLE>
<CAPTION>
                                                                                     Statutory            Tax
                                                                    Amount            Tax Rate          Benefit
                                                                 -------------       ----------      --------------
           <S>                                                   <C>                 <C>             <C>
           Tax asset related to depreciation.............          $  (64,784)           44.62%         $  (28,907)

           Tax benefit of loss carryforwards.............           3,965,025            44.62%          1,769,194

           Valuation reserve.............................                                               (1,740,287)
                                                                                                     --------------
                                                                                                        $     --
                                                                                                     ==============
</TABLE>

          As of December 31, 1998, our accounts contained the following deferred
          assets:

<TABLE>
<CAPTION>
                                                                                     Statutory            Tax
                                                                    Amount            Tax Rate          Benefit
                                                                 -------------       ----------      --------------
           <S>                                                   <C>                 <C>             <C>
           Tax asset related to depreciation.............        $       8,500           34%           $   2,900

           Tax benefit of loss carryforwards.............            2,500,000           34%             850,000

           Valuation reserve.............................                                               (852,900)
                                                                                                     --------------
                                                                                                       $      --
                                                                                                     ==============
</TABLE>

13.  Litigation Settlement

     During the year ended December 31, 1997, we received $157,500 in cash in
     settlement of a lawsuit pertaining to a breach of contract action.


14.  Related Party Transactions

     Summarized below is information concerning related party transactions and
     balances not disclosed elsewhere in these consolidated financial statements
     for our three fiscal years ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                             ------------------------------------
                                                                                1999         1998          1997
                                                                             ---------     --------      --------
        <S>                                                                  <C>           <C>           <C>
        Collective legal fees accrued to two law firms in 1999, and
           three law firms in 1998 and 1997, with partners who were also
           directors of Pinnacle or Pinnacle Canada.......................   $ 28,147     $142,131      $322,769


        Collective wages, fees and benefits paid to three executive officers
           of Pinnacle in 1999, and two executive officers of Pinnacle
           in 1998 and 1997, who were also directors of Pinnacle..........     491,021      240,000       165,101

        Accounts payable due to executive officers........................         --            --        12,167

        Accounts receivable due from executive officers...................       1,565        1,335            --
</TABLE>

     Our rights to use our SFD technology arises from an SFD technology license
     which we acquired from the owner and licensor of that technology, Momentum
     Resources Corporation, pursuant to which we received the exclusive world-
     wide right to use the SFD technology for hydrocarbon exploration purposes.
     Momentum is controlled and indirectly owned by two of our

                                      F-20
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

     significant stockholders, both of whom currently serve as directors and one
     of whom currently serves as one of our executive officers. We are obligated
     under the terms of the SFD technology license to pay Momentum a fee equal
     to 1% of any "Prospect Profits" (as that term is defined in the license)
     which we may receive on or before December 31, 2000, and 5% of any Prospect
     Profits which we may receive after December 31, 2000. No Prospect Revenue
     has been generated as of December 31, 1999.

15.  Commitments

     At December 31, 1999, we had entered into joint venture agreements with two
     separate oil and gas exploration companies. We are required under these
     joint venture agreements to conduct SFD surveys to identify oil and natural
     gas prospective prospects on selected exploration areas of up to 2,400
     square miles, and our joint venture partners are required to drill each
     SFD-identified prospect they accept under their respective agreement. We
     may elect each SFD-identified prospect they accept under their respective
     agreement. We may elect under each of these joint venture agreements to
     receive one of the two following payments streams for each SFD-identified
     prospect accepted and drilled by the joint venture partner;

          .    A capital investment and generally risk-free overriding royalty
               of 5% to 8% of oil or natural gas revenues received by the joint
               venture partner with respect to the prospect; or

          .    A working interest of up to 45% of the joint venture partner's
               revenues with respect to the prospect.

     In any situation where we elect to participate on a working interest basis,
     we must bear our share of mineral and drilling right acquisition (if
     necessary), drilling, completion and production costs incurred with respect
     to the prospect based upon our elected working interest percentage.
     Although we will bear our share of these costs, our joint venture partner
     will nevertheless remain responsible for conducing and managing all
     drilling, production and marketing activities to exploit the prospect.

     On November 25, 1997, we entered into a five-year non-cancelable operating
     lease for our principal executive offices. This lease, which consisted of
     7,244 rentable square feet as of December 31, 1999, expires on January 21,
     2003. Our combined obligations for base lease payments and building
     operating cost and other pass-through items as of December 31, 1999 was
     Cdn. $11,372 per month, which translates into U.S. $7,876 per month based
     upon the closing conversion rate as of December 31, 1999.

                                      F-21
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

16.  Segmented Information

     We currently operate in only one business segment, oil and natural gas
     exploration, insofar as we intend to develop all oil and natural gas
     exploration prospects identified using our proprietary SFD survey
     technology either directly for our account or indirectly for our account
     through working interest or overriding royalty interests through our joint
     venture partners. We do not currently sell or market our SFD data as a
     separate product to third parties.

     As we are a development stage enterprise, the majority of our revenues
     through December 31, 1999, have been from interest earned on cash and cash
     equivalents.

     Summarized below is geographic information relating to:

      .   revenues we have received from our external customers for our last
          three fiscal years ended December 31, 1999, allocated amongst the
          geographic areas in which the revenue is generated;

      .   revenues we have received from sources other than our external
          customers for our last three fiscal years ended December 31, 1999,
          allocated amongst the geographic areas in which the revenue is
          generated;

      .   our operating loss for our last three fiscal years ended December 31,
          1999, allocated amongst the geographic areas in which the revenue and
          associated expenses are generated; and

      .   our assets as of the last day of each fiscal year indicated, allocated
          amongst the geographic areas in which the assets are physically
          located or principally connected.

                                      F-22
<PAGE>

                       PINNACLE OIL INTERNATIONAL, INC.
                       (A Development Stage Enterprise)

                  Notes To Consolidated Financial Statements
                          (Expressed in U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                        United States           Canada              Total
                                                        -------------        -----------         ------------
       <S>                                              <C>                  <C>                 <C>
       1999:
         Assets.....................................     $ 9,349,409         $ 1,380,517         $ 10,729,926
         Revenues from external customers...........              --                  --                   --
         Revenues from other sources................         355,727               4,707              360,434
         Operating loss.............................        (416,465)         (1,118,041)          (1,534,513)

       1998:
         Assets.....................................     $ 4,764,653         $   801,552          $ 5,566,205
         Revenues from external customers...........              --                  --                   --
         Revenues from other sources................         215,503              13,634              229,137
         Operating loss.............................        (347,953)           (769,855)          (1,117,808)

       1997:
         Assets.....................................     $    30,001         $ 1,149,860          $ 1,179,861
         Revenues from external customers...........              --                  --                   --
         Revenues from other sources................         203,316               2,016              205,332
         Operating loss.............................        (512,292)           (401,029)            (913,321)
</TABLE>

     In preparing the above table, we have eliminated all intersegment revenues,
expenses and assets.

17.  Subsequent Events

     (a)  Preferred Stock and Warrants (see note 9)

          On April 3, 2000, the holder of warrants to purchase 200,000 shares of
          our common stock at an exercise price of $7.50 per share exercised
          these warrants, resulting in gross proceeds to our company of
          $1,500,000.

     (b)  Options (see note 11)

          On February 15, 2000, we created the 2000 Pinnacle Oil International,
          Inc. Directors' Stock Plan, pursuant to which we reserved 400,000
          shares of our common stock for the purpose of granting awards or stock
          grants to current or prospective directors. Also on February 15, 2000,
          we granted 15,000 non-qualified options under the 2000 Pinnacle Oil
          International, Inc. Directors' Stock Plan to our five outside
          independent directors as compensation for their services as members of
          our Board of Directors for the next three years. The purchase price
          for these options were fixed at $28.75 per share, reflecting the
          closing trading price of our common stock as of the date of grant.
          These options vest in equal increments on the first through third
          anniversary dates of the date of grant, respectively, based upon
          continued provision of services as a director, and lapse, if
          unexercised, five years after the vesting date, unless the optionee's
          status as a director is terminated, in which case they lapse two years
          from date of vesting.

     (c)  Commitments (see note 15)

          On March 7, 2000, we entered into a lease amendment pursuant to which
          we expanded our principal executive offices by an additional 6,081
          rentable square feet, bringing the total square footage rented to
          13,325 square feet. As a result of this expansion, our base rental
          obligation for the balance of the term of our original office lease
          has been increased by Cdn. $6,588 per month, which translates into an
          additional U.S. $4,564 per month based upon the closing conversion
          rate as of December 31, 1999. Also as a result of this expansion, our
          building operating cost and other pass-through charges under the lease
          were increased by Cdn. $46,824 per year, which translates into an
          additional U.S. $32,442 per year based upon the closing conversion
          rate as of December 31, 1999.

          On March 20, 2000, we entered into an agreement to purchase a Piaggio
          P180 Avanti aircraft for a purchase price of $2,790,000, subject to us
          obtaining appropriate financing. The closing date for the acquisition
          is fixed by the agreement as of April 21, 2000. Under the terms of the
          agreement we paid a $30,000 deposit into escrow, which will be
          released to the seller of the aircraft if the transaction does not
          close due to our failure to procure financing.



                                     F-23