---

UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM
  10-K/A

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934
  For the fiscal year ended March 31, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934 
  For the transition period from [ ] to [ ]

Commission file number 000 19949

Torrent Energy Corporation(Exact name of registrant as specified in its charter)

|Colorado                                                             | 84-1153522                          
|-------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or
      organization) | (I.R.S. Employer Identification No.)
|                                                                     |                                     
|1 SW Columbia Street; Suite 640                                      |                                     
|Portland, Oregon                                                     | 97258                               
|(Address of principal executive offices)                             | (Zip Code)                          

Issuers telephone number: 503.224.0072

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

|Title of each class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|Nil                 | Nil                                      

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

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the
issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period

---

that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained in this form, 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. [ ]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b 2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act) Yes
[ ] No [X]

State issuers revenues for its most recent fiscal year. $
Nil

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

34,821,953  shares of common stock at $1.06
  per share = $36,911,270

(1) Closing price on July 6, 2007.

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

36,561,953 shares of common stock issued and outstanding
as of July 6, 2007

2

---

PART I

|ITEM 1. | BUSINESS
|------- | --------

Torrent Energy Corporation is an
  exploration stage energy company committed to the pursuit of unconventional
  natural gas niche opportunities located primarily in North America. As used
  in this annual report, the terms our Company, we, us
  and our mean Torrent Energy Corporation, and our wholly owned subsidiaries,
  Methane Energy Corp. and Cascadia Energy Corp., unless otherwise indicated.
  A brief history of our Company is provided in the section entitled Corporate
  History below.

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

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

Our audited consolidated
financial statements are stated in United States dollars and are prepared in
accordance with United States Generally Accepted Accounting Principles. All
references to CDN$ refer to Canadian dollars.

Corporate History

We were formed by the merger of
Scarab Systems, Inc., a Nevada corporation, with iRV, Inc., a Colorado
corporation, on July 17, 2002. We were initially involved in the business of
providing services to the e commerce industry. However, we ceased all activities
in the e-commerce industry by the end of the fiscal year ended March 31, 2003.
Scarab Systems, Inc. was a privately owned corporation incorporated on October
8, 2001. Subsequent to completion of the reorganization, Scarab Systems, Inc.
transferred all its assets and liabilities to iRV, Inc. The directors and
executive officers of iRV, Inc. were subsequently reconstituted. iRV, Inc.
changed its name to Scarab Systems, Inc. on March 24, 2003.

We were given two options in
fiscal year 2002 to acquire all the issued and outstanding shares of 485017 B.C.
Ltd., a British Columbia company doing business as MarketEdge Direct. These
options were given to us as security against a subscription receivable of
$337,500 for 675,000 shares of our common stock from the shareholders of
MarketEdge Direct. MarketEdge Direct was in the business of providing a wide
range of marketing products and services.

3

---

Effective August 7, 2002, we exercised both of the options and
acquired all the issued and outstanding shares of MarketEdge Direct. Due to
disappointing financial results of MarketEdge Direct, on March 28, 2003, we
entered into an agreement with the former shareholders of MarketEdge Direct to
sell MarketEdge Direct back to them. As a result, all the issued and outstanding
shares of MarketEdge Direct that we acquired were sold back to the former
MarketEdge Direct shareholders for the return to treasury of 540,000 shares of
our common stock.

On March 28, 2003, we acquired
all the issued and outstanding shares of Catalyst Technologies, Inc., a British
Columbia corporation. Catalyst was a Vancouver-based, web design and Internet
application developer. Catalyst specialized in the development of web-sites and
Internet software design, primarily for the health and nutraceutical industry.
The acquisition of Catalyst was treated as a non-material business combination
in fiscal year 2003, and we discontinued Catalysts operations during the fiscal
year ended March 31, 2004 due to a lack of working capital and disappointing
financial results.

On April 30, 2004, we
incorporated an Oregon subsidiary company named Methane Energy Corp. in
anticipation of acquiring oil and gas properties in the State of Oregon. On May
11, 2004, Methane Energy Corp. entered into a lease purchase and sale agreement
with GeoTrends-Hampton International, LLC to purchase GeoTrends-Hampton
Internationals undivided working interest in certain oil and gas leases for the
Coos Bay Basin prospect located onshore in the Coos Bay Basin of Oregon. To
acquire these oil and gas leases, we paid a total of $300,000 in cash, issued
1,800,000 restricted shares of our common stock in three performance-based
tranches, and granted a 4% overriding royalty interest upon production from
lands and leases in the Coos Bay project area. The lease purchase and sale
agreement closed on June 22, 2004. On closing, we paid $100,000 in cash and
issued 600,000 shares of our common stock. We subsequently paid the remaining
$200,000 cash consideration and have issued an additional 1,200,000 shares of
our common stock to satisfy the remaining components of the purchase
obligation.

Pursuant to the lease purchase
and sale agreement with GeoTrends-Hampton International, LLC, we acquired leases
of certain properties in the Coos Bay area of Oregon that are believed to be
prospective for oil and gas exploration. Additional leases were subsequently
acquired from the State of Oregon and from private property owners; and as of
July 6, 2007, we have amassed approximately 118,000 acres under lease with
annual lease rental payments totaling approximately $93,000. We continue to seek
additional lease properties in the Coos Bay area.

As a result of the change in our
business focus, we received shareholder approval on July 13, 2004 to change our
name from Scarab System, Inc. to Torrent Energy Corporation.

On June 29, 2005, we incorporated
  a Washington subsidiary company named Cascadia Energy Corp. in anticipation
  of acquiring oil and gas properties in the State of Washington. Cascadia Energy
  Corp. executed a lease option agreement dated August 9, 2005 with Weyerhaeuser
  Company to lease 100,000 acres that it could select from an overall 365,000
  acre block in the Chehalis Basin located in Lewis, Cowlitz and Skamania Counties
  of Washington. We have commenced an exploratory work program on certain acreage,
  searching for possible hydrocarbon deposits. Cascadia Energy Corp. was also
  granted a two year first right of refusal on the balance of the Weyerhaeuser
  acreage.

4

---

Initial cash consideration for this option was $100,000 and,
  on or before the end of the initial first year, Cascadia Energy Corp. was to
  elect either to undertake a work commitment of $285,715 pertaining to the full
  100,000 acres (proportionately reduced if Cascadia Energy Corp. elects to evaluate
  less than the entire acreage) or pay Weyerhaeuser $285,715 in lieu of the work
  commitment or such lesser amount if less than the full 100,000 acres is chosen
  to be evaluated, but in no event less than 50,000 acres. In February 2007, Weyerhaeuser
  extended the initial period for completion of the $285,715 work commitment to
  August of 2007.

From October 2006 through May
2007, Cascadia Energy Corp has entered into three additional lease agreements
with Weyerhaeuser totaling 36,991 acres, two that required payment of upfront
lease bonuses of $428,610 and one which requires annual lease payments of
$1,275. Certain of these agreements include a provision requiring Cascadia
Energy Corp. to commence a well within the first two years of the lease, or the
lease will terminate and we would be required to make a payment of $75,000 to
Weyerhaeuser.

On May 9, 2006, Cascadia Energy
Corp., entered into an option to acquire oil & gas leases with Pope
Resources LP located in the Chehalis Basin. This option provides Cascadia Energy
Corp. with the right to earn oil and gas leases covering 15,280 acres of mineral
rights interests held by Pope Resources LP. for a purchase price of $1 per net
mineral acre or $15,280. The initial term of this option is for a period of 18
months ending on November 9, 2007. If Cascadia Energy Corp. expends $200,000 on
operations and activities during the initial term, the lease term shall be
extended for an additional year. If the conditions for extension of the initial
term are not satisfied, this option will terminate as of the expiration of the
initial term and, as additional consideration, Cascadia Energy Corp. will pay
Pope Resources LP an additional sum of $30,560.

During the last year, Cascadia
Energy Corp has also acquired various lease acreage in the Chehalis Basin from
the State of Washington adjacent or contiguous to its other holdings. As of July
6, 2007, the total acreage under lease from the State of Washington was 23,735
acres with lease terms of four years. This acreage was acquired in lease
auctions for aggregate consideration of $37,719.

Our total holdings in the
Chehalis Basin of Washington as of July 6, 2007 were approximately 176,000 acres
with future annual lease payments totaling approximately $38,993, along with
lease terms that include approximately $500,000 in exploration expenditure
commitments prior to November 2007. We continue to seek additional lease
properties in the Chehalis Basin.

Cascadia Energy Corp. has also
entered into a joint venture agreement dated August 12, 2005 with St. Helens
Energy, LLC, a 100 percent owned subsidiary of Comet Ridge Limited, an
Australian coal seam gas explorer listed on the Australian Stock Exchange, and
headquartered in Perth, Western Australia. Under this agreement, St. Helens
Energy, LLC holds a 40 percent interest in the Washington exploration project.
Cascadia Energy Corp. serves as operator of the joint venture and St. Helens
Energy, LLC actively assists in evaluating the area and developing exploratory
leads and prospects.

5

---

The joint venture provides for
Cascadia Energy Corp. and its joint venture partner, St. Helens Energy, LLC, to
share the costs of exploring, developing and operating any economic natural gas
resources discovered in the Chehalis Basin area. Both capital and operating
costs, as well as any resulting revenues associated with the project area, are
to be allocated 60 percent to Cascadia Energy Corp. and 40 percent to St. Helens
Energy, LLC. Cascadia Energy Corp. acts as the operator of the venture and
submits authorizations for expenditures to its joint venture partner for
approval on a periodic basis. At any time, St. Helens Energy, LLC may decline to
participate; i.e. non-consent, in which case Cascadia Energy Corp. will absorb
100 percent of the cost of a specific authorization for expenditure and receive
100 percent of any net revenues derived from the specific expenditure.
Alternatively, Cascadia Energy Corp. might also choose not to undertake the
expenditure absent joint venture partner participation.

Other than as set out herein, we
have not been involved in any bankruptcy, receivership or similar proceedings,
nor have we been a party to any material reclassification, merger, consolidation
or purchase or sale of a significant amount of assets not in the ordinary course
of our business.

Current Business

We are an exploration stage
company engaged in the exploration for coalbed methane in the Coos Bay region of
Oregon and in the Chehalis Basin region of Washington State. Through one of our
wholly owned subsidiaries, Methane Energy Corp., we now hold leases to
approximately 118,000 acres of prospective coalbed methane lands in the Coos Bay
Basin. Methane Energy Corp. operates the exploration project in the Coos Bay
Basin. Through our other wholly-owned subsidiary, Cascadia Energy Corp., we are
evaluating approximately 176,000 acres under private and state leases located in
the Chehalis Basis.

Coos Bay Basin Exploration Prospect

The Coos Bay Basin is located
along the Pacific coast in southwest Oregon, approximately 200 miles south of
the Columbia River and 80 miles north of the California border. The onshore
portion of the Coos Bay Basin is elliptical in outline, elongated in a
north-south direction and covers over 250 square miles. More than 150,000 acres
in the Coos Bay Basin is underlain by the Coos Bay coal field and appears
prospective for coalbed methane gas production. The current leasehold position
owned by Methane Energy Corp. covers most of the lands believed to be
prospective for coalbed methane production in the Coos Bay Basin. Additional
leasing, title and curative work continues. Most areas in Coos County are
accessible year-round via logging and fire control roads maintained by the
county or timber companies. In addition, numerous timber recovery staging areas
are present and in many cases can be modified for drill-site locations.

The Coos Bay Basin is basically
  a structural basin formed by folding and faulting and contains a thick section
  of coal-bearing sediments. Coal-bearing rocks contained within the Coos Bay
  Basin form the Coos Bay Coal field. Coal mining from the Coos Bay field began
  in 1854 and continued through the mid 1950s. Much of the coal was shipped
  to San Francisco. Since mining activity ended several companies such as Sumitomo,
  Shell and American Coal Company have done exploratory work and feasibility studies
  on the Coos Bay Coal Field but no mining operations were conducted. In addition,
  approximately 20 exploratory oil and/or gas wells have been drilled in the Coos
  Bay basin over the years from 1914 to 1993. Many of these wells encountered
  gas shows in the coal seams that were penetrated during drilling.

6

---

Coalbeds are contained in both
  the Lower and Upper Member of the Middle Eocene Coaledo Formation. The coal-bearing
  sandstones and siltstones of the Middle Eocene Coaledo formation are estimated
  to form a section up to 6,400 feet thick. Total net coal thickness for the Lower
  Coaledo Member can range up to 70 feet and over 30 feet for the Upper Coaledo
  Member. Coos Bay coal rank ranges from subbituminous to high-volatile bituminous,
  with a heating value of 8,300 to 14,000 British Thermal Units per pound (BTU/LB.),
  a low sulphur content, and a moderate percentage of ash.

On October 6, 2004, a multi-hole
coring program was commenced on the Methane Energy Corp. leases. Coring was
needed to collect coal samples so that accurate gas content data could be
measured. Cores were collected, desorption work was done on the coals and
evaluation completed by mid 2005. This data, as well as other geologic
information, was provided to Sproule Associates, Inc., an international
reservoir engineering firm, for an independent evaluation. To date, natural gas
analyses performed on samples from Methane Energy Corp. coal samples and wells
indicate that the gas is pipeline quality and that the coals are fully saturated
with gas. It is important to note that technically recoverable gas volumes do
not necessarily qualify as proved reserves, and we have not recorded any proven
reserves at any of our projects at this time.

Drilling and testing programs
were then initiated at three pilot sitesBeaver Hill, Radio Hill and Westport. A
total of twelve exploratory wells have been drilled. Five exploratory wells were
drilled and completed at Beaver Hill; two exploratory wells were drilled at
Radio Hill with one completion; and five exploratory wells were drilled at
Westport with completions scheduled. Production and flow testing at the pilot
well sites as well as continued development work are currently progressing.

Natural Gas Market

Until 2005, the port of Coos Bay
was one of the largest population centers on the west coast not served by
natural gas. A project to bring natural gas into the region via a 52-mile,
12-inch pipeline was approved, funded by Coos County and the State of Oregon,
and completed in late 2004 with gas sales beginning in early 2005. While the
line is owned by Coos County, the local gas distribution company, Northwest
Natural Gas, operates the line. Northwest Natural Gas serves Coos County and
most of western Oregon. The pipeline and its associated distribution system
represent the most likely market option for delivery of gas, if produced by
Methane Energy Corp. in the future. Estimates of local Coos County market
requirements are over 10 million cubic feet of gas per day initially, which
represents about 10% of ultimate pipeline capacity. Excess capacity is available
for additional gas input.

Coos County is also likely to benefit
  from new industrial, commercial and residential development as natural gas is
  now available. Expansion of the market is likely to bring greater demand for
  and value to natural gas. Because of its west coast location, Coos Bay market
  prices would be subject to pricing standards of the New York Mercantile Exchange
  for most of the year.

7

---

Regional gas pricing hubs are located at Malin and Stanfield,
  Oregon. The closest pricing point, however, would be the Coos Bay City Gate,
  where Northwest Natural Gass retail rates are set and regulated by Oregons
  Public Utilities Commission. Seasonal or critical gas demand fluctuations could
  cause prices to exceed or fall below posted prices on a regular basis.

Exploration Objectives

The Coos Bay Basin is the
southernmost of a series of sedimentary basins that are present in western
Oregon and Washington west of the Cascade Range. The region containing this
series of basins is generally referred to as the Puget-Willamette Trough. These
basins contain thick sequences of predominantly non-marine, coal-bearing
sedimentary rock sequences that are correlative in age, closely related in
genesis, and very similar in many other characteristics. Methane Energy Corp. is
primarily targeting natural gas from coal seams of the Coaledo Formation in the
Coos Bay Basin. Secondary objectives are natural gas, and possibly oil, trapped
in conventional sandstone reservoirs.

Indications of the hydrocarbon
potential in the Puget-Willamette Trough are shown by natural gas production at
the Mist Field in northwest Oregon, the presence of excellent quality sand
reservoir development at the Jackson Prairie Gas Storage Field in southwest
Washington, and numerous oil and/or gas shows from historic oil and gas
exploration drilling activity.

Chehalis Basin Exploration Prospect

The Chehalis Basin is located
about midway between Portland and Seattle in southwest Washington State,
approximately 90 miles north of the Columbia River. The Chehalis Basin lies
between the western foothills of the Cascade Range and the eastern border of the
Coast Ranges and is a structurally-formed basin that contains and is flanked by
a thick section of coal-bearing sediments. The coals are hosted by
Lower-Middle-Upper Eocene continental sedimentary rocks. The coal-bearing Eocene
sandstone and siltstone section is estimated to be approximately 6,600 feet
thick.

The Chehalis Basin is more or
less centered within the subbituminous and lignite coal fields of southwestern
Washington. Subbituminous and lignite are various types of coal. The
Centralia-Chehalis coal district lies to the north and portions of the Morton
and Toledo coal fields lie to the east and south, respectively. The
Centralia-Chehalis coal district is the largest of the subbituminous and lignite
fields of southwestern Washington. At least 13 separate coal seams have been
mined or are being mined from the district. Most coal suitable for mining has a
subbituminous C rank, contains 14% to 35% moisture, 5% to 25% ash, and has a
heating value ranging from 8,300 to 9,500 BTU/LB.

TransAlta currently operates a
coal-fired power plant and a gas-fired power plant at their Centralia complex.
The coal-fired plant produces 1,404 megawatts, enough electricity to supply a
city the size of Seattle. In November 2006, the Centralia coal mine adjacent to
the power plant closed due to the high cost of operations. Currently, coal to
supply the gas-fired power plant is purchased Wyoming and Montana.

Coals in the Chehalis Basin are
  relatively thick and continuous. These coals contain a methane gas resource.
  Limited core and desorption work showed gas content ranging from 6 to 86 standard
  cubic feet per ton in the coal seams.

8

---

Two seams, the Blue and the Brown, each
  attain thicknesses of about 40 feet. Total net coal typically approaches 75
  feet and in places, exceeds 100 feet in thickness. More than 250,000 acres in
  the Chehalis Basin appears prospective for methane production from the coals.
  In addition, conventional gas potential is present.

During the 1980s Kerr-McGee
conducted a shallow coal exploration drilling program along the southwest flank
of the Chehalis Basin. They encountered a number of gas shows associated with
both coals and sandstones. One of the show wells was offset by Duncan Oil in
2001 and it flow tested 714 thousand cubic feet per day from a sand zone.

Our subsidiary, Cascadia Energy
Corp., currently controls, through lease options and oil and gas leases,
approximately 176,000 acres in the Chehalis Basin. We are also exploring lease
opportunities for additional acres and have identified specific leasehold
ownership positions falling within our Chehalis Basin exploration prospect area.
Access to virtually all areas in our Chehalis Basin project area is excellent
year-round via logging and fire control roads maintained by the forest service
or the timber industry. Likewise, numerous potential drill-site locations are
already constructed as timber recovery staging areas and may be available to be
utilized in the initial testing phase of the drilling program. In April 2007, we
commenced drilling three stratigraphic/information holes. For the next 12 months
ending March 31, 2008, we plan to acquire additional leasehold rights in the
Chehalis Basin project area to secure control of prospective acreage adjacent or
contiguous to our existing leases.

Natural Gas Market

Our Chehalis Basin project area
is located in close proximity to the Interstate 5 corridor that parallels the
route of the principal interstate pipeline providing natural gas to utility,
commercial and industrial customers in Washington and Oregon. With anticipated
declines in Canadian-sourced natural gas, we believe that robust markets will
exist for any gas produced from the Chehalis Basin. Because of its west coast
location and ready connection to a major interstate pipeline, Chehalis Basin
market prices would be subject to pricing standards of the New York Mercantile
Exchange for most of the year. Regional gas pricing hubs are located at Malin
and Stanfield, Oregon. However, seasonal or critical gas demand fluctuations
could cause prices to exceed or fall below posted prices on a regular basis.

Exploration Objectives

The Chehalis Basin is located
towards the northern end of a series of sedimentary basins that are present in
Oregon and Washington west of the Cascade Range. The region containing this
series of basins is generally referred to as the Puget-Willamette Trough. These
basins contain thick sequences of predominantly non-marine, coal-bearing
sedimentary rock sequences that are correlative in age, closely related in
genesis, and very similar in many characteristics. Cascadia Energy Corp. is
primarily targeting natural gas from coal seams of the Cowlitz Formation in the
Chehalis Basin. Secondary objectives are natural gas, and possibly oil, trapped
in conventional sandstone reservoirs.

Indications of the hydrocarbon
  potential in the Puget-Willamette Trough are shown by natural gas production
  at the Mist Field in northwest Oregon, the presence of excellent quality sand
  reservoir development at the Jackson Prairie Gas Storage Field in southwest
  Washington, and numerous oil and/or gas shows from historic oil and gas exploration
  drilling activity.

9

---

The Coalbed Methane Industry

During the past two decades,
coalbed methane has emerged as a viable source of natural gas compared to the
late 1980s when no significant production outside of the still dominant San Juan
Basin in New Mexico, and the Black Warrior Basin in Alabama. According to data
from the U.S. Department of Energys Energy Information Administration, coalbed
methane production totaled 1.72 trillion cubic feet in 2004, an increase of 7.5%
over 2003. This production accounted for nearly 9% of the countrys total
dry-gas output of 19.7 trillion cubic feet. Coalbed methane production currently
comes from fifteen basins located in the Rocky Mountain, Mid-Continent and
Appalachian regions. Various evaluation, exploration and development projects
are underway in at least four other basins, including Coos Bay and Chehalis
basins. One of the coalbed methane industrys leading information specialists
estimates that the number of producing wells nationwide (including those close
to achieving production) is approaching 35,000. By comparison, more than 405,000
wells produce natural gas nationwide. However, none of this production of
natural gas currently comes from Oregon or Washington. All of the natural gas
presently consumed in the Pacific Northwest must be delivered by interstate
pipelines from Western Canada and Wyoming.

We believe the success of coalbed
methane developments has been largely the result of improved drilling and
completion techniques (including horizontal/lateral completions), better
hydraulic fracture designs and significant cost reductions as a result of highly
dependable gas content and coalbed reservoir performance analysis. Also aiding
this sectors growth is the apparent shortage of quality domestic conventional
exploration and development projects.

We also believe that a major
factor driving the growth in coalbed methane production is its relatively low
finding and development costs. Coalbed methane fields are often found where
deeper conventional oil and gas reservoirs have already been developed.
Therefore, considerable exploration-cost reducing geologic information is often
readily available. This available geological information, combined with
comparatively shallow depths of prospective coalbed reservoirs, reduces finding
and development costs.

A number of government agencies
and industry organizations use various statistical methodologies to estimate the
volume of potentially recoverable coalbed methane using currently available
technology and specific economic conditions. The Potential Gas Committee, which
provides the most frequent assessments of the countrys natural gas resource
base, estimates technically recoverable coalbed methane resources of 106.5
trillion cubic feet for the Lower 48 States as of year end 2004. This represents
approximately 15% of the total estimated in-place coalbed methane resource of
700 trillion cubic feet. It is important to note that technically recoverable
gas volumes do not necessarily qualify as proved reserves, and we have not
recorded any proved reserves at our projects in Oregon or Washington at this
time.

Coalbed Methane

Natural gas normally consists of
  80% or more methane with the balance comprising such hydrocarbons as butane,
  ethane and propane. In some cases it may contain minute quantities of hydrogen
  sulfide, referred to as sour gas.

10

---

Coalbed methane is, generally, a sweet gas consisting of 95%
  methane and thus is normally of pipeline quality. Coalbed methane is considered
  an unconventional natural gas resource because it does not rely on conventional
  trapping mechanisms, such as a fault or anticline, or stratigraphic traps. Instead
  coalbed methane is absorbed or attached to the molecular structure of the coals
  which is an efficient storage mechanism as coalbed methane coals can contain
  as much as seven times the amount of gas typically stored in a conventional
  natural gas reservoir such as sandstone or shale. The absorbed coalbed methane
  is kept in place as a result of a pressure equilibrium often from the presence
  of water. Thus the production of coalbed methane in many cases requires the
  dewatering of the coals to be exploited. This process usually requires the drilling
  of adjacent wells and sometimes takes 6 to 36 months to complete. Coalbed methane
  production typically has a low rate of production decline and an economic life
  typically of 10 to 20 years.

The principal sources of coalbed
methane are either biogenic, producing a dry gas which is generated from
bacteria in organic matter, typically at depths less than 1,000 feet, or
thermogenic, which is a deeper wet gas formed when organic matter is broken down
by temperature and pressure.

The three main factors that
determine whether or not gas can be economically recovered from coalbeds are:
(1) the gas content of the coals; (2) the permeability or flow characteristics
of the coals; and (3) the thickness of the coalbeds. Gas content is measured in
terms of standard cubic feet per ton and varies widely from 430 standard cubic
feet per ton in the deep (2,000 to 3,500 feet) San Juan, New Mexico thermogenic
coals, and only 60 standard cubic feet per ton for the shallow (300 to 700 feet
deep) Powder River, Wyoming biogenic coals. The San Juan coals are considered to
have the industrys highest permeability. Relatively high permeability, which
can affect the ability of gas to easily travel to the borehole, is an important
factor for the success of coalbed methane wells, but is not absolutely required.
The thickness of coalbeds from which coalbed methane is economically produced
varies from as little as a few feet in some areas of the gas-rich (300 standard
cubic feet) Raton Basin to as much as 75 net feet of coalbed thickness at the
relatively gas-poor Powder River Basin.

Competition

Coalbed methane in the United States
  is produced by several major exploration and production companies and by numerous
  independents. The majors include BP American and ConocoPhillips in the San Juan
  Basin and, to a lesser extent, Chevron USA in the Black Warrior Basin. A number
  of large and mid-size independents, including Anadarko Petroleum Corporation,
  CMS Energy Corporation, CNX Gas Corporation, Devon Energy Corporation, Dominion
  Resources, Inc., El Paso Corporation, EnCana Corporation, Energen Corporation,
  Equitable Resources, Inc., Fidelity Exploration & Production Company, GeoMet
  Inc., J.M. Huber Corporation, Lance Oil & Gas Corporation, Penn Virginia
  Corporation, Pennaco Energy Inc., Pioneer Natural Resources Company, The Williams
  Companies, Inc., XTO Energy Inc. and Yates Petroleum Corporation, have established
  production in one or more basins. Dozens of smaller independents, many of whom
  originally began with conventional oil and gas production and operating a small
  number of wells, have found profitable niches in coalbed methane. Other new
  entrants to coalbed methane continue to acquire prospective acreage and to conduct
  test drilling. By virtue of their strategic property holdings, affiliates of
  several of the countrys largest coal mining companies also have become
  active in coalbed methane, such as Consol Energy Inc., Jim Walter Resources,
  Inc., Peabody Energy Corporation, USX Corporation and Westmoreland Coal Company.

11

---

Government Regulation

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

Employees

As at July 6, 2007, we had
sixteen non-union, full time employees, two of which are executives. We consider
our relations with our employees to be good.

|ITEM 1A. | RISK FACTORS
|-------- | ------------

Much of the information included
in this annual report includes or is based upon estimates, projections or other
forward-looking statements. Such forward-looking statements include any
projections or estimates made by us and our management in connection with our
business operations. These include (i) the potential prospective for coalbed
methane and conventional natural gas production in the Coos Bay Basin and the
Chehalis Basin, (ii) the potential pipeline capacity in the port of Coos Bay
area, and (iii) greater market for natural gas in Coos County and the Pacific
Northwest region in general. While these forward-looking statements, and any
assumptions upon which they are based, are made in good faith and reflect our
current judgment regarding the direction of our business, actual results will
almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested herein. We
undertake no obligation to update forward-looking statements to reflect events
or circumstances occurring after the date of such statements.

Such estimates, projections or
other forward-looking statements involve various risks and uncertainties as
outlined below. We caution readers of this annual report that important factors
in some cases have affected and, in the future, could materially affect actual
results and cause actual results to differ materially from the results expressed
in any such estimates, projections or other forward-looking statements. In
evaluating us, our business and any investment in our business, readers should
carefully consider the following factors.

12

---

Risks Relating to Our Business:

Our independent auditors have
expressed substantial doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.

In their report dated July 2,
2007, our independent auditors stated that our consolidated financial statements
for the fiscal year ended March 31, 2007 were prepared assuming that we would
continue as a going concern. Our ability to continue as a going concern is an
issue raised as a result of recurring losses from operations and periodic
working capital deficiencies. Our ability to continue as a going concern is
subject to our ability to obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our securities. Our
continued net operating losses increase the difficulty in meeting such goals and
there can be no assurances that such funding methods will prove successful.

We have a history of losses
that may continue, which may negatively impact our ability to achieve our
business objectives.

We have accumulated a deficit of
$16,645,776 to March 31, 2007 and incurred net losses applicable to common
shareholders of $7,765,427 for the fiscal year ended March 31, 2007; and
$5,295,572 for the fiscal year ended March 31, 2006. We cannot assure you that
we can achieve or sustain profitability on a quarterly or annual basis in the
future. Our operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There is no assurance that future
operations will be profitable. We may not achieve our business objectives and
the failure to achieve such goals would have an adverse impact on us.

If we are unable to obtain
additional funding, our business operations will be harmed; and if we do obtain
additional financing, our then existing shareholders may suffer substantial
dilution.

We will require additional funds
to sustain and expand our oil and gas exploration activities. We anticipate that
we will require up to approximately $18,500,000 to fund our continued operations
for the fiscal year ending March 31, 2008. Additional capital will be required
to effectively support our operations and to implement our business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and inhibit our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our exploration plans and possibly cease our
operations. Any additional equity financing may result in substantial dilution
to our then existing shareholders.

We have a limited operating
history and if we are not successful in continuing to grow our business, then we
may have to scale back or even cease our ongoing business operations.

Our Company has a limited operating
  history in the business of oil and gas exploration and must be considered to
  be an exploration stage company. We have no history of revenues from operations
  and have no significant tangible assets. We have yet to generate positive earnings
  and there is no assurance that we will ever operate profitably. Our success
  is significantly dependent on successful lease acquisition, drilling, completion
  and production programs. Our operations will be subject to all the risks inherent
  in the establishment of a developing enterprise and the uncertainties arising
  from the absence of a significant operating history.

13

---

We may be unable to locate recoverable reserves or operate on
  a profitable basis. We are in the exploration stage and potential investors
  should be aware of the difficulties normally encountered by enterprises in the
  exploration stage. If our business plan is not successful, and we are not able
  to operate profitably, investors may lose some or all of their investment in
  our Company.

If we are unable to retain the
services of Mr. Carlson and other senior executives or if we are unable to
successfully recruit qualified managerial and field personnel having experience
in oil and gas exploration, we may not be able to continue our
operations.

Our success depends to a
significant extent upon the continued service of Mr. John Carlson, our president
and chief executive officer, and a director. Loss of the services of Mr. Carlson
could have a material adverse effect on our growth, revenues, and prospective
business. We do not maintain key-man insurance on the life of Mr. Carlson. In
addition, in order to successfully implement and manage our business plan, we
will be dependent upon, among other things, successfully recruiting qualified
managerial and field personnel who have experience in the oil and gas
exploration industry. Competition for qualified individuals is intense. There
are no assurances that we will be able to find and attract new employees; or to
retain existing employees; or to find, attract and retain qualified personnel on
acceptable terms.

As our properties are in the
exploration and development stage, there is no assurance that we will establish
commercially exploitable discoveries on our properties.

Exploration for economic reserves
of oil and gas is subject to a number of risk factors. Few properties that are
explored are ultimately developed into producing oil and/or gas wells. Our
properties are in the exploration stage only and are without proven reserves of
oil and gas. We may not establish commercially exploitable discoveries on any of
our properties; and we may never have profitable operations.

We are unsure about the
likelihood that we will discover and establish a profitable production of gas
from coal seams in the Coos Bay or Chehalis Basin regions.

Currently, there is no commercial
production of coal in the state of Oregon or Washington. Additionally, no
coalbed methane gas production exists either in Washington or Oregon. Coalbed
methane gas only accounts for a small percentage of all natural gas production
in the United States. The closest coalbed methane production to the Coos Bay and
Chehalis Basin occurs in the state of Wyoming. As a result, it is unlikely that
we will discover any significant amount of coalbed methane in the Coos Bay or
Chehalis Basins or be able to establish wells that will produce a profitable
amount of coalbed methane gas.

Even if we are able to
discover commercially exploitable resources on any of the properties on which we
hold an interest, we may never achieve profitability or may not receive an
adequate return on invested capital because the potential profitability of oil
and gas ventures depends upon factors beyond the control of our Company.

The potential profitability of
  oil and gas properties is dependent upon many factors beyond our control. For
  instance, world prices and markets for oil and gas are unpredictable, highly
  volatile, potentially subject to governmental fixing, pegging, controls or any
  combination of these and other factors, and respond to changes in domestic,
  international, political, social and economic environments.

14

---

Additionally, due to worldwide economic uncertainty, the availability
  and cost of funds for production and other expenses have become increasingly
  difficult, if not impossible, to project. In addition, adverse weather conditions
  can also hinder drilling operations. These changes and events may materially
  affect our future financial performance. These factors cannot be accurately
  predicted and the combination of these factors may result in our Company not
  receiving an adequate return on invested capital.

Even if we are able to
discover and complete a gas well, there can be no assurance the well will become
profitable.

We have not yet established a
commercially viable coalbed methane gas resource. Even if we are able to do so,
a productive well may become uneconomic in the event water or other deleterious
substances are encountered which impair or prevent the production of oil and/or
gas from the well. In addition, production from any well may be unmarketable if
it is impregnated with water or other deleterious substances. In addition, the
marketability of oil and gas which may be acquired or discovered will be
affected by numerous factors, including the proximity and capacity of oil and
gas pipelines and processing equipment, market fluctuations of prices, taxes,
royalties, land tenure, allowable production and environmental protection, all
of which could result in greater expenses than revenue generated by the
well.

The oil and gas industry is
highly competitive and there is no assurance that we will be successful in
acquiring more leases.

The oil and gas industry is
intensely competitive. We compete with numerous individuals and companies,
including many major oil and gas companies that have substantially greater
technical, financial and operational resources. Accordingly, there is a high
degree of competition for desirable oil and gas leases, for suitable properties
for drilling operations, for necessary drilling equipment, as well as for access
to funds. We cannot predict if the necessary funds can be raised or that any
projected work will be completed. Our budget anticipates our acquiring
additional leases for acreage in both the Coos Bay and Chehalis Basins. This
acreage may not become available or, if it is available for leasing, we may not
be successful in acquiring clear title to the leases. If we do not acquire the
leases, we will not be able to completely fulfill our current business plan.
Failure to carry out our business plan may reduce the likelihood of achieving
profitable operations and may discourage investors from investing in our
Company. If these things happen, we may not be able to raise additional funds
when we need them and we may have to cease operations.

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

The marketability of natural resources
  that may be acquired or discovered by us will be affected by numerous factors
  beyond our control. These factors include market fluctuations in oil and gas
  pricing and demand, the proximity and capacity of natural resource markets and
  processing equipment, governmental regulations, land lease tenure, land use,
  regulation concerning the importing and exporting of oil and gas, and environmental
  protection regulations.

15

---

The exact effect of these factors cannot be accurately predicted,
  but the combination of these factors may result in us not receiving an adequate
  return on invested capital to be profitable or viable.

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

Oil and gas operations are
subject to federal, state, and local laws relating to the protection of the
environment, including laws regulating removal of natural resources from the
ground and the discharge of materials into the environment. Oil and gas
operations are also subject to federal, state, and local laws and regulations
that seek to maintain health and safety standards by regulating the design and
use of drilling methods and equipment. Various permits from government bodies
are required for drilling operations to be conducted; no assurance can be given
that such permits will be granted. Environmental standards imposed by federal,
state, or local authorities may be changed, and any such changes may have
material adverse effects on our activities. Moreover, compliance with such laws
may cause substantial delays or require capital outlays in excess of those
anticipated, thus causing an adverse effect on our business operations.
Additionally, we may be subject to liabilities for pollution or other
environmental damages. We believe that our operations comply, in all material
respects, with all applicable environmental and health and safety regulations.
To date, we have not been required to spend any material amounts on compliance
with environmental and health and safety regulations. However, we may be
required to do so in the future and this may affect our ability to expand or
maintain our operations. Our operating partners maintain insurance coverage
customary to the industry; however, we are not fully insured against all
possible environmental and health and safety risks.

Oil and gas exploration and
production activities are subject to certain environmental regulations that may
prevent or delay the commencement or continuation of our operations.

In general, our oil and gas
exploration and production activities are subject to certain federal, state and
local laws and regulations relating to environmental quality and pollution
control. Such laws and regulations increase the costs of these activities and
may prevent or delay the commencement or continuation of a given operation.
Compliance with these laws and regulations has not had a material effect on our
operations or financial condition to date. Specifically, we are subject to
legislation regarding emissions into the environment, water discharges and
storage and disposition of hazardous wastes. In addition, legislation has been
enacted which requires well and facility sites to be abandoned and reclaimed to
the satisfaction of state authorities. However, such laws and regulations are
frequently changed and we are unable to predict the ultimate cost of compliance.
Generally, environmental requirements do not appear to affect us any differently
or to any greater or lesser extent than other companies in the industry. We
believe that our operations comply, in all material respects, with all
applicable environmental regulations. Our operating partners maintain insurance
coverage customary to the industry; however, we are not fully insured against
all possible environmental risks.

16

---

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

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

There are a large number of
shares issuable upon conversion or redemption of our Series E Convertible
Preferred Stock and the sale of these shares may depress the market price of our
common stock.

As of March 31, 2007, we had
33,424,941 shares of common stock issued and outstanding and 25,000 shares of
Series E Convertible Preferred Stock outstanding. In addition, we may be
obligated to issue between 10,000,000 to approximately 50,000,000 shares of our
common stock upon conversion or redemption of the outstanding Series E
Convertible Preferred Stock. Ten million shares of our common stock, including
all of the shares issuable upon conversion or redemption of the Series E
Convertible Preferred Stock may be sold pursuant to a registration statement
that became effective on February 9, 2007. Additional shares associated with
conversion or redemption of the Series E Convertible Stock may also become
available for sale. The sale of these shares may adversely affect the market
price of our common stock.

The issuance of shares upon
conversion or redemption of the Series E Convertible Preferred Stock may cause
immediate and substantial dilution to our existing stockholders.

The issuance of shares upon
conversion or redemption of the Series E Convertible Preferred Stock may result
in substantial dilution to the interests of other stockholders since we may
choose to pay for our redemption of the Series E Convertible Preferred Stock
through issuance of our common stock and the selling stockholders may also
choose to convert and sell the full amount issuable on conversion. The upper
limit of the number of shares of our common stock that may be issued from
conversion or redemption of Series E Convertible Preferred Stock in the event of
default is approximately 50,000,000 shares, which will have the effect of
further diluting the proportionate equity interest and voting power of holders
of our common stock.

Redemption of shares for cash
under the terms of the Series E Convertible Preferred Stock may cause us to
scale back or cease our operations if we are unable to obtain substitute funding
under acceptable terms.

Enforcement of the conditional
  mandatory redemption requirement under the terms of the Series E Convertible
  Stock would result in a monthly cash outflow of more than $1 million and could
  have a material adverse effect on our financial position and operations. Subsequent
  to March 31, 2007 and through July 1, 2007, the Series E Convertible Preferred
  Stock investor, Cornell Capital Partners, LP, has elected, in lieu of cash payments,
  to accept a limited redemption of $2,350,000 of Series E Preferred Stock plus
  accrued dividends, which has been converted into 4,767,038 shares of our common
  stock at a conversion price of $0.50 per share. However, there is no assurance
  that the Series E Convertible Preferred Stock investor will continue to waive
  the contractual redemption requirement.

17

---

Risks Relating to Our Shares of Common Stock:

If we fail to remain current
in our reporting requirements, we could be removed from the OTC Bulletin Board
which would limit the ability of broker-dealers to sell our securities and the
ability of stockholders to sell their securities in the secondary
market.

Companies trading on the OTC
Bulletin Board, such as us, must be reporting issuers under Section 12 of the
Securities Exchange Act of 1934, as amended, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting requirements,
we could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market.

Our shares of common stock is
subject to the penny stock rules of the Securities and Exchange Commission and
the trading market in our securities is limited, which makes transactions in our
shares of common stock cumbersome and may reduce the value of an investment in
our shares of common stock.

The Securities and Exchange
Commission has adopted Rule 15g 9 which establishes the definition of a penny
stock, for the purposes relevant to us, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require:

- that a broker or dealer approve a persons account for transactions in
  penny stocks; and
- the broker or dealer receives from the investor a written agreement to the
  transaction, setting forth the identity and quantity of the penny stock to be
  purchased.

In order to approve a persons
account for transactions in penny stocks, the broker or dealer must:

- obtain financial information and investment experience objectives of the
  person; and
- make a reasonable determination that the transactions in penny stocks are
  suitable for that person and the person has sufficient knowledge and
  experience in financial matters to be capable of evaluating the risks of
  transactions in penny stocks.

The broker or dealer must also
deliver, prior to any transaction in a penny stock, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market, which, in highlight form:

18

---

- sets forth the basis on which the broker or dealer made the suitability
  determination; and
- that the broker or dealer received a signed, written agreement from the
  investor prior to the transaction.

Generally, brokers may be less
willing to execute transactions in securities subject to the penny stock
rules. This may make it more difficult for investors to dispose of our shares of
common stock and cause a decline in the market value of our shares of common
stock.

Disclosure also has to be made
about the risks of investing in penny stocks in both public offerings and in
secondary trading and about the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.

National Association of
Securities Dealers Inc. sales practice requirements may also limit a
stockholders ability to buy and sell our shares of common stock.

In addition to the penny stock
rules described above, the National Association of Securities Dealers Inc. has
adopted rules that require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customers financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the National Association of Securities Dealers Inc. believes
that there is a high probability that speculative low priced securities will not
be suitable for at least some customers. The National Association of Securities
Dealers Inc. requirements make it more difficult for broker-dealers to recommend
that their customers buy our shares of common stock, which may limit your
ability to buy and sell our shares of common stock and have an adverse effect on
the market for its shares.

|ITEM 2. | PROPERTIES
|------- | ----------

Our principal office is located
at 1 SW Columbia Street, Suite 640, Portland, Oregon 97258 and was leased for a
term beginning October 1, 2006 and ending September 30, 2009 at a cost of $4,400
per month. The office space consists of five offices, a conference room, space
for modular workstations and a reception area totaling approximately 2,708
square feet.

In addition, Methane Energy Corp.
leases an office at 200 North Adams, Coquille, Oregon, 97423. The lease runs
from August 1, 2006 through July 31, 2008 at a cost of $3,125 per month. The
Coquille office is comprised of approximately 3,323 square feet, consisting of
twelve offices, a kitchen, and space for modular workstations. We believe that
our current office space and facilities are sufficient to meet our present needs
and do not anticipate any difficulty securing alternative or additional space,
as needed, on terms acceptable to us.

19

---

Through our subsidiary, Methane
Energy Corp., we have leased approximately 118,000 of undeveloped acreage in the
Coos Bay Basin as of June 2007. Sixteen thousand acres are leased from Menasha
Development Corporation, 29,000 acres from Coos County, 14,000 acres from the
State of Oregon, and approximately 59,000 acres from various companies and
individual landowners. The total annual lease payments related to the 118,000
acres are approximately $122,000. These leases typically have a five-year term
with an option for an additional five years with renewal conditioned on
continued payment of annual lease rentals. In addition, we have granted the
landowners royalties, typically averaging 12.5% on gross sales resulting from
the leases in addition to the 4% overriding royalty interest to be paid to the
project originators.

We have recently completed the
initial phases of a pilot well program designed to assess the coalbed methane
production capability of the wells in the Coos Bay Basin. The test results will
assist our management in determining exploration potential and economic
viability of further development plans in the area. We contract for drilling
rigs and related services from outside sources. Our coal and water samples are
analyzed by independent testing labs, then interpreted by analysts such as
Sproule Associates Inc. and MHA Petroleum Consultants for resource assessment.

Through our subsidiary, Cascadia
Energy Corp., we have acquired mineral leasehold rights to 176,000 acres in the
Chehalis Basin area of Washington State as of June 2007. We executed a one-year
lease option agreement on August 9, 2005 with Weyerhaeuser Company to lease
100,000 acres that we may select from an overall 365,000 acreage block in the
Chehalis Basin during the one-year option term and we also obtained a two-year
first right of refusal on the balance of the acreage that we do not select
during its initial selection process. Cash consideration of $100,000 was paid
for the lease option of which we paid $60,000 and our joint venture partner, St.
Helens Energy LLC, paid the reminding $40,000. In February 2007, we extended
the term of this option for an additional year by committing to a work program
of $285,715 by August 2007, pertaining to the full 100,000 acres but may be
proportionally reduced based on the number of acres selected for exploration
activity during the initial option period. Alternatively, we may simply execute
a lease agreement on the acreage at an annual rental rate of $1.00 per acre.

From October 2006 through May
2007, Cascadia Energy Corp has entered into three additional lease agreements
with Weyerhaeuser totaling 36,991 acres, two that required payment of upfront
lease bonuses of $428,610 and one that requires annual lease payments of $1,275.
Certain of these agreements include a provision requiring Cascadia Energy Corp.
to commence a well within the first two years of the lease, or the lease will
terminate and we would be required to make a payment of $75,000 to
Weyerhaeuser.

On May 9, 2006, Cascadia Energy
Corp. entered into an option to acquire oil & gas lease with Pope Resources
LP. This option provides Cascadia Energy Corp. with the right to earn oil and
gas leases covering 15,280 acres of mineral rights interests held by Pope
Resources LP in Cowlitz and Lewis Counties, Washington, for an option price of
$1 per net mineral acre or $15,280. The initial term of this option is for a
period of 18 months ending on November 9, 2007. If Cascadia Energy Corp. expends
$200,000 on operations and activities in the overall Cedar Creek area during the
initial term, the initial term shall be extended for an additional year.

20

---

If the conditions for extension of the initial term are not
satisfied, this option will terminate as of the expiration of the initial term
and, as additional consideration, Cascadia Energy Corp. will pay Pope Resources
LP an additional sum of $30,560.

During the last 18 months,
Cascadia Energy Corp. acquired through lease auctions an additional 23,735 acres
from the State of Washington Land Trust for initial lease terms of five-years,
which acreage is adjacent or contiguous to other of our acreage in the Chehalis
Basin. This acreage was acquired for aggregate lease consideration of $37,719
and has been included in the Chehalis Basin project area.

We have completed considerable
geological and geophysical analysis on our Chehalis Basin project acreage and
plan to continue exploratory activities. There is no assurance that we will
raise sufficient capital to take advantage of our opportunity in Washington
State.

|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

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

|ITEM 4. | SUBMISSION OF MATTERS TO VOTE OF SECURITIES
      HOLDERS
|------- | ---------------------------------------------------------

We held an annual general meeting
of stockholders on December 8, 2006 in Coos Bay, Oregon. Proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was
no solicitation in opposition to the managements nominees as listed in the
proxy statement and all of managements nominees were elected. Our directors
elected at this annual meeting included Michael Raleigh and Curtis Hartzler.
Stockholders also approved the appointment of Peterson Sullivan PLLC as our
independent auditors (17,394,455 shares voted for, 12,480 shares voted against,
20,020 shares abstained) and approved the amended 2006 Equity Incentive Plan to
increase the maximum number of shares reserved for issuance under the plan,
including options already granted, from 1,000,000 to 1,800,000 shares (4,006,068
shares voted for, 537,492 shares voted against, 157,757 shares abstained,
12,725,638 shares not voted).

PART II

|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS **AND ISSUER PURCHASE OF EQUITY SECURITIES**
|------- | --------------------------------------------------------------------------------------------------------

In the United States, our shares
of common stock are traded on the National Association of Securities Dealers
Inc. OTC Bulletin Board under the symbol TREN. The following quotations
obtained from Stockwatch reflect the high and low bids for our shares of common
stock based on inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

The high and low bid prices of
our shares of common stock for the periods indicated below are as follows:

21

---

Quarter Ended
      High
      LowMarch 31, 2004
    $ 0.51
    $ 0.05June 30, 2004
    $ 1.29
    $ 0.38September 30, 2004(1)
    $ 1.18
    $ 0.65December 31, 2004
    $ 1.37
    $ 0.72March 31, 2005
    $ 1.36
    $ 0.93June 30, 2005
    $ 3.56
    $ 0.95September 30, 2005
    $ 2.58
    $ 1.56December 31, 2005
    $ 2.43
    $ 1.68March 31, 2006
    $ 3.07
    $ 1.94June 30, 2006
    $ 3.93
    $ 1.62September 30, 2006
    $ 2.58
    $ 1.40December 31, 2006
    $ 2.00
    $ 0.99March 31, 2007
    $ 1.35
    $ 0.97


| | (1) | On July 30, 2004, our trading symbol changed from SBSY
      to TREN to reflect the change in our corporate
name.
| | --- | ---------------------------------------------------------------------------------------------------------------------

Holders

Our shares of common stock are
issued in registered form. Computershare Trust Company, Inc., 350 Indiana
Street, Suite 800, Golden, CO 80401 (Telephone: 303.262.0600; Facsimile:
303.262.0604) is the registrar and transfer agent for our shares of common
stock.

On July 6, 2007, the
shareholders list of our shares of common stock showed 125 registered holders
of our shares of common stock and 36,561,953 shares of common stock outstanding.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of shares of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies.

Dividends

During the fiscal year ended
March 31, 2007, we accrued or paid preferred stock dividends of $695,339. See
Notes 10 and 12 to our audited consolidated financial statements.

Equity Compensation Plan Information

The following table provides a
summary of the number of options granted under our compensation plans, as well
as options granted outside of our compensation plans, the weighted average
exercise price and the number of options remaining available for issuance all as
at March 31, 2007.

22

---

Number of
      securities to be issued upon exercise of
      outstanding options
      Weighted-
      Average exercise price of outstanding
      options, warrants and rights
      Number of securities remaining available for
      future issuance under equity compensation
      plansEquity compensation plans not approved by security
      holders(1)
    200,000
    $ 0.50
    NilEquity compensation plans approved by
      security holders(2)
    2,300,000
    $ 1.53
    NilEquity compensation plans approved by
      security holders(3)
    1,465,000
    $ 2.09
    335,000Total
    3,965,000
    $ 1.68
    335,000


| | (1) | Referring to our 2004 non-qualified stock option plan.
      Please see the 2004 Non- Qualified Stock Option Plan section
    below.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                       
| | (2) | Referring to our 2005 equity incentive plan. Please see
      the 2005 Non-Qualified Stock Option Plan section below.               
| |     |                                                                                                                                       
| | (3) | Referring to our 2006 equity incentive plan. Please see
      the 2006 Equity Incentive Plan section below                          

2004 Non-Qualified Stock Option Plan

On February 10, 2004, our board
of directors adopted the 2004 Non-Qualified Stock Option Plan (the 2004 Plan)
for our executives, employees and outside consultants and advisors. Under the
plan, executives, employees and outside consultants and advisors may receive
awards of non-qualified stock options. The purpose of the plan is to provide
executives, employees and non-employee consultants and advisors with an
increased incentive to make contributions to our Company. The aggregate number
of shares of common stock that may be granted by our Company under the 2004 Plan
will not exceed a maximum of 1,800,000 shares of common stock during the period
of the plan. The 2004 Plan shall terminate upon the earlier of February 10, 2014
or the issuance of all shares of common stock granted under the plan. The option
prices per share are determined by our board of directors when the stock option
is granted.

During the year ended March 31,
2004, we granted 1,060,000 stock options to various consultants of our Company.
Each option entitles the holder to acquire one share of common stock at an
exercise price of $0.10 per share. These options have vesting periods ranging
from immediately to over seven months, and expire two years from date of grant.

23

---

During the fiscal year ended
March 31, 2005, we granted a total of 1,340,000 stock options of which 740,000
were under the 2004 Plan and the other 600,000 were outside the plan. Of the
total 1,340,000 options, 740,000 stock options were granted to various directors
and consultants of our Company under the 2004 Plan. Each option entitles the
holder to acquire one share of common stock at exercise prices ranging from
$0.10 to $0.50 per share. Vesting of these options ranged from 100% immediately
to 25% immediately and 25% every six months afterward until fully vested 18
months from the date of grant. These options expire five years from the date of
grant.

Of the 600,000 stock options
granted outside the 2004 Plan, 200,000 stock options with an exercise price of
$1.00 per share and another 200,000 with an exercise price of $2.00 per share
were granted pursuant to a mail distribution agreement with a third party. These
options vested immediately and were exercisable until November 1, 2005. These
options have a cashless exercise provision whereby the optionee can elect to
receive shares of common stock in lieu of paying cash for the options based on a
formula that includes using the average closing prices of the five trading days
preceding the exercise date.

The other 200,000 stock options
granted outside the 2004 Plan were to a consultant providing public and investor
relations services. These options have an exercise price of $0.83 per share,
vested 25% immediately, and 25% every quarter thereafter. Either party may
terminate the investor relations agreement with thirty days written notice.

As of March 31, 2007, 200,000
options with an exercise price of $0.50 per share remained outstanding under the
2004 Plan.

2005 Equity Incentive Plan

On March 17, 2005, our board of
directors adopted the 2005 Equity Incentive Plan for our executives, employees
and outside consultants and advisors. Under the 2005 Equity Incentive Plan,
executives, employees and outside consultants and advisors may receive awards as
described in the 2005 Equity Incentive Plan. The purpose of the equity incentive
plan is to provide long-term performance incentives to those key employees and
consultants of our Company and our subsidiaries who are largely responsible for
the management, growth and protection of the business of our Company and our
subsidiaries. A maximum of 2,000,000 shares of our common stock are subject to
the 2005 Equity Incentive Plan. As of December 31, 2005, a registration
statement on Form S-8 was filed to register the common stock issuable under our
2005 Equity Incentive Plan with an amendment to increase the number of shares
under the plan to 2,500,000. As of March 31, 2007, 2,500,000 options with an
average exercise price of $1.47 per share had been granted under the 2005 Equity
Incentive Plan as further described below.

On April 1, 2005, 1,200,000 stock
  options were granted to directors and officers under the 2005 Equity Incentive
  Plan to purchase 1,200,000 shares of our common stock. On April 15, 2005, 300,000
  stock options were granted to an officer of our subsidiary, Methane Energy Corp.,
  under the 2005 Equity Incentive Plan to purchase 300,000 shares of our common
  stock with an exercise price of $1.25 per share. On June 2, 2005, 200,000 stock
  options were granted to consultants under the 2005 Equity Incentive Plan to
  purchase 200,000 shares of our common stock with an exercise price of $2.00
  per share. On October 15, 2005, 250,000 stock options were granted to a newly
  hired employee of our subsidiary, Methane Energy Corp., under the 2005 Equity
  Incentive Plan to purchase 250,000 shares of our common stock with an exercise
  price of $2.00 per share.

24

---

On November 22, 2005 40,000 stock options were granted to a consultant
  under the 2005 Equity Incentive Plan to purchase 40,000 shares of our common
  stock with an exercise price of $2.00 per share. On January 16, 2006, 310,000
  stock options were granted to a newly hired officer and to other employees and
  consultants under the 2005 Equity Incentive Plan with an exercise price of $2.11
  per share. In addition, we had previously granted a consultant the option to
  purchase 200,000 shares of our common stock at an exercise price of $0.83 per
  share pursuant to a consulting agreement for public and investor relations with
  a third party in which 25% of the options vest immediately and 25% vest every
  quarter thereafter and either party may terminate the investor relations agreement
  with thirty days written notice. These options were originally granted
  outside of the 2005 Equity Incentive Plan, subsequently were revised to be included
  under the 2005 Equity Incentive Plan, and were exercised by the consultant during
  fiscal year 2007. There are currently no further options available for grant
  under the 2005 Equity Incentive Plan.

2006 Equity Incentive Plan

On May 10, 2006, our board of
directors adopted the 2006 Equity Incentive Plan for our executives, employees
and outside consultants and advisors. Under the 2006 Equity Incentive Plan,
executives, employees and outside consultants and advisors may receive awards as
described in the 2006 Equity Incentive Plan. The purpose of the equity incentive
plan is to provide long-term performance incentives to those key employees and
consultants of our Company and our subsidiaries who are largely responsible for
the management, growth and protection of the business of our Company and our
subsidiaries. A maximum of 1,800,000 shares of our common stock are subject to
the 2006 Equity Incentive Plan. As of March 31, 2007, 1,465,000 options with an
average exercise price of $2.09 per share had been granted under the 2006 Equity
Incentive Plan to directors and to employees. Under the 2006 Equity Incentive
Plan, 355,000 options remain available for grant.

Recent Sales of Unregistered Securities

In May 2004, we issued 1,442,930
shares of our common stock and 1,442,930 warrants to purchase our shares of
common stock at an exercise price of $0.50 pursuant to a private placement in
exchange for aggregate cash payments of $505,025. We issued 300,071 shares of
our common stock to two non-U.S. persons (as that term is defined in Regulation
S of the Securities Act of 1933) or entities for aggregate payments of $105,025
in an offshore transaction relying on Regulation S and/or Section 4(2) of the
Securities Act of 1933. We also issued 1,142,859 shares of our common stock to
two U.S. persons or entities for aggregate cash payments of $400,000 and in
reliance on Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933. Certain registration rights were granted to investors pursuant to this
financing. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were our accredited investors, business associates or executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.

25

---

In June 2004, we issued 600,000
shares of our common stock pursuant to the lease purchase and sale agreement
with Geo-Trends-Hampton International, LLC. These shares of common stock were
issued in reliance on Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were our accredited investors, business
associates or executive officers, and transfer was restricted by us in
accordance with the requirements of the Securities Act of 1933.

In June 2004, we issued 300,000
shares of our common stock pursuant to an investor relation's agreement. These
shares of common stock were issued to non-U.S. persons (as that term is defined
in Regulation S of the Securities Act of 1933), in an offshore transaction
relying on Regulation S and/or Section 4(2) of the Securities Act of 1933.

In June 2004, we issued 500,000
shares of our common stock and 500,000 warrants to purchase our shares of common
stock pursuant to a private placement in exchange for aggregate cash payments of
$200,000. The shares of common stock were issued to three U.S. persons or
entities in reliance on Rule 506 of Regulation D under the Securities Act of
1933. Certain registration rights were granted to investors pursuant to this
financing. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were our accredited investors, business associates or executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.

In August 2004, we issued 2,200
shares of Series B convertible preferred stock for $2,200,000. These shares were
issued in reliance on Rule 506 of Regulation D under the Securities Act of 1933.
Certain registration rights were granted to investors pursuant to this
financing. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were our accredited investors, business associates or executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.

In February 2005, we issued
600,000 shares of our common stock pursuant to a lease purchase and sale
agreement with Geo-Trends-Hampton International, LLC. These shares were issued
in reliance on Rule 506 of Regulation D under the Securities Act of 1933. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
our accredited investors, business associates or executive officers, and
transfer was restricted by us in accordance with the requirements of the
Securities Act of 1933.

In February 2005, we issued
2,500,000 shares of our common stock for $2,500,000 pursuant to two securities
purchase agreements entered into with two accredited investors. These shares
were issued in reliance on Rule 506 of Regulation D under the Securities Act of
1933. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were our accredited investors, business associates or executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.

26

---

In July and September 2005 and
January 2006 we issued in a series of related tranches a total of 12,500 shares
of Series C convertible preferred stock for $12,500,000. These shares were
issued in reliance on Rule 506 of Regulation D under the Securities Act of 1933.
Certain registration rights were granted to investors pursuant to this
financing. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were our accredited investors, business associates or executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933. The Series C convertible preferred stock was
converted to 7,651,648 shares of our common stock, 2,083,614 of which were
issued in fiscal 2006 and 5,568,034 of which were issued in our fiscal 2007 year
end. The Series C convertible preferred stock has now been converted in full. On
May 10, 2006, we issued 228,714 of our common shares in payment of $343,712 due
in accrued dividends on our Series C convertible preferred stock during the
period it was outstanding. Dividends accrued on our Series C convertible
preferred stock have now been paid in full.

In February 2006, we issued
600,000 shares of our common stock pursuant to a lease purchase and sale
agreement with Geo-Trends-Hampton International, LLC. These shares were issued
in reliance on Rule 506 of Regulation D under the Securities Act of 1933. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
our accredited investors, business associates or executive officers, and
transfer was restricted by us in accordance with the requirements of the
Securities Act of 1933.

In June 2006 we committed to the
issuance of 25,000 shares of Series E convertible preferred stock for
$25,000,000. These shares were issued in reliance on Rule 506 of Regulation D
under the Securities Act of 1933. Certain registration rights were granted to
investors pursuant to this financing. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to one
accredited investor and transfer was restricted by us in accordance with the
requirements of the Securities Act of 1933. The Series E convertible preferred
stock is convertible into common stock by the holder at any time by dividing the
dollar amount being converted by $2.50. The holder of the Series E convertible
preferred stock may only convert up to $1,250,000 of Series E convertible
preferred stock into common shares in any 30 day period. Commencing on the
earlier of the month following acceptance of the registration statement and
December 1, 2006, we were required to convert up to 5% of the initial investment
each month, payable in shares valued at $2.50 if the stock trading price is
$2.50 or above; in stock valued at $1.67 or in cash at the initial investment
amount plus 20% if the stock trading price is between $1.67 and $2.50; and in
cash at the initial investment amount plus 20% if the stock trading price is
below $1.67.

The first conditional mandatory
  redemption payment was due on December 1, 2006 with additional payments due
  on the first trading day of each subsequent month in an amount sufficient to
  ratably retire the Series E Convertible Preferred Stock over the period ending
  August 1, 2008. The Series E Convertible Preferred Stock investor chose to waive
  the monthly conditional mandatory redemption payments otherwise due on December
  1, 2006 through March 31, 2007. Subsequent to March 31, 2007 and through July
  1, 2007, the investor has elected, in lieu of a cash payment, to accept a limited
  redemption, totaling $2,350,000 plus accrued and unpaid dividends, which has
  been converted into 4,767,038 shares of our common stock at a conversion rate
  of $0.50 per share.

27

---

We have no assurance that the Series E convertible preferred
  stock investor will continue to limit the contractual redemption requirement
  or to accept payment in shares of our common stock at the $0.50 per share conversion
  rate.

As a condition of the Series E
  convertible preferred stock private placement mentioned in the preceding paragraph,
  we filed a registration statement registering 10,000,000 common shares for conversion
  from Series E convertible preferred stock. The registration statement was declared
  effective on February 9, 2007; and all proceeds from the issuance of the Series
  E convertible preferred stock have been received.

On July 21, 2006, we entered into
an agreement with GeoMechanics International, Inc. (GMI) pursuant to which GMI
provided certain technical services to the Coos Bay project during the 2006/2007
drilling season in return for 125,000 shares of our common stock. These
technical services were valued at $227,500 and included geomechanical
evaluation, modeling and advisory services.

In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons, who represented that they were accredited, were
accredited or sophisticated investors and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.

Except as expressly set forth
above, the individuals and entities to whom we issued securities as indicated in
this section of the annual report are unaffiliated with us.

Purchases of Equity Securities by the Issuer and Affiliated
Purchasers

We did not purchase any of our
shares of common stock or other securities during the fiscal year ended March
31, 2007.

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following selected financial
data as of and for the dates indicated have been derived from our consolidated
financial statements. You should read the following selected financial data
together with our consolidated financial statements and related footnotes and
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The selected consolidated
statement of operations data of our Company for the year ended March 31, 2007
and the consolidated balance sheet data of our Company as of March 31, 2007,
2006 and 2005 are derived from our consolidated financial statements that have
been audited by Peterson Sullivan PLLC. The selected consolidated statement of
operations data of our Company for the two year period ended March 31, 2004 and
2003 and the consolidated balance sheet data of our Company as of March 31, 2004
and 2003 are derived from our consolidated financial statements that have been
audited by Moore Stephens Ellis Foster Ltd., Chartered Accountants. The
historical results are not necessarily indicative of the operating results to be
expected in the future.

28

---

Consolidated Statement of Operations Data
      (Dollars in Thousands)
      Year
        Ended March 31,2007
      2006(3)
      2005
      2004(2)
      2003(1)Sales or Operating Revenue
    Nil
    Nil
    Nil
    Nil
    NilLoss from Continuing Operations
    $ (6,360)
    $ (4,036)
    $ (2,419)
    $ (375)
    $ (417)General and Administrative Expenses
    $ 6,654
    $ 4,193
    $ 2,419
    $ 412
    $ 347Exploration Costs
    $ 14,668
    $ 13,602
    $ 2,775
    $ -
    $ -Other Income (Expense)
    $ 294
    $ 157
    $ 1
    $ 37
    $ (70)Net Loss Applicable to Common
      Shareholders
    $ (7,765)
    $ (5,296)
    $ (2,701)
    $ (375)
    $ (396)Basic and Diluted Net Loss per Avg.
      Shares Outstanding
    $ (0.24)
    $ (0.22)
    $ (0.17)
    $ (0.04)
    $ (0.05)Consolidated Balance Sheet Data (Dollars in
      Thousands)
      Year
        Ended March 312007
      2006
      2005(3)
      2004
      2003(2)Working capital
    $3,072
    $ 1,152
    $ 1,969
    $ (15)
    $ (210)Total assets
    $ 38,957
    $ 19,927
    $ 5,648
    $ 13
    $ 1Long-term obligations and redeemable
      preferred stock
    $ 9
    $ -
    $ -
    $ -
    $ -Cash dividends per common Share
    $ -
    $ -
    $ -
    $ -
    $ -


| | (1) | We were incorporated under the name of iRV, Inc. on July
      17, 2002. We were initially involved in the business of providing services
      to the e-commerce industry. However, we ceased all activities in the
      e-commerce industry by the end of the fiscal year ended March 31,
    2003.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                       
| | (2) | We changed our name to Scarab Systems, Inc. on March 24,
      2003 and acquired all the issued and outstanding shares of Catalyst
      Technologies, Inc., which was in the web design and Internet application
      development business.                                                         
| |     |                                                                                                                                                                                                                                                                                                       
| | (3) | We changed our business to oil and gas exploration when
      we first incorporated our subsidiary, Methane Energy Corp. on April 30,
      2004. Since that time, we have focused our business operations on
      exploration of oil and gas.                                                       

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
      FINANCIAL **CONDITION AND RESULTS OF OPERATIONS**
|------- | -----------------------------------------------------------------------------------------------

You should read the following
discussion of our financial condition and results of operations together with
our audited consolidated financial statements and the related notes for the
years ended March 31, 2007, 2006 and 2005 which appear elsewhere in this annual
report. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this annual report, particularly in Item
1  Description of Business  Risk Factors of this annual report.

Overview

Until June 22, 2004, when we completed
  our acquisition of certain oil and gas leases in the Coos Bay region, our business
  was to provide services to the e-commerce industry. Historically, these services
  have been comprised of marketing, e-commerce development and the sale and distribution
  of transaction processing and payment services. Since none of these services
  were sufficient to provide us with a sustainable foundation, we commenced reviewing
  opportunities in the resource sector in late fiscal 2004. Accordingly, the accumulated
  losses of $883,317 to March 31, 2004 reflect our past activities that have been
  either discontinued or abandoned.

29

---

Our restructuring accelerated
from January 1, 2004 to March 31, 2004 (final quarter of fiscal 2004) and was
finalized from April 1, 2004 to June 30, 2004 (first quarter of fiscal 2005). We
decided to investigate and pursue a number of conventional oil and gas
opportunities as well as a number of unconventional (coalbed methane)
acquisition candidates. Due diligence on a coalbed methane opportunity was
completed in April and May of 2004, resulting in the announcement on May 20,
2004 of the purchase of certain Oregon-based oil and gas lease assets from an
independent company. Two private placements from April 1, 2004 to June 30, 2004
(first quarter of fiscal 2005) allowed us to complete the lease acquisitions and
to commence leasing additional mineral rights under the land surrounding the
existing oil and gas leases. We now have a coalbed methane exploration project
in Oregon on which to focus.

Additional private placements
from July 1, 2004 to September 30, 2004 (second quarter of fiscal 2005) and from
January 1, 2005 to March 31, 2005 (fourth quarter of fiscal 2005) allowed us to
complete additional lease acquisitions, core hole drilling, marketing and public
relations, and pay legal and professional fees related to the Oregon properties.
Private placements completed between April 1, 2005 and June 30, 2006 provided
sufficient funding to complete a pilot well program on the Oregon prospect from
which we plan to obtain production evaluation data, and to acquire option rights
and lease rights on prospective acreage in the State of Washington, and to begin
core holes drilling on prospective acreage in the State of Washington.
Additional financings will be required to support further leasing activities and
related exploratory drilling and testing programs on both our Oregon and
Washington prospects.

Land Acquisition

We currently lease approximately
118,000 acres in the Coos Bay Basin of Oregon and 60,720 acres in the Chehalis
Basin of Washington with up to an additional 115,280 acres in the Chehalis Basin
subject to lease option agreements. Our objective is to achieve a land lease
position of approximately 125,000 acres in the Coos Bay Basin and approximately
180,000 acres in the Chehalis Basin by the end of fiscal 2008, although there is
no assurance that we can reach these goals.

Exploration Activities

We are planning to continue an
aggressive drilling and exploration program in the Coos Bay Basin. Based on
existing data, which provided substantial subsurface information and substantive
indications of economic viability, we are planning to continue our current
completion program and extend our drilling program during fiscal 2008, with up
to ten new wells planned in the Westport area of Coos Bay. Contingent upon
successful completion results, we plan to connect any producing wells to the
Coos County pipeline.

We also plan to continue our
exploratory activities in the Chehalis Basin area with up to five stratagraphic
and pilot wells to be drilled in the latter half of 2007 and early 2008.
Retrieval, analysis and testing of core samples obtained from these wells will
provide a basis for structuring a plan for a potential resource development
program.

30

---

We will require additional funds
to sustain and expand our oil and gas exploration activities. We anticipate that
we will require up to approximately $18,500,000 to fund our continued operations
for the fiscal year ending March 31, 2008. Additional capital will be required
to effectively support our operations and to otherwise implement our overall
business strategy.

Major expenditures expected for the
next 12 months include the following:

| | Well drilling, completion and testing: | $ | 12,000,000 | 
| | -------------------------------------- | - | ---------- | 
| | Land and leasing expenditures:         |   | 800,000    | 
| | Geological and geophysical             |   | 400,000    | 
| | expenditures:                          |   |            | 
| | Operating expenses:                    |   | 1,000,000  | 
| | General and administrative:            |   | 4,300,000  | 
| | Total                                  | $ | 18,500,000 | 

The continuation of our business
is dependent on obtaining further financing, positive results from exploratory
activities, and achieving a profitable level of business. In the event that our
properties continue to show promise but we dont have the resources to develop
them, we would likely seek partners to assist in that development which would
dilute our interest in the property, or we may sell our interest outright.
Alternatively, we could seek additional financing which could dilute our
existing shareholders interests. Furthermore, if at any stage we determine that
it is not expected that our properties can be commercially developed, we may
abandon further development work and our interests in the properties.

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

Liquidity and Capital Resources

Our cash on hand was $5,941,577
as of March 31, 2007 compared to $2,658,719 at March 31, 2006. Our working
capital surplus was $3,071,530 as of March 31, 2007 as compared to $1,151,881 at
March 31, 2006.

During the fiscal year ended
March 31, 2007, we received net proceeds of $23,115,000 from the issuance of
shares of our preferred stock. This compares to net proceeds of $3,444,285 from
common stock issues and $11,552,000 from preferred stock issues during the
fiscal year ended March 31, 2006.

31

---

During the fiscal year ended
March 31, 2007, we expended cash of $13,463,412 on our Coos Bay and Chehalis
Basin projects compared to $11,435,664 during the fiscal year ended March 31,
2006. Expenditures on the Coos Bay project for the year ending March 31, 2007
were $13,056,712 and included $385,434 in seismic and lease costs, $12,250,086
in drilling costs for the pilot well program and $421,192 for geological and
geophysical consulting fees. During the comparative period in the prior year,
our expenditures for Coos Bay were $11,152,801 and included $522,043 for seismic
and lease costs, $9,997,602 in drilling costs and $633,156 for geological and
geophysical consulting fees.

During the fiscal year ended
March 31, 2007, cash expenditures for our Chehalis Basin project totaled
$406,700 and included $319,344 for seismic and lease costs, $25,843 in drilling
costs and $61,513 for geological and geophysical consulting. During the same
period in the prior year, our expenditures for the Chehalis Basin project area
were $282,863 and included $224,588 for seismic and lease costs and $58,725 for
geological and geophysical consulting. The Chehalis Basin expenditures are net
of the 40% participation by our joint venture partner.

Series B Convertible Preferred Shares

We are authorized to issue up to
5,000 shares of Series B preferred stock, par value $0.01. On August 27, 2004,
we closed a private placement of 2,200 shares of Series B Convertible Preferred
Stock (Series B Stock) for $2,200,000 in gross proceeds. Our Series B Stock is
non-voting, carry a cumulative dividend rate of 5% per year, and are convertible
into shares of common stock at any time by dividing the dollar amount being
converted by the lower of $1.20 or 80% of the lowest volume weighted average
trading price per share of our common stock for 10 trading days. The holder of
the Series B Stock may only convert up to $250,000 of Series B Stock into shares
of common stock in any 30-day period. We may redeem the Series B Stock by paying
120% of the invested amount together with any unpaid dividends. As a condition
of the private placement, we agreed to file a registration statement registering
up to 5,000,000 shares of common stock in order to receive all of the proceeds
of the private placement.

During the fiscal year ended
March 31, 2005, 500 Series B convertible preferred shares were converted into
614,358 shares of our common stock at an average price of $0.83 per share of
common stock. In the fiscal year ended March 31, 2006, all of the remaining
1,700 Series B convertible preferred shares were converted into 1,795,253 shares
of our common stock at an average price of $1.06 per share of common stock.
Please refer to Note 9 to our audited consolidated financial statements.

Series C Convertible Preferred Shares

We are authorized to issue up to
  25,000 shares of Series C preferred stock, par value $0.01. On July 19, 2005,
  we closed a private placement of Series C Convertible Preferred Stock (Series
  C Stock) at $1,000 per share for 12,500 shares. Our Series C Stock is
  non-voting, carries a cumulative dividend rate of 5% per year, and is convertible
  into shares of common stock at any time by dividing the dollar amount being
  converted by the lower of $3.00 or 85% of the lowest volume weighted average
  trading price per share of our common stock for 5 trading days. As a condition
  of the private placement, we agreed to file a registration statement registering
  up to 12,500,000 shares of common stock in order to receive all of the proceeds
  of the private placement. Please refer to Note 10 to our audited consolidated
  financial statements.

32

---

During the second fiscal quarter
  ended September 30, 2005, we completed a $12,500,000 Series C Stock offering.
  Under the terms of this financing, we received gross proceeds of $6,000,000
  on closing and an additional $3,500,000 upon filing a registration statement
  on Form SB 2 registering the converted shares of common stock for resale. An
  additional $3,000,000 in gross proceeds was received upon effectiveness of the
  registration statement. The registration statement was accepted by the Securities
  Exchange Commission on January 12, 2006; and on January 13, 2006 our Company
  received $2,775,000 in proceeds from payment of the final tranche, net of a
  7.5% finders fee. These proceeds are being used to fund our Coos Bay program
  and for general working capital. For more details please review our Form 8-K
  filing of July 20, 2005 and refer to Note 10 to our audited consolidated financial
  statements.

The Series C Stock was converted
to 7,651,648 shares of our common stock, 2,083,614 of which were issued in
fiscal 2006 and 5,568,034 of which were issued in fiscal 2007. The Series C
Stock has now been converted in full.

Series E Convertible Preferred Shares

We are authorized to issue up to
25,000 shares of Series E preferred stock, par value $0.01. On June 28, 2006, we
closed a private placement of Series E Convertible Preferred Stock at $1,000 per
share for 25,000 shares. Our Series E Convertible Preferred Stock is non-voting,
carries a cumulative dividend rate of 5% per year, and is convertible into
shares of common stock at any time by dividing the dollar amount being converted
by $2.50. The holder of the Series E Convertible Preferred Stock may only
convert up to 1,250 Series E Convertible Preferred Stock into common shares in
any 30 day period. We may, in our discretion, waive this conversion limitation;
and this conversion limitation shall not apply upon the occurrence and
continuance of an event of default. We are also required to redeem a certain
amount of Series E Convertible Preferred Stock each month starting the month
after this registration statement becomes effective or December 1, 2006,
whichever is earlier. If the closing trading price of our common stock exceeds
$2.50 for the five consecutive trading days immediately before a redemption
date, then we will not need to make the redemption. We may elect to pay for the
redemption of Series E Convertible Preferred Stock by cash or through issuance
of our common stock. If we choose to pay for the redemption of Series E
Convertible Preferred Stock in cash, we will need to pay the liquidation amount
of the Series E Convertible Preferred Stock to be redeemed plus a 20% redemption
premium. If we choose to pay for the redemption of Series E Convertible
Preferred Stock through issuance of our common stock, the number of shares of
our common stock to be issued is determined by dividing the liquidation amount
of the Series E Convertible Preferred Stock to be redeemed by $1.67. However, if
the closing trading price of our common stock as of the redemption date falls
below $1.67, we will not be allowed to pay for the redemption through issuance
of our common stock.

As a condition of the private placement,
  we agreed to file a registration statement registering up to 15,000,000 shares
  of common stock in order to receive all of the proceeds of the private placement.
  The Series E Convertible Preferred Stock investor modified this requirement
  to initially register 10,000,000 shares of common stock. On February 9, 2007,
  the registration statement was filed and approved by the Securities and Exchange
  Commission; and we have received all of the proceeds related to the private
  placement.

33

---

The first conditional mandatory
  redemption payment was due on December 1, 2006 with additional payments due
  on the first trading day of each subsequent month in an amount sufficient to
  ratably retire the Series E Convertible Preferred Stock over the period ending
  August 1, 2008. The Series E Convertible Preferred Stock investor chose to waive
  the monthly conditional mandatory redemption payments otherwise due on December
  1, 2006 through March 31, 2007. Subsequent to March 31, 2007 and through July
  1, 2007, the Series E Convertible Preferred Stock investor has elected, in lieu
  of a cash payment, to accept a limited redemption, totaling $2,350,000 plus
  accrued and unpaid dividends, which has been converted into 4,767,038 shares
  of our common stock at a conversion rate of $0.50 per share. We have no assurance
  that the Series E convertible preferred stock investor will continue to limit
  the contractual redemption requirement or to accept payment in shares of our
  common stock at the $0.50 per share conversion rate. Please refer to Note 12
  to our audited consolidated financial statements.

In accordance with the Financial
  Accounting Standards Board Statement of Financial Accounting Standards (SFAS)
  No. 150, Accounting for Certain Instruments with Characteristics of Both
  Liabilities and Equity, the Company has determined that this limited redemption
  amount of $2,350,000 has met the characteristics of a liability and, therefore,
  has been classified as a current liability in the Companys financial statements
  for its fiscal year ended March 31,2007. Subsequent to March 31, 2007 and prior
  to the issuance of these financial statements, the Company and the investor
  agreed to this limited redemption of 2,350 shares of the Series E Stock as a
  negotiated settlement to the conditional mandatory redemption provisions that
  would have required cash redemption payments of $7,058,824 for 5,882 shares
  of Series E Stock. See Note 16 for additional discussion regarding this subsequent
  event related to the conditional mandatory redemption of the Series E Stock.

Warrants

We issued no warrants during the
  fiscal years ended March 31, 2007 and March 31, 2006. During the fiscal year
  ended March 31, 2005, we issued warrants attached to a private placement to
  purchase 1,442,930 shares of our common stock at a price of $0.50 per share
  exercisable until May 19, 2006. We also issued warrants attached to a private
  placement to purchase 500,000 shares of our common stock at a price of $0.55
  per share exercisable until July 7, 2006. A total of 1,614,359 warrants were
  exercised in fiscal 2005. During the year ended March 31, 2006, 228,571 shares
  of common stock were issued pursuant to the exercise of share purchase warrants
  for proceeds of $114,285. As of March 31, 2006, all previously issued warrants
  had been exercised. Please refer to Note 8 to our audited consolidated financial
  statements.

34

---

$2,500,000 Private Placement

To obtain funding for our ongoing
operations, we entered into two stock purchase agreements with two accredited
investors on February 11, 2005 for the sale of 2,500,000 shares of our common
stock for $2,500,000. The investors provided us with an aggregate of $2,500,000
on February 15, 2005, pursuant to the stock purchase agreements. The funds from
the sale of the shares of common stock were used for business development
purposes, working capital needs, and payment of consulting and legal fees.

$3,300,000 Private Placement

In July 2005, we closed a private
placement with three institutional investors resulting in gross proceeds of
$3,300,000 by issuing 1,650,000 shares of common stock at a price of $2.00 per
share. These placement proceeds were used to fund our pilot well program in Coos
Bay, Oregon. For more details please review our Form 8-K filings dated July 20,
2005 and refer to Note 13 to our audited consolidated financial statements.

Additional Financing

We will require additional
financing in order to complete our stated plan of operations for the next twelve
months. There can be no assurance, however, that such financing will be
available or, if it is available, that we will be able to structure such
financing on terms acceptable to us and that it will be sufficient to fund our
cash requirements until we can reach a level of profitable operations and
positive cash flows. If we are unable to obtain the financing necessary to
support our operations, we may be unable to continue as a going concern. We
currently have no firm commitments for any additional capital.

The trading price of our shares
of common stock and a downturn in the United States stock and debt markets could
make it more difficult to obtain financing through the issuance of equity or
debt securities. Even if we are able to raise the funds required, it is possible
that we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our shares of common stock. If additional financing is not
available or is not available on acceptable terms, we will have to curtail our
operations.

Results of Operations

As we have remained in the early
stages of development, we have not yet generated any revenues from our
operations.

The results of operations include
  the results of our Company and its wholly owned subsidiaries, Methane Energy
  Corp. and Cascadia Energy Corp., for the years ended March 31, 2007 and 2006;
  and our Company and its wholly owned subsidiary, Methane Energy Corp., for the
  year ended March 31, 2005.

35

---

During the years ended March 31, 2007, 2006 and 2005, our Company
  performed all of the administrative operations while the subsidiaries, Methane
  Energy Corp. and Cascadia Energy Corp., held the interests in the leases and
  operated the Coos Bay project and Chehalis Basin project, respectively.

Year ended March 31, 2007 compared to year ended March 31,
2006

Operating expenses during the
year ended March 31, 2007 increased significant by over the twelve months ended
March 31, 2006 due to expansion of our activities in both the Coos Bay project
and the Chehalis Basin project. During the year ended March 31, 2007, we
completed drilling on pilot production wells in the Westport area of the Coos
Bay Basin of Oregon and commenced pre-drilling activities in the Chehalis Basin
of Washington. The most significant operating expense increases were consulting
fees, payroll expense, stock-based compensation, investor relations and
travel.

Operating expenses were
$6,654,031 for the year ended March 31, 2007, compared with $4,193,346 for the
year ended March 31, 2006. The full-year impact of a growing internal staff
dealing with all functions of a two-basin land-acquisition and exploration
program led to payroll expenses of $968,830 in fiscal 2007, a $876,833 increase
over the $91,997 incurred during the previous fiscal year.

Consulting expense increased by
$475,897 from $605,920 in fiscal 2006 to $1,081,817 in fiscal 2007 primarily due
to consulting services related to defining financing alternatives to fund our
activities during fiscal 2007.

Stock-based compensation expenses
of $2,465,796 during fiscal 2007 rose by $390,374 from fiscal 2006 of
$2,075,422. This occurred as we granted stock options to three new independent
directors, our new president and chief executive, and other new employees during
the most recent fiscal year.

Directors fees increased from
$25,000 in fiscal 2006 to $77,500 in fiscal 2007. We increased our compensation
to outside directors from $10,000 per year to $30,000 per year and were
successful in attracting three new independent directors to our board.

Investor relations expenses were
$592,371 for the year ended March 31, 2007, compared with $163,435 for the year
ended March 31, 2006. This increase of $428,936 was primarily a result of
expenditures on a program intended to stimulate investor awareness during the
period when our Series C Stock was being converted to common shares, which were
being sold on the open market by the investors.

During the twelve months ended
March 31, 2007, we paid $105,442 for lease rentals related to our increasing
portfolio of oil and gas leases. During the preceding twelve-month period we had
paid a total of $73,254 in lease rentals.

Office rental costs increased
from $59,472 in fiscal 2006 to $132,273 in fiscal 2007, an increase of $72,801.
The increase came as a result of our moving into new office locations with
additional space in both Coquille, Oregon, our operational office for Methane
Energy Corp., and Portland, Oregon, our administrative office.

36

---

Travel costs for the year ended
March 31, 2007 were $383,779 as compared to $287,563 for the same period last
year. The additional travel costs totaling $96,216 related to efforts to secure
financing and to increased activity in both the Coos Bay Basin and the Chehalis
Basin.

We invested excess cash in term
deposits during the year ended March 31, 2007 resulting in interest revenue of
$294,053. Similar investments during the twelve months ended March 31, 2006
resulted in $156,799 of interest revenue.

We recorded the remaining
$710,110 in value and a like amount in accretion related to the beneficial
conversion feature on the Series C Stock during the year ended March 31, 2007.
We also accrued $35,270 for dividends on our Series C Stock.

Year ended March 31, 2006 compared to year ended March 31,
2005

Operating expenses increased
considerably between the fiscal 2006 and fiscal 2007 periods due to our
increased activity compared to the prior period when we were only beginning to
re-establish our operations. During the year ended March 31, 2006, we completed
drilling on the initial exploratory wells in the Coos Bay Basin of Oregon and
commenced completion and testing operations. The most significant operating
expenses increases consisted of consulting fees and payroll expense, lease
rentals, insurance, legal and accounting fees, stock-based compensation and
travel expenses.

Operating expenses were
$4,193,346 for the year ended March 31, 2006, compared with $2,419,652 for the
year ended March 31, 2005. A significant portion of the increase in expenditures
was attributable to stock-based compensation expenses of $2,075,422 (2005 -
$701,740) related to the granting of six tranches of stock options during the
year ended March 31, 2006.

Consulting fees were $605,920 for
the year ended March 31, 2006, compared with $288,845 for the previous twelve
months. This increase is a result of our expanded operating and funding
activities to develop the corporate infrastructure to properly manage and direct
our coalbed methane projects. Additionally, we began adding permanent employees
to handle both technical and administrative functions for us that added $91,997
in payroll expense for the fiscal year 2006 as compared to the previous fiscal
year. There is now a management team in place to continue the exploration of the
Coos Bay project in Methane Energy Corp. and to start planning for the
exploration of the Chehalis basin project in Cascadia Energy Corp.

Investor relations expenses were
$163,435 for the year ended March 31, 2006, compared with $864,375 for the year
ended March 31, 2005. A significant portion of the prior period investor
relations expenses consists of $450,000 in fees for a shareholder awareness mail
distribution program that has not been renewed. Additionally, the reduced
balance for the twelve months ending March 31, 2006 partially attributable to a
reversal of prior year investor relations expenses of $99,641. This reversal
relates directly to the cancellation of 200,000 stock options that were
originally granted during the fiscal year ended March 31, 2005.

During the twelve months ended
March 31, 2006, we paid $73,254 for lease rentals related to our increasing
portfolio of oil and gas leases. During the preceding twelve-month period we had
paid a total of $15,017 in lease rentals.

37

---

Legal and accounting costs rose
during the period primarily as a result of activities supporting multiple
funding initiatives, improving our accounting infrastructure, and compliance
with regulatory and audit requirements. As a result, our legal and accounting
costs were $402,127 for the year ended March 31, 2006, compared to $128,719 for
the twelve months ended March 31, 2005.

Travel costs for the year ended
March 31, 2006 were $287,563 as compared to $86,593 for the same period last
year. The additional travel costs were due to the requirements to bring the
expertise into Oregon for our drilling program plus the travel required for our
funding activities.

We invested excess cash in term
deposits during the year ended March 31, 2006 resulting in interest revenue of
$156,799. Similar investments during the twelve months ended March 31, 2005
yielded $1,027 in interest revenue.

We recorded the remaining
$105,081 for dividend accretion related to the beneficial conversion feature on
the Series B Stock during the year ended March 31, 2006. We recorded $845,763 in
value and $845,763 in accretion, both related to the beneficial conversion
feature associated with the Series C Stock that was issued during the year ended
March 31, 2006. We also accrued $308,442 for dividends to be paid on the Series
C Stock.

38

---

Contractual Obligations

As of March 31, 2007, the
following table provides details of certain contractual obligations of the
Company. For more information regarding these obligations, see the Companys
audited consolidated financial statements and footnotes referenced below.

|                               |   | Total      |  |   | Less than 1 year |  |   | 1 -3 years | 
|------------------------------ | - | ---------- |  | - | ---------------- |  | - | ---------- | 
|Convertible Series E Preferred | $ | 25,000,000 |  | $ | 2,350,000        |  | $ | 22,650,000 | 
|Stock (see Note 12)            |   |            |  |   |                  |  |   |            | 
|Operating Lease Obligations    |   | 152,847    |  |   | 106,992          |  |   | 45,855     | 
|(see Note 15)                  |   |            |  |   |                  |  |   |            | 
|Long-term Note (see Note 2)    |   | 46,875     |  |   | 37,500           |  |   | 9,375      | 
|Total                          | $ | 25,199,722 |  | $ | 2,494,492        |  | $ | 22,705,230 | 

Off-Balance Sheet Arrangements

None

New Accounting Pronouncements

In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. SFAS 157 addresses
differences in the definition of fair value and guidance in applying the
definition of fair value to the many accounting pronouncements that require fair
value measurements. SFAS 157 emphasizes that (1) fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing the asset or liability for sale or transfer
and (2) fair value is not entity-specific but based on assumptions that market
participants would use in pricing the asset or liability. Finally, SFAS 157
establishes a hierarchy of fair value assumptions that distinguishes between
independent market participant assumptions and the reporting entitys own
assumptions about market participant assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We do not expect that SFAS 157
will have a material impact on our consolidated results of operations, financial
position or liquidity.

In September 2006, the SEC staff
issued Staff Accounting Bulletin 108 (SAB 108), Financial
StatementsConsidering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements. SAB 108 addresses how a
registrant should quantify the effect of an error on the financial statements
and concludes that a dual approach should be used to compute the amount of a
misstatement. Specifically, the amount should be computed using both the
rollover (current year income statement perspective) and iron curtain
(year-end balance sheet perspective) methods. The provisions of SAB 108 are
effective for our Company beginning April 1, 2007. We do not expect that the
implementation of SAB 108 will have a material impact on our consolidated
results of operations, financial position or liquidity.

39

---

In July 2006, FASB issued FASB
Interpretation (FIN) No. 48, Accounting For Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109. This Interpretation provides
guidance for recognizing and measuring uncertain tax positions, as defined in
SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a
threshold condition that a tax position must meet for any of the benefit of an
uncertain tax position to be recognized in the financial statements. Guidance is
also provided regarding derecognition, classification and disclosure of
uncertain tax positions. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. We do not expect that this Interpretation will have a
material impact on our financial position, results of operations or cash flows.

In February 2006, FASB issued
SFAS No.155, Accounting for Certain Hybrid Financial Instrumentsan
amendment of FASB Statements No. 133 and 140. SFAS No. 155 clarifies
certain issues related to definitions of, measurement of, and accounting for
derivative instruments. Specifically, SFAS No. 155 permits fair value
measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. It also clarifies which
interest-only strips and principal-only strips are not subject to SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and
establishes a requirement to evaluate interests in securitized financial assets
to identify interest that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation.
Finally, SFAS No. 155 clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives and amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. The adoption of SFAS No. 155 will have no impact on our Companys
consolidated financial statements.

In May 2005, the FASB issued SFAS
No. 154, Accounting Changes and Error Corrections. SFAS No. 154
replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3
Reporting Accounting Changes in Interim Financial Statements. SFAS No.
154 requires retrospective application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 will have no impact on our Companys consolidated financial
statements.

In March 2005, the FASB issued
  FIN No. 47, Accounting for Conditional Asset Retirement Obligations.
  Under the provisions of FIN 47, the term conditional asset retirement obligation
  as used in SFAS No. 143, Accounting for Asset Retirement Obligations,
  refers to a legal obligation to perform an asset retirement activity in which
  the timing and/or method of settlement are conditional on a future event that
  may or may not be within the control of the entity while the obligation to perform
  the asset retirement activity is unconditional. Accordingly, an entity is required
  to recognize a liability for the fair value of a conditional asset retirement
  obligation if the fair value of the liability can be reasonably estimated. The
  fair value of a liability for the conditional asset retirement obligation is
  required to be recognized when incurredgenerally upon acquisition, construction,
  or development and/or through the normal operation of the asset. We have adopted
  FIN No. 47 as of December 31, 2005. Adoption of this pronouncement did not have
  a significant effect on our 2005 consolidated financial statements, and we do
  not expect this pronouncement to have a significant effect on our future reported
  financial position or earnings.

40

---

Critical Accounting Policies and Estimates

Our consolidated financial statements
  have been prepared on a going concern basis. We have accumulated a deficit of
  $16,645,776 from inception to March 31, 2007. Our ability to continue as a going
  concern is dependent upon our ability to generate profitable operations in the
  future and/or to obtain the necessary financing to meet our obligations and
  repay our liabilities arising from normal business operations when they come
  due. The outcome of these matters cannot be predicted with any certainty at
  this time. We have historically satisfied our working capital needs primarily
  by issuing equity securities and at March 31, 2007 we had working capital of
  $3,071,530, largely as a result of completing private placements during the
  year ended March 31, 2007 that raised aggregate net proceeds of $23,115,000.
  Management plans to continue to provide for our capital needs by issuing equity
  securities. These consolidated financial statements do not include any adjustments
  to the amount and classification of assets and liabilities that may be necessary
  should we be unable to continue as a going concern.

41

---

Accounting Estimates

The preparation of the
consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Management makes its best estimate of the
ultimate outcome for these items based on the historical trends and other
information available when the consolidated financial statements are prepared.
Changes in the estimates are recognized in accordance with the accounting rules
for the estimate, which is typically in the period when new information becomes
available to management. Actual results could differ from those estimates and
assumptions.

Income Taxes

We have adopted SFAS No. 109,
Accounting for Income Taxes, which requires us to recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in our consolidated financial statements or tax returns
using the liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
consolidated financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.

Stock-based Compensation

Effective April 1, 2004, we
adopted SFAS No. 123 Accounting for Stock Based Compensation as amended by
SFAS No. 148 "Accounting for Stock-based Compensation - Transition and
Disclosure. Effective April 1, 2006, we adopted FAS 123(R), Share-Based
Payment, using the modified prospective approach. We recognize stock-based
compensation expense using a fair value based method.

Prior to the adoption of these
standards, we applied the disclosure provision of SFAS No. 123 for stock options
granted to directors, officers and employees. As permitted by SFAS No. 123, we
followed the intrinsic value approach of APB No. 25 Accounting for Stock Issued
to Employees and the related interpretations. We have a stock option plan that
is described more fully in Note 7 to our audited consolidated financial
statements

Accounting for Derivative Instruments and Hedging
Activities

We have adopted SFAS No. 133 Accounting
  for Derivative and Hedging Activities, which requires companies to recognize
  all derivative contracts as either assets or liabilities in the balance sheet
  and to measure them at fair value. If certain conditions are met, a derivative
  may be specifically designated as a hedge, the objective of which is to match
  the timing of gain and loss recognition on the hedging derivative with the recognition
  of (i) the changes in the fair value of the hedged asset or liability that are
  attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted
  transaction.

42

---

For a derivative not designated as a hedging instrument, the
  gain or loss is recognized in income in the period of change. We have not entered
  into derivative contracts either to hedge existing risks or for speculative
  purposes, but we plan to use derivative contracts in the future solely for hedging
  prices on production.

Long-Lived Assets Impairment

Our long-term assets are reviewed
when changes in circumstances require as to whether their carrying value has
become impaired, pursuant to guidance established in SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Management considers
assets to be impaired if the carrying value exceeds the future projected cash
flows from the related operations, undiscounted and without interest charges. If
impairment is deemed to exist, the assets will be written down to fair value,
and a loss is recorded as the difference between the carrying value and the fair
value. Fair values are determined based on the quoted market values, discounted
cash flows or internal and external appraisal, as applicable. Assets to be
disposed of are carried at the lower of carrying value or estimated net
realizable value.

Asset Retirement Obligations

We recognize a liability for
future retirement obligations associated with our oil and gas properties. The
estimated fair value of the asset retirement obligation is based on the current
cost escalated at an inflation rate and discounted at a credit adjusted
risk-free rate. This liability is capitalized as part of the cost pool of the
related asset and amortized using the units of production method. The liability
accretes until we settle the obligation.

Oil and Gas Properties

We utilize the full cost method
to account for our investment in oil and gas properties. Accordingly, all costs
associated with acquisition, exploration and development of oil and gas
reserves, including such costs as leasehold acquisition costs, interest costs
relating to unproved properties, geological expenditures and direct internal
costs are capitalized into the full cost pool. When we obtain proven oil and gas
reserves, capitalized costs, including estimated future costs to develop the
reserves and estimated abandonment costs, net of salvage, will be depleted on
the units-of-production method using estimates of proved reserves. Investments
in unproved properties and major development projects including capitalized
interest, if any, are not amortized until proved reserves associated with the
projects can be determined. If the future costs of exploration of unproved
properties are determined uneconomical, the amounts of such properties are added
to the capitalized cost to be amortized. As of March 31, 2007, all of our oil
and gas properties were unproved and were excluded from amortization.

The capitalized costs included in
the full cost pool are subject to a ceiling test, which limits such costs to
the aggregate of the estimated present value, using an estimated discount rate,
of the future net revenues from proved reserves, based on current economic and
operating conditions and the estimated value of unproven properties. As at March
31, 2007, none of our unproved oil and gas properties was considered impaired.

43

---

|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUT MARKET **RISK**
|-------- | --------------------------------------------------------------------

Interest Rate and Credit Rating Risk

As of March 31, 2007, we had
$5,941,577 in cash, cash equivalents and short term investments, of which
$941,577 was held in our operating accounts and $5,000,000 was invested in time
deposits with 30-day maturities. Based on sensitivity analyses performed on the
financial instruments held as of March 31, 2007, an immediate 10% change in
interest rates is not expected to have a material effect on our near term
financial condition or results.

Commodity Price Risk

As of March 31, 2007, we have no
coalbed methane gas production. At such time as we do record commercial
production volumes of coalbed methane gas, we will be subject to commodity price
risk related to the sale of such production. Prospectively, commodity prices
received for our production will be based on spot prices applicable to natural
gas, which are volatile, unpredictable, and beyond our control. Accordingly
until such time as we establish measurable production volumes, our vulnerability
to fluctuations in the price of natural gas is negligible.

Exchange Rate Sensitivity

As of March 31, 2007, our
suppliers bill us for drilling and other operating costs almost exclusively in
U.S. dollars. Accordingly, a 10% change in the U.S./Canadian exchange rate is
not expected to have a material effect on our near term financial condition or
results.

44

---

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTAL
      DATA
|------- | ------------------------------------------------

| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our audited consolidated financial statements
        are stated in United States dollars and are prepared in accordance with
        United States Generally Accepted Accounting Principles.
| |                                                                                                                                                                                              
| | The following consolidated financial statements are filed as
      part of this annual report:                                                                                               
| |                                                                                                                                                                                              
| | Report of Independent Registered Public Accounting Firm.                                                                                                                                     
| |                                                                                                                                                                                              
| | Audited Consolidated Balance Sheets as of March 31, 2007 and
      2006.                                                                                                                     
| |                                                                                                                                                                                              
| | Audited Consolidated Statements of Stockholders Equity
      (Deficit) from October 8, 2001 (inception) to March 31, 2007.                                                                  
| |                                                                                                                                                                                              
| | Audited Consolidated Statements of Operations for the years
      ended March 31, 2007, 2006 and 2005.                                                                                       
| |                                                                                                                                                                                              
| | Audited Consolidated Statements of Cash Flows for the years
      ended March 31, 2007, 2006 and 2005.                                                                                       

45

---

|FINANCIAL STATEMENTS             
|---------------------------------
|                                 
|TORRENT ENERGY CORPORATION       
|(formerly Scarab Systems, Inc.)  
|(An exploration stage enterprise)
|                                 
|Consolidated Financial Statements
|                                 
|March 31, 2007, 2006 and 2005    

|Index                                                          
|---------------------------------------------------------------
|Report
      of Independent Registered Public Accounting Firm  
|Consolidated
      Balance Sheets                              
|Consolidated
      Statements of Stockholders Equity (Deficit)
|Consolidated
      Statements of Operations                    
|Consolidated
      Statements of Cash Flows                    
|Notes
      to Consolidated Financial Statements               

46

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To The Audit Committee 
  Torrent Energy Corporation
  Portland, Oregon

We have audited the accompanying consolidated balance sheets
  of Torrent Energy Corporation and Subsidiaries (an exploration stage company)
  ("the Company") as of March 31, 2007 and 2006, and the related consolidated
  statements of operations, stockholders' equity (deficit), and cash flows for
  the years ended March 31, 2007, 2006, and 2005, and for the period from October
  8, 2001 (inception) to March 31, 2007. These financial statements are the responsibility
  of the Company's management. Our responsibility is to express an opinion on
  these financial statements based on our audits. The financial statements for
  the cumulative period from October 8, 2001 (inception) to March 31, 2004, were
  audited by other auditors whose report dated April 7, 2004, expressed an unqualified
  opinion on those statements although their opinion was modified for going concern
  considerations. The financial statements for the period from October 8, 2001
  (inception) to March 31, 2004, include total revenues and net loss of $0 and
  $883,317, respectively. Our opinion on the statements of operations, stockholders'
  equity (deficit), and cash flows for the period from October 8, 2001 (inception)
  to March 31, 2007, insofar as it relates to amounts for prior periods through
  March 31, 2004, is based solely on the report of other auditors.

We conducted our audits in accordance with the standards of
  the Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audit to obtain reasonable assurance about
  whether the financial statements are free of material misstatement. The Company
  has determined that it is not required to have, nor were we engaged to perform,
  an audit of its internal control over financial reporting. Our audit included
  consideration of internal control over financial reporting as a basis for designing
  audit procedures that are appropriate in the circumstances, but not for the
  purpose of expressing an opinion on the effectiveness of the Company's internal
  control over financial reporting. Accordingly, we express no such opinion. An
  audit includes examining, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements. An audit also includes assessing the
  accounting principles used and significant estimates made by management, as
  well as evaluating the overall financial statement presentation. We believe
  that our audits provide a reasonable basis for our opinion.

47

---

In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  Torrent Energy Corporation and Subsidiaries as of March 31, 2007 and 2006, and
  the results of their operations and their cash flows for the years ended March
  31, 2007, 2006, and 2005, and for the cumulative period from October 8, 2001
  (inception) to March 31, 2007, in conformity with accounting principles generally
  accepted in the United States.

The accompanying consolidated financial statements have been
  prepared assuming the Company will continue as a going concern. As discussed
  in Note 1 to the consolidated financial statements, the Company has experienced
  recurring losses from operations since inception and has a substantial accumulated
  deficit. These conditions raise substantial doubt about the Company's ability
  to continue as a going concern. Management's plans regarding these matters are
  also described in Note 1. The consolidated financial statements do not include
  any adjustments that might result from the outcome of this uncertainty.

/S/ PETERSON SULLIVAN PLLC

July 2, 2007
  Seattle, Washington

48

---

|TORRENT ENERGY CORPORATION       
|---------------------------------
|(formerly Scarab Systems, Inc.)  
|(An exploration stage enterprise)
|                                 
|Consolidated Balance Sheets      

|                                                                            |   | March 31,   |   |   | March 31,  |  
|--------------------------------------------------------------------------- | - | ----------- | - | - | ---------- | -
|ASSETS                                                                      |   | 2007        |   |   | 2006       |  
|Current Assets                                                              |   |             |   |   |            |  
|Cash and cash equivalents                                                   | $ | 5,941,577   |   | $ | 2,658,719  |  
|Joint
      venture receivables                                             |   | 147,928     |   |   | 46,745     |  
|Inventory                                                                   |   | 906,208     |   |   | 375,355    |  
|Prepaid
      expenses and deposits                                         |   | 511,135     |   |   | 398,620    |  
|                                                                            |   |             |   |   |            |  
|Total Current Assets                                                        |   | 7,506,848   |   |   | 3,479,439  |  
|                                                                            |   |             |   |   |            |  
|Oil and gas properties, unproven (Note 4 )                                  |   | 31,234,262  |   |   | 16,377,085 |  
|Other assets, net of depreciation of $43,762 and $2,533                     |   | 215,999     |   |   | 70,759     |  
|                                                                            |   |             |   |   |            |  
|Total Assets                                                                | $ | 38,957,109  |   | $ | 19,927,283 |  
|                                                                            |   |             |   |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                              |   |             |   |   |            |  
|Current Liabilities                                                         |   |             |   |   |            |  
|Accounts payable                                                            | $ | 1,379,204   |   | $ | 1,931,985  |  
|Accounts
      payable  related parties (Note 3)                           |   | 8,545       |   |   | 87,131     |  
|Convertible Series E
      preferred stock subject to mandatory redemption, |   |             |   |   |            |  
|2,350 shares outstanding (2006  Nil) (Note 12)                             |   | 2,350,000   |   |   | -          |  
|Preferred stock dividends
      payable                                     |   | 660,069     |   |   | 308,442    |  
|Current
      portion of long-term note                                     |   | 37,500      |   |   | -          |  
|                                                                            |   |             |   |   |            |  
|Total Current Liabilities                                                   |   | 4,435,318   |   |   | 2,327,558  |  
|                                                                            |   |             |   |   |            |  
|Long-term Liabilities                                                       |   |             |   |   |            |  
|Long-term note                                                              |   | 9,375       |   |   | -          |  
|                                                                            |   |             |   |   |            |  
|Total Liabilities                                                           |   | 4,444,693   |   |   | 2,327,558  |  
|                                                                            |   |             |   |   |            |  
|                                                                            |   |             |   |   |            |  
|Commitment and Contingencies(Notes
      4 and 15)                          |   |             |   |   |            |  
|                                                                            |   |             |   |   |            |  
|STOCKHOLDERS EQUITY (DEFICIT)                                              |   |             |   |   |            |  
|                                                                            |   |             |   |   |            |  
|Share Capital                                                               |   |             |   |   |            |  
|Convertible Series C
      preferred stock, $0.01 par value, 25,000 shares  |   |             |   |   |            |  
|authorized, 12,500 shares issued and Nil outstanding (2006 
      8,375)   |   | -           |   |   | 84         |  
|Convertible Series E
      preferred stock, $0.01 par value, 25,000 shares  |   |             |   |   |            |  
|authorized, 25,000 shares issued and outstanding (2006  Nil)               |   | 226         |   |   | -          |  
|Common stock, $0.001 par
      value, 100,000,000 shares authorized,        |   |             |   |   |            |  
|33,424,941 shares issued and outstanding (2006  27,531,907)                |   | 33,425      |   |   | 27,532     |  
|                                                                            |   |             |   |   |            |  
|Additional paid in capital                                                  |   | 51,124,541  |   |   | 26,452,458 |  
|                                                                            |   |             |   |   |            |  
|Deficit accumulated during the
      exploration stage                      |   | (16,645,776 | ) |   | (8,880,349 | )
|Total stockholders equity (deficit)                                        |   | 34,512,416  |   |   | 17,599,725 |  
|Total liabilities and stockholders
      equity (deficit)                  | $ | 38,957,109  |   | $ | 19,927,283 |  

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

49

---

|TORRENT ENERGY CORPORATION                                             
|-----------------------------------------------------------------------
|(Formerly Scarab Systems, Inc.)                                        
|(An Exploration Stage Enterprise)                                      
|                                                                       
|Consolidated Statements of Stockholders Equity
      (Deficit)        
|For the Period from October 8, 2001 (Inception) to
      March 31, 2007

|                                                                                                |  |              |   |   |                  |   |   |            |   |   | Share         |   |   | Deficit           |   |   |                  |  
|----------------------------------------------------------------------------------------------- |  | ------------ | - | - | ---------------- | - | - | ---------- | - | - | ------------- | - | - | ----------------- | - | - | ---------------- | -
|                                                                                                |  |              |   |   |                  |   |   |            |   |   | subscriptions |   |   | accumulated       |   |   | Total            |  
|                                                                                                |  | Common Stock |   |   | Additional paid- |   |   | received/  |   |   | during        |   |   | Stockholders     |  
|                                                                                                |  | Shares       |   |   | Amount           |   |   | in capital |   |   | (receivable)  |   |   | exploration stage |   |   | equity (deficit) |  
|Stock issued for cash at $0.001 per share in
      October 2001                                 |  | 5,425,000    |   | $ | 5,425            |   | $ | -          |   | $ | -             |   | $ | -                 |   | $ | 5,425            |  
|Stock issued for intangible asset acquisition at $0.001 per
      share in October 2001         |  | 200,000      |   |   | 200              |   |   | -          |   |   | -             |   |   | -                 |   |   | 200              |  
|Issued 1,440,000 common stock at $0.001 per
      share in October 2001                         |  | 1,440,000    |   |   | 1,440            |   |   | -          |   |   | (1,440        | ) |   | -                 |   |   | -                |  
|Stock issued at $0.50 per share in November 2001                                                |  | 675,000      |   |   | 675              |   |   | 336,825    |   |   | (337,500      | ) |   | -                 |   |   | -                |  
|Stock issued for cash at $0.50 per share in
      January 2002                                  |  | 390,000      |   |   | 390              |   |   | 194,610    |   |   | -             |   |   | -                 |   |   | 195,000          |  
|Net(loss)for the period                                                                         |  | -            |   |   | -                |   |   | -          |   |   | -             |   |   | (112,434          | ) |   | (112,434         | )
|Balance,March 31, 2002                                                                          |  | 8,130,000    |   |   | 8,130            |   |   | 531,435    |   |   | (338,940      | ) |   | (112,434          | ) |   | 88,191           |  
|                                                                                                |  |              |   |   |                  |   |   |            |   |   |               |   |   |                   |   |   |                  |  
|Stock issued for cash at $0.25 to $0.50 per
      share in April 2002                           |  | 130,000      |   |   | 130              |   |   | 39,870     |   |   | -             |   |   | -                 |   |   | 40,000           |  
|Recapitalization to effect the acquisition of iRV, Inc.                                         |  | 1,446,299    |   |   | 1,446            |   |   | (1,446     | ) |   | -             |   |   | -                 |   |   | -                |  
|Acquisition of MarketEdge Direct                                                                |  | -            |   |   | -                |   |   | -          |   |   | 337,500       |   |   | -                 |   |   | 337,500          |  
|Proceeds of share subscription                                                                  |  | -            |   |   | -                |   |   | -          |   |   | 1,440         |   |   | -                 |   |   | 1,440            |  
|Return of stocks in connection with disposal
      of MarketEdge Direct                         |  | (540,000     | ) |   | (540             | ) |   | (358,042   | ) |   | -             |   |   | -                 |   |   | (358,582         | )
|Proceeds of 96,000 share subscription at $0.40 to $0.50 per
      share                         |  | -            |   |   | -                |   |   | -          |   |   | 40,500        |   |   | -                 |   |   | 40,500           |  
|241,020 shares allotted for services rendered
      at $0.10 to $0.40 per share                 |  | -            |   |   | -                |   |   | 33,306     |   |   | -             |   |   | -                 |   |   | 33,306           |  
|Net (loss) for the
      year                                                                   |  | -            |   |   | -                |   |   | -          |   |   | -             |   |   | (396,277          | ) |   | (396,277         | )
|Balance,March 31, 2003                                                                          |  | 9,166,299    |   |   | 9,166            |   |   | 245,123    |   |   | 40,500        |   |   | (508,711          | ) |   | (213,922         | )
|                                                                                                |  |              |   |   |                  |   |   |            |   |   |               |   |   |                   |   |   |                  |  
|Stocks issued for services rendered and recorded
      in fiscal year 2004                      |  | 241,020      |   |   | 241              |   |   | (241       | ) |   | -             |   |   | -                 |   |   | -                |  
|Stocks issued at $0.40 to $0.50 per share                                                       |  | 96,000       |   |   | 96               |   |   | 40,404     |   |   | (40,500       | ) |   | -                 |   |   | -                |  
|Stocks issued for conversion of debt at $0.10
      per share in February 2004                  |  | 510,000      |   |   | 510              |   |   | 50,490     |   |   | -             |   |   | -                 |   |   | 51,000           |  
|Stocks issued for cash at $0.10 per share in February and March
      2004                      |  | 1,200,000    |   |   | 1,200            |   |   | 118,800    |   |   | -             |   |   | -                 |   |   | 120,000          |  
|Stocks issued for exercise of stock options
      at $0.10 per share in February and March 2004 |  | 960,000      |   |   | 960              |   |   | 95,040     |   |   | -             |   |   | -                 |   |   | 96,000           |  
|Issuance of stock options as compensation                                                       |  | -            |   |   | -                |   |   | 195,740    |   |   | -             |   |   | -                 |   |   | 195,740          |  
|Forgiveness of debt  related party                                                             |  | -            |   |   | -                |   |   | 110,527    |   |   | -             |   |   | -                 |   |   | 110,527          |  
|Net (loss) for the
      year                                                                   |  | -            |   |   | -                |   |   | -          |   |   | -             |   |   | (374,606          | ) |   | (374,606         | )
|Balance,March 31, 2004                                                                          |  | 12,173,319   |   | $ | 12,173           |   | $ | 855,883    |   | $ | -             |   | $ | (883,317          | ) | $ | (15,261          | )

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

50

---

|TORRENT ENERGY CORPORATION                                             
|-----------------------------------------------------------------------
|(Formerly Scarab Systems, Inc.)                                        
|(An Exploration Stage Enterprise)                                      
|                                                                       
|Consolidated Statements of Stockholders Equity
      (Deficit)        
|For the Period from October 8, 2001 (Inception) to
      March 31, 2007

|                                                                                                                                                              |  |                 |   |   |              |   |  |            |  |   |           |  |   |                    |   |   | Share         |  |   | Deficit    |   |   |                  |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | - | - | ------------ | - |  | ---------- |  | - | --------- |  | - | ------------------ | - | - | ------------- |  | - | ---------- | - | - | ---------------- | -
|                                                                                                                                                              |  | Series B        |   |   |              |   |  |            |  |   |           |  |   | subscriptions      |   |   | accumulated   |  |   | Total      |  
|                                                                                                                                                              |  | Preferred Stock |   |   | Common Stock |   |  | Additional |  |   | received/ |  |   | during exploration |   |   | Stockholders | 
|                                                                                                                                                              |  | Shares          |   |   | Amount       |   |  | Shares     |  |   | Amount    |  |   | paid-in capital    |   |   | (receivable)  |  |   | stage      |   |   | equity (deficit) |  
|Stocks issued for exercise of stock options at $0.10 per share
      in May, June and July 2004                                                               |  | -               |   | $ | -            |   |  | 640,000    |  | $ | 640       |  | $ | 63,360             |   | $ | -             |  | $ | -          |   | $ | 64,000           |  
|Stocks and warrants issued under a private
      placement at $0.35 per share in May 2004                                                                     |  | -               |   |   | -            |   |  | 1,442,930  |  |   | 1,443     |  |   | 503,582            |   |   | -             |  |   | -          |   |   | 505,025          |  
|Stocks issued for investor relations services at $0.54 per
      share in June 2004                                                                           |  |                 |   |   |              |   |  | 300,000    |  |   | 300       |  |   | 161,700            |   |   | -             |  |   | -          |   |   | 162,000          |  
|Stocks issued for acquisition of oil and gas
      properties at $0.38 per share in June 2004 and January 2005 (Note 4)                                       |  |                 |   |   |              |   |  | 1,200,000  |  |   | 1,200     |  |   | 454,800            |   |   | -             |  |   | -          |   |   | 456,000          |  
|Stocks and warrants issued under a private placement at $0.40
      per share in July 2004                                                                    |  |                 |   |   |              |   |  | 500,000    |  |   | 500       |  |   | 199,500            |   |   | -             |  |   | -          |   |   | 200,000          |  
|Stocks issued under a private placement at
      $1.00 per share in 2005, net of share issue costs of $100,000                                                |  |                 |   |   |              |   |  | 2,500,000  |  |   | 2,500     |  |   | 2,397,500          |   |   | -             |  |   | -          |   |   | 2,400,000        |  
|Stocks issued for exercise of warrants at $0.50 and $0.55 per
      share (Note 8)                                                                            |  |                 |   |   |              |   |  | 1,614,359  |  |   | 1,614     |  |   | 825,565            |   |   | -             |  |   | -          |   |   | 827,179          |  
|Convertible Series B preferred stock issued
      under a private placement at $1,000 per Series B share in August 2004, net
      of issuance costs (Note 9) |  | 2,200           |   |   | 22           |   |  | -          |  |   | -         |  |   | 1,934,978          |   |   | -             |  |   | -          |   |   | 1,935,000        |  
|Stocks issued for conversion of Series B preferred stock at
      prices ranging from $0.76 to $0.89 per share                                                |  | (500            | ) |   | (5           | ) |  | 614,358    |  |   | 615       |  |   | (610               | ) |   | -             |  |   | -          |   |   | -                |  
|Beneficial conversion feature on convertible
      Series B preferred stock (Note 9)                                                                          |  | -               |   |   | -            |   |  | -          |  |   | -         |  |   | 315,245            |   |   | -             |  |   | -          |   |   | 315,245          |  
|Accretion of Series B preferred stock beneficial conversion
      feature                                                                                     |  | -               |   |   | -            |   |  | -          |  |   | -         |  |   | -                  |   |   | -             |  |   | (210,163   | ) |   | (210,163         | )
|Series B preferred stock dividend                                                                                                                             |  | -               |   |   | -            |   |  | -          |  |   | -         |  |   | -                  |   |   | -             |  |   | (72,672    | ) |   | (72,672          | )
|Issuance of stock options as compensation                                                                                                                     |  | -               |   |   | -            |   |  | -          |  |   | -         |  |   | 701,740            |   |   | -             |  |   | -          |   |   | 701,740          |  
|Net (loss) for the year                                                                                                                                       |  | -               |   |   | -            |   |  | -          |  |   | -         |  |   | -                  |   |   | -             |  |   | (2,418,625 | ) |   | (2,418,625       | )
|Balance,March 31, 2005                                                                                                                                        |  | 1,700           |   | $ | 17           |   |  | 20,984,966 |  | $ | 20,985    |  | $ | 8,413,243          |   |   | -             |  | $ | (3,584,777 | ) | $ | 4,849,468        |  

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

51

---

|TORRENT ENERGY CORPORATION                                             
|-----------------------------------------------------------------------
|(Formerly Scarab Systems, Inc.)                                        
|(An Exploration Stage Enterprise)                                      
|                                                                       
|Consolidated Statements of Stockholders Equity
      (Deficit)        
|For the Period from October 8, 2001 (Inception) to
      March 31, 2007

|                                                                                                                                                             |  |                 |   |   |                 |   |  |              |   |   |            |   |  |             |  |   |               |  |   |                 |   |   | Deficit     |   |   |                  |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | - | - | --------------- | - |  | ------------ | - | - | ---------- | - |  | ----------- |  | - | ------------- |  | - | --------------- | - | - | ----------- | - | - | ---------------- | -
|                                                                                                                                                             |  |                 |   |   |                 |   |  |              |   |   |            |   |  |             |  |   |               |  |   |                 |   |   | accumulated |   |   |                  |  
|                                                                                                                                                             |  | Series B        |   |   | Series C        |   |  |              |   |   |            |   |  |             |  |   | during        |  |   | Total           |  
|                                                                                                                                                             |  | Preferred Stock |   |   | Preferred Stock |   |  | Common Stock |   |   | Additional |   |  | exploration |  |   | Stockholders | 
|                                                                                                                                                             |  | Shares          |   |   | Amount          |   |  | Shares       |   |   | Amount     |   |  | Shares      |  |   | Amount        |  |   | paid-in capital |   |   | stage       |   |   | equity (deficit) |  
|Stock issued for conversion of Series B preferred
      stock at prices ranging from $0.77 to $1.20 per share                                                |  | (1,700          | ) | $ | (17             | ) |  | -            |   | $ | -          |   |  | 1,795,254   |  | $ | 1,795         |  | $ | (1,778          | ) | $ | -           |   | $ | -                |  
|Accretion of Series B preferred stock beneficial conversion
      feature                                                                                    |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | -               |   |   | (105,081    | ) |   | (105,081         | )
|Common stock issued for cashless exercise of stock options
      (Note 7)                                                                                    |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | 89,502      |  |   | 89            |  |   | (89             | ) |   |             |   |   |                  |  
|Cancellation of stock options as compensation (Note 7)                                                                                                       |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | (99,641         | ) |   |             |   |   | (99,641          | )
|Common stock issued for exercise of warrants ranging from $0.50
      to $0.55 per share (Note 8)                                                            |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | 328,571     |  |   | 329           |  |   | 168,956         |   |   |             |   |   | 169,285          |  
|Common stock issued at $2 per share under a private placement
      in July 2005, net of issuance cost (Note 13)                                             |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | 1,650,000   |  |   | 1,650         |  |   | 3,273,350       |   |   |             |   |   | 3,275,000        |  
|Convertible Series C preferred stock issued under a private
      placement at $1,000 per Series C share in July 2005, net of issuance costs
      (Note 10) |  | -               |   |   | -               |   |  | 12,500       |   |   | 125        |   |  | -           |  |   | -             |  |   | 11,551,875      |   |   | -           |   |   | 11,552,000       |  
|Beneficial conversion feature on convertible Series C preferred
      stock (Note 10)                                                                        |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | 845,763         |   |   | -           |   |   | 845,763          |  
|Accretion of Series C beneficial conversion feature (Note 10)                                                                                                |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | -               |   |   | (845,763    | ) |   | (845,763         | )
|Series C stock dividend                                                                                                                                      |  |                 |   |   |                 |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | -               |   |   | (308,442    | ) |   | (308,442         | )
|Common stock issued for conversion of Series
      C preferred stock ranging from $1.64 to $2.27 per share                                                   |  | -               |   |   | -               |   |  | (4,125       | ) |   | (41        | ) |  | 2,083,614   |  |   | 2,084         |  |   | (2,043          | ) |   | -           |   |   | -                |  
|Common stock issued for acquisition of oil and gas properties
      at $0.38 per share in February 2006 (Note 4)                                             |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | 600,000     |  |   | 600           |  |   | 227,400         |   |   | -           |   |   | 228,000          |  
|Stock based compensation for the period                                                                                                                      |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | 2,075,422       |   |   | -           |   |   | 2,075,422        |  
|Net (loss) for the
      period                                                                                                                              |  | -               |   |   | -               |   |  | -            |   |   | -          |   |  | -           |  |   | -             |  |   | -               |   |   | (4,036,286  | ) |   | (4,036,286       | )
|Balance,March 31, 2006                                                                                                                                       |  | -               |   | $ | -               |   |  | 8,375        |   | $ | 84         |   |  | 27,531,907  |  | $ | 27,532        |  | $ | 26,452,458      |   | $ | (8,880,349  | ) | $ | 17,599,725       |  

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

52

---

|TORRENT ENERGY CORPORATION                                     
|---------------------------------------------------------------
|(Formerly Scarab Systems, Inc.)                                
|(An Exploration Stage Enterprise)                              
|                                                               
|Consolidated Statements of Stockholders Equity
      (Deficit)
|For the
      Period from April 1, 2006 to March 31, 2007      

|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   | Deficit     |   |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- | --------------------- |  | --------------------- | ------ | --------------------- | ------ | ------------ | - | ------ | ------- | ------ | - | ---------- | ------ | - | ---------- |  | - | ------------- |  | - | ---------- | - | - | ------------- |  | - | ------------ |  | - | ----------- | - | - | ---------- | -
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   | Share        |  |   | accumulated |   |   | Total      |  
|                                                                                                                                       | Series B              |  | Series C              |        | Series E              |        |              |   |        |         |        |   | Additional |        |   |            |  |   | subscriptions |  |   | during     |   |   | Stockholders' | 
|                                                                                                                                       | Preferred
      Stock |  | Preferred
      Stock |        | Preferred
      Stock |        | Common Stock |   |        | Paid-In |        |   | Shares     |        |   | Received/  |  |   | exploration   |  |   | Equity     |  
|                                                                                                                                       | Shares                |  |                       | Amount |                       | Shares |              |   | Amount |         | Shares |   |            | Amount |   | Shares     |  |   | Amount        |  |   | Capital    |   |   | Issuable      |  |   | (Receivable) |  |   | stage       |   |   | (Deficit)  |  
|Beneficial conversion feature on convertible
      Series C Preferred Stock (Note 10)                                                  | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  | $ | 710,110    |   |   | -             |  |   | -            |  |   | -           |   |   | 710,110    |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Accretion of Series C beneficial conversion
      feature (Note 10)                                                                    | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  |   | -          |   |   | -             |  |   | -            |  |   | (710,110    | ) |   | (710,110   | )
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Series C Stock Dividend                                                                                                                | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  |   | -          |   |   | -             |  |   | -            |  |   | (35,270     | ) |   | (35,270    | )
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Common Stock Issued for Conversion of Series
      C Preferred Stock ranging from $1.64 to $2.27 per share                             | -                     |  |                       | -      |                       | (8,375 | )            |   | (84    | )       | -      |   |            | -      |   | 5,339,320  |  |   | 5,339         |  |   | (5,255     | ) |   | -             |  |   | -            |  |   | -           |   |   | -          |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Common Stock Issued in Lieu of Cash Dividend
      on Series C Preferred Stock at a price of $1.50 per share (Note 10)                 | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | 228,714    |  |   | 229           |  |   | 343,483    |   |   | -             |  |   | -            |  |   | -           |   |   | 343,712    |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Convertible Series E Preferred Stock Issued under Private Placement
      at $1,000 per Series E share net of Issuance costs (Note 12) | -                     |  |                       | -      |                       | -      |              |   | -      |         | 25,000 |   |            | 250    |   | -          |  |   | -             |  |   | 23,114,750 |   |   | -             |  |   | -            |  |   | -           |   |   | 23,115,000 |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Convertible Series E Preferred reclassed to Liability per SFAS
      No. 150                                                           |                       |  |                       |        |                       |        |              |   |        |         | (2,350 | ) |            | (24    | ) |            |  |   |               |  |   | (2,349,976 | ) |   |               |  |   |              |  |   |             |   |   | (2,350,000 | )
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Series E Stock Dividend                                                                                                                | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  |   | -          |   |   | -             |  |   | -            |  |   | (660,069    | ) |   | (660,069   | )
|Stock based Compensation for the period                                                                                                | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  |   | 2,465,796  |   |   |               |  |   |              |  |   |             |   |   | 2,465,796  |  
|Common Stock issued for Services (Note 13)                                                                                             | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | 125,0000   |  |   | 125           |  |   | 227,375    |   |   | -             |  |   | -            |  |   | -           |   |   | 227,500    |  
|Exercise of stock options ( Note 7)                                                                                                    |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   | 200,000    |  |   | 200           |  |   | 165,800    |   |   |               |  |   |              |  |   |             |   |   | 166,000    |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Net (Loss) for the
      Period                                                                                                        | -                     |  |                       | -      |                       | -      |              |   | -      |         | -      |   |            | -      |   | -          |  |   | -             |  |   | -          |   |   | -             |  |   | -            |  |   | (6,359,978  | ) |   | (6,359,978 | )
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|                                                                                                                                       |                       |  |                       |        |                       |        |              |   |        |         |        |   |            |        |   |            |  |   |               |  |   |            |   |   |               |  |   |              |  |   |             |   |   |            |  
|Balance, March 31, 2007                                                                                                                | -                     |  | $                     | -      |                       | -      |              | $ | -      |         | 22,650 |   | $          | 226    |   | 33,424,941 |  | $ | 33,425        |  | $ | 51,124,541 |   | $ | -             |  | $ | -            |  | $ | (16,645,776 | ) | $ | 34,512,416 |  

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

53

---

|TORRENT ENERGY CORPORATION           
|-------------------------------------
|(formerly Scarab Systems, Inc.)      
|(An exploration stage enterprise)    
|                                     
|Consolidated Statements of Operations

|                                               |   | Cumulative      |   |   |                |   |   |                |   |   |                |  
|---------------------------------------------- | - | --------------- | - | - | -------------- | - | - | -------------- | - | - | -------------- | -
|                                               |   | October 8, 2001 |   |   |                |   |   |                |   |   |                |  
|                                               |   | (inception) to  |   |   | Year Ended     |   |   | Year Ended     |   |   | Year Ended     |  
|                                               |   | March 31, 2007  |   |   | March 31, 2007 |   |   | March 31, 2006 |   |   | March 31, 2005 |  
|                                               |   |                 |   |   |                |   |   |                |   |   |                |  
|Expenses                                       |   |                 |   |   |                |   |   |                |   |   |                |  
|Consulting (Note 3)                            | $ | 2,377,202       |   | $ | 1,081,817      |   | $ | 605,920        |   | $ | 288,845        |  
|Directors' fees                                |   | 110,000         |   |   | 77,500         |   |   | 25,000         |   |   | 7,500          |  
|Payroll expense                                |   | 1,060,827       |   |   | 968,830        |   |   | 91,997         |   |   | -              |  
|Depreciation and amortization                  |   | 49,535          |   |   | 41,229         |   |   | 6,111          |   |   | -              |  
|Insurance                                      |   | 279,824         |   |   | 116,776        |   |   | 114,229        |   |   | 48,819         |  
|Interest expense                               |   | 7,500           |   |   | -              |   |   | -              |   |   | 7,500          |  
|Interest expense on long term debt             |   | 16,569          |   |   | -              |   |   | -              |   |   | -              |  
|Investor relations                             |   | 1,618,989       |   |   | 592,371        |   |   | 163,435        |   |   | 864,375        |  
|Legal and accounting                           |   | 1,040,537       |   |   | 388,433        |   |   | 402,127        |   |   | 128,719        |  
|Lease rental expense                           |   | 193,713         |   |   | 105,442        |   |   | 73,254         |   |   | 15,017         |  
|Office and Miscellaneous                       |   | 419,683         |   |   | 183,433        |   |   | 127,291        |   |   | 49,449         |  
|Purchase investigation costs                   |   | 103,310         |   |   | -              |   |   | -              |   |   | 103,310        |  
|Rent                                           |   | 254,648         |   |   | 132,273        |   |   | 59,472         |   |   | 19,520         |  
|Shareholder relations                          |   | 214,481         |   |   | 18,634         |   |   | 105,126        |   |   | 90,721         |  
|Stock-based compensation (Note 7)              |   | 5,438,698       |   |   | 2,465,796      |   |   | 2,075,422      |   |   | 701,740        |  
|Shrinkage on inventory                         |   | 52,473          |   |   | 26,821         |   |   | 25,652         |   |   | -              |  
|Telephone                                      |   | 125,782         |   |   | 70,897         |   |   | 30,747         |   |   | 7,544          |  
|Travel                                         |   | 774,388         |   |   | 383,779        |   |   | 287,563        |   |   | 86,593         |  
|                                               |   |                 |   |   |                |   |   |                |   |   |                |  
|Operating (loss)                               |   | (14,138,159     | ) |   | (6,654,031     | ) |   | (4,193,346     | ) |   | (2,419,652     | )
|                                               |   |                 |   |   |                |   |   |                |   |   |                |  
|Other income (expense)                         |   |                 |   |   |                |   |   |                |   |   |                |  
|Interest income                                |   | 451,879         |   |   | 294,053        |   |   | 156,799        |   |   | 1,027          |  
|Gain on sale of equipment                      |   | 261             |   |   | -              |   |   | 261            |   |   | -              |  
|Gain on settlement of debt                     |   | 37,045          |   |   | -              |   |   | -              |   |   | -              |  
|Write-off of goodwill                          |   | (70,314         | ) |   | -              |   |   | -              |   |   | -              |  
|                                               |   |                 |   |   |                |   |   |                |   |   |                |  
|Loss from continued operations                 |   | (13,719,288     | ) |   | (6,359,978     | ) |   | (4,036,286     | ) |   | (2,418,625     | )
|Net income from
      discontinued operations  |   | 21,082          |   |   | -              |   |   | -              |   |   | -              |  
|                                               |   |                 |   |   |                |   |   |                |   |   |                |  
|Net loss and comprehensive loss for the period |   | (13,698,206     | ) |   | (6,359,978     | ) |   | (4,036,286     | ) |   | (2,418,625     | )
|Series B preferred stock dividend              |   | (72,672         | ) |   | -              |   |   | -              |   |   | (72,672        | )
|Series C preferred stock dividend              |   | (343,712        | ) |   | (35,270        | ) |   | (308,442       | ) |   | -              |  
|Series E preferred stock dividend              |   | (660,069        | ) |   | (660,069       | ) |   | -              |   |   | -              |  
|Dividend accretion of Series B preferred stock |   |                 |   |   |                |   |   |                |   |   |                |  
|beneficial conversion feature (Note
      9)   |   | (315,244        | ) |   | -              |   |   | (105,081       | ) |   | (210,163       | )
|Dividend accretion of Series C preferred stock |   |                 |   |   |                |   |   |                |   |   |                |  
|beneficial conversion feature (Note 10)        |   | (1,555,873      | ) |   | (710,110       | ) |   | (845,763       | ) |   | -              |  
|Net loss for the period applicable to common   |   |                 |   |   |                |   |   |                |   |   |                |  
|stockholders                                   | $ | (16,645,776     | ) | $ | (7,765,427     | ) | $ | (5,295,572     | ) | $ | (2,701,460     | )
|Basic and
      diluted (loss) per share       |   |                 |   | $ | (0.24          | ) | $ | (0.22          | ) | $ | (0.17          | )
|Weighted average number of common              |   |                 |   |   |                |   |   |                |   |   |                |  
|shares
      outstanding                       |   |                 |   |   | 32,677,984     |   |   | 24,407,133     |   |   | 15,678,187     |  

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

54

---

|TORRENT ENERGY CORPORATION           
|-------------------------------------
|(formerly Scarab Systems, Inc.)      
|(An exploration stage enterprise)    
|Consolidated Statements of Cash Flows

|                                            |   | Cumulative      |   |   | Year        |   |   |                |   |   |                |  
|------------------------------------------- | - | --------------- | - | - | ----------- | - | - | -------------- | - | - | -------------- | -
|                                            |   | October 8, 2001 |   |   | Ended       |   |   | Year           |   |   | Year           |  
|                                            |   | (inception) to  |   |   | March 31,   |   |   | Ended          |   |   | Ended          |  
|                                            |   | March 31, 2007  |   |   | 2007        |   |   | March 31, 2006 |   |   | March 31, 2005 |  
|Cash flows provided by                      |   |                 |   |   |             |   |   |                |   |   |                |  
|(used in) operating activities              |   |                 |   |   |             |   |   |                |   |   |                |  
|Net (loss) for the period                   | $ | (13,698,206     | ) | $ | (6,359,978  | ) | $ | (4,036,286     | ) | $ | (2,418,625     | )
|Adjustments to reconcile net loss to        |   | -               |   |   | -           |   |   | -              |   |   | -              |  
|net cash used in operating activities:      |   | -               |   |   | -           |   |   | -              |   |   | -              |  
|- depreciation and amortization             |   | 49,535          |   |   | 41,229      |   |   | 6,111          |   |   | -              |  
|- stock-based compensation                  |   | 5,438,698       |   |   | 2,465,796   |   |   | 2,075,422      |   |   | 701,740        |  
|- shrinkage on inventory                    |   | 26,821          |   |   | 26,821      |   |   | -              |   |   | -              |  
|- foreign exchange                          |   | 1,398           |   |   | -           |   |   | -              |   |   | -              |  
|- write-off of goodwill                     |   | 70,314          |   |   | -           |   |   | -              |   |   | -              |  
|- debt forgiven                             |   | 37,045          |   |   | -           |   |   | -              |   |   | -              |  
|-gain on sale of equipment                  |   | (261            | ) |   | -           |   |   | (261           | ) |   |                |  
|- net income from the discontinued          |   |                 |   |   |             |   |   |                |   |   |                |  
|operations                                  |   | (21,082         | ) |   | -           |   |   | -              |   |   | -              |  
|- common shares issued for service          |   |                 |   |   |             |   |   |                |   |   |                |  
|rendered                                    |   | 195,306         |   |   | -           |   |   | -              |   |   | 162,000        |  
|- reversal of option expense charged for    |   |                 |   |   |             |   |   |                |   |   |                |  
|services                                    |   | (99,641         | ) |   | -           |   |   | (99,641        | ) |   | -              |  
|Changes in non-cash working capital         |   |                 |   |   |             |   |   |                |   |   |                |  
|items:                                      |   | -               |   |   | -           |   |   | -              |   |   | -              |  
|Joint venture receivables                   |   | (147,928        | ) |   | (101,183    | ) |   | (46,745        | ) |   | -              |  
|Inventory                                   |   | (933,029        | ) |   | (557,674    | ) |   | (375,355       | ) |   | -              |  
|Prepaid expenses                            |   | (284,200        | ) |   | (52,333     | ) |   | (231,867       | ) |   | -              |  
|Accounts
      payable                      |   | (1,877,343      | ) |   | (1,857,814  | ) |   | (644,985       | ) |   | 531,480        |  
|Net cash used in
      operating activities |   | (11,242,573     | ) |   | (6,395,136  | ) |   | (3,353,607     | ) |   | (1,023,405     | )
|                                            |   |                 |   |   |             |   |   |                |   |   |                |  
|Cash flows provided by (used in)            |   |                 |   |   |             |   |   |                |   |   |                |  
|investing activities                        |   |                 |   |   |             |   |   |                |   |   |                |  
|Oil and gas properties                      |   | (27,218,510     | ) |   | (13,463,412 | ) |   | (11,435,664    | ) |   | (2,319,434     | )
|Loan                                        |   | (62,684         | ) |   | -           |   |   | -              |   |   | -              |  
|Proceeds from sale of equipment             |   | 7,415           |   |   | -           |   |   | 7,415          |   |   | -              |  
|Acquisition
      of other assets           |   | (197,688        | ) |   | (111,469    | ) |   | (84,024        | ) |   | -              |  
|Net cash used
      in investing activities | $ | (27,471,467     | ) | $ | (13,574,881 | ) | $ | (11,512,273    | ) | $ | (2,319,434     | )

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

55

---

|TORRENT ENERGY CORPORATION                       
|-------------------------------------------------
|(formerly Scarab Systems, Inc.)                  
|(An exploration stage enterprise)                
|Consolidated Statements of Cash Flows (continued)

|                                                |   | Cumulative      |   |   |                |   |   |                |   |   |                |  
|----------------------------------------------- | - | --------------- | - | - | -------------- | - | - | -------------- | - | - | -------------- | -
|                                                |   | October 8, 2001 |   |   | Year           |   |   | Year           |   |   | Year           |  
|                                                |   | (inception) to  |   |   | Ended          |   |   | Ended          |   |   | Ended          |  
|                                                |   | March 31, 2007  |   |   | March 31, 2007 |   |   | March 31, 2006 |   |   | March 31, 2005 |  
|Cash flows provided by (used in)                |   |                 |   |   |                |   |   |                |   |   |                |  
|financing activities                            |   |                 |   |   |                |   |   |                |   |   |                |  
|Proceeds from issuance of
      common          |   |                 |   |   |                |   |   |                |   |   |                |  
|stock                                           | $ | 7,988,414       |   | $ | -              |   | $ | 3,444,285      |   | $ | 3,996,204      |  
|Net proceeds from issuance of
      Series B    |   |                 |   |   |                |   |   |                |   |   |                |  
|preferred stock                                 |   | 1,935,000       |   |   | -              |   |   | -              |   |   | 1,935,000      |  
|Net proceeds from issuance of
      Series C    |   |                 |   |   |                |   |   |                |   |   |                |  
|preferred stock                                 |   | 11,552,000      |   |   | -              |   |   | 11,552,000     |   |   | -              |  
|Net proceeds from issuance of
      Series E    |   |                 |   |   |                |   |   |                |   |   |                |  
|Preferred stock                                 |   | 23,115,000      |   |   | 23,115,000     |   |   | -              |   |   | -              |  
|Payment of Series B preferred
      stock       |   |                 |   |   |                |   |   |                |   |   |                |  
|dividend                                        |   | (72,672         | ) |   | -              |   |   | (72,672        | ) |   | -              |  
|Proceeds from promissory notes                  |   | 30,000          |   |   | -              |   |   | -              |   |   | 30,000         |  
|Repayment of promissory notes                   |   | (58,125         | ) |   | (28,125        | ) |   | -              |   |   | (30,000        | )
|Proceeds from shareholder loan                  |   | 80,000          |   |   | -              |   |   | -              |   |   | 80,000         |  
|Repayment of shareholder loan                   |   | (80,000         | ) |   | -              |   |   | -              |   |   | (80,000        | )
|Proceeds from exercise of stock options         |   | 166,000         |   |   | 166,000        |   |   | -              |   |   | -              |  
|Net cash
      provided by financing activities |   | 44,655,617      |   |   | 23,252,875     |   |   | 14,923,613     |   |   | 5,931,204      |  
|Increase in cash and cash
      equivalents     |   | 5,941,577       |   |   | 3,282,858      |   |   | 57,733         |   |   | 2,588,365      |  
|Cash and cash equivalents,                      |   |                 |   |   |                |   |   |                |   |   |                |  
|beginning of period                             |   | -               |   |   | 2,658,719      |   |   | 2,600,986      |   |   | 12,621         |  
|Cash and cash
      equivalents, end of period  | $ | 5,941,577       |   | $ | 5,941,577      |   | $ | 2,658,719      |   | $ | 2,600,986      |  
|                                                |   |                 |   |   |                |   |   |                |   |   |                |  
|                                                |   |                 |   |   |                |   |   |                |   |   |                |  
|Supplemental cash flow information:             |   |                 |   |   |                |   |   |                |   |   |                |  
|Interest paid                                   | $ | 13,013          |   | $ | -              |   | $ | -              |   | $ | 7,500          |  
|                                                |   |                 |   |   |                |   |   |                |   |   |                |  
|Non-cash transactions:                          |   |                 |   |   |                |   |   |                |   |   |                |  
|Common stock issued pursuant
      to           |   |                 |   |   |                |   |   |                |   |   |                |  
|conversion of promissory note                   | $ | 55,000          |   | $ | -              |   | $ | -              |   | $ | -              |  
|Common stock issued for
      investor          |   |                 |   |   |                |   |   |                |   |   |                |  
|relations services                              | $ | 162,000         |   | $ | -              |   | $ | -              |   | $ | 162,000        |  
|Common stock issued for
      prepaid           |   |                 |   |   |                |   |   |                |   |   |                |  
|technical services                              | $ | 227,500         |   | $ | 227,500        |   | $ | -              |   | $ | -              |  
|Forgiveness of accrued
      consulting fees    |   |                 |   |   |                |   |   |                |   |   |                |  
|payable to directors and officers               | $ | 110,527         |   | $ | -              |   | $ | -              |   | $ | -              |  
|Common stock issued for oil
      and gas       |   |                 |   |   |                |   |   |                |   |   |                |  
|properties                                      | $ | 684,000         |   | $ | -              |   | $ | 228,000        |   | $ | 456,000        |  
|Property acquired through
      issuance of     |   |                 |   |   |                |   |   |                |   |   |                |  
|note                                            | $ | 75,000          |   | $ | 75,000         |   | $ | -              |   | $ | -              |  
|Settlement of Series B earned
      dividends   |   |                 |   |   |                |   |   |                |   |   |                |  
|with issuance of common stock                   | $ | 343,712         |   | $ | 343,712        |   | $ | -              |   | $ | -              |  
|Payment of Series C dividends
      with        |   |                 |   |   |                |   |   |                |   |   |                |  
|issuance of common stock                        | $ | 35,270          |   | $ | 35,270         |   | $ | -              |   | $ | -              |  

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

56

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

|Note 1. | Incorporation and Continuance of
      Operations
|------- | -------------------------------------------------

Torrent Energy Corporation (the
Company or Torrent) is an exploration stage company that, pursuant to
shareholder approval on July 13, 2004, changed its name from Scarab Systems,
Inc.

Torrent was formed by the merger
of Scarab Systems, Inc., a Nevada corporation into iRV, Inc., a Colorado
corporation. Scarab Systems, Inc. (Nevada) was a privately owned Nevada
corporation incorporated on October 8, 2001. The effective date of the merger
transaction between Scarab Systems, Inc. (Nevada) and iRV, Inc. was July 17,
2002. Subsequent to the completion of the reorganization, Scarab Systems, Inc.
(Nevada) transferred all its assets and liabilities to iRV, Inc. and ceased
operations. The directors and executive officers of iRV, Inc. were subsequently
reconstituted. iRV, Inc. changed its name to Scarab Systems, Inc. on March 24,
2003. The corporate charter of Scarab Systems Inc. (Nevada) was revoked in 2002.
The Company was initially providing services to the e-commerce industry but
ceased all activity in the e-commerce industry by the end of the fiscal year
2003.

On March 28, 2003, the Company
acquired all the issued and outstanding shares of Catalyst Technologies, Inc., a
British Columbia corporation (Catalyst). Catalyst was a Vancouver, British
Columbia based, web design and Internet application developer. The acquisition
of Catalyst was treated as a non-material business combination in the fiscal
year 2003 and the Company abandoned Catalyst during the fiscal year 2004 due to
a lack of working capital and disappointing financial results.

In fiscal year 2005, the Company
changed its business to focus on the exploration and development of oil and gas
properties. On April 30, 2004, the Company incorporated a wholly-owned Oregon
subsidiary company named Methane Energy Corp. to acquire oil and gas properties
in the State of Oregon. On June 29, 2005, the Company incorporated a
wholly-owned Washington subsidiary company named Cascadia Energy Corp. to
acquire oil and gas properties in the State of Washington.

These consolidated financial
statements have been prepared in conformity with U.S. generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business. The general business strategy of the Company is to
explore its newly-acquired oil and gas properties. The Company has not generated
any revenue to date and has incurred operating losses and requires additional
funds to meet its obligations and maintain its operations. Managements plan in
this regard is to raise equity and/or debt financing as required. These
conditions raise substantial doubt about the Companys ability to continue as a
going concern. These financial statements do not include any adjustments that
might result from this uncertainty.

57

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

|                                                       |   | March 31, 2007 |   |   | March 31, 2006 |  
|------------------------------------------------------ | - | -------------- | - | - | -------------- | -
|Deficit accumulated during the exploration
      stage | $ | (16,645,776    | ) | $ | (8,880,349     | )
|Working capital surplus                                | $ | 3,071,530      |   | $ | 1,151,881      |  

The consolidated financial statements
  for the fiscal years ended March 31, 2007, 2006 and 2005 were prepared assuming
  that the Company would continue as a going concern. The Company's ability to
  continue as a going concern is an issue raised as a result of recurring losses
  from operations, working capital deficiency, and the ability to obtain necessary
  funding from outside sources, including obtaining additional funding from the
  sale of securities. The existence of the Series E Convertible Preferred Stock
  issue presents significant potential for dilution that impacts the Company's
  ability to obtain funding from the sale of securities on terms that are considered
  acceptable. Consequently, the Company is considering other financing alternatives
  including, but not limited to, expanding joint venture partner participation
  and selected asset sales.

The Company's ongoing exploration
  activities require the expenditure of approximately $18.5 million for the fiscal
  year ending March 31, 2008, which funding must be raised from outside sources.
  There can be no assurance that financing will be available in amounts or on
  terms acceptable to the Company, if at all. The inability to obtain additional
  capital will restrict the Company's ability to grow and inhibit its ability
  to continue to conduct business operations. If the Company is unable to obtain
  additional financing, it will likely be required to curtail its exploration
  plans and possibly cease operations. Any additional equity financing may result
  in substantial dilution to the Company's then existing shareholders.

|Note 2. | Summary of Significant Accounting
      Policies
|------- | ------------------------------------------------

| | a) | Principles of Consolidation
| | -- | ---------------------------

The accompanying consolidated
financial statements presented are those of the Company and its wholly-owned
subsidiaries, Methane Energy Corp. and Cascadia Energy Corp. All significant
intercompany balances and transactions have been eliminated.

| | b) | Principles of Accounting
| | -- | ------------------------

These consolidated financial
statements are stated in U.S. dollars and have been prepared in accordance with
the U.S. generally accepted accounting principles.

| | c) | Cash and Cash Equivalents
| | -- | -------------------------

Cash equivalents are comprised of
certain highly liquid instruments with original maturities of three months or
less. As of March 31, 2007, cash balance was $941,577 (2006: $416,955) and cash
equivalents consist of short-term deposits of $5,000,000 (2006: $2,241,764).

58

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

| | d) | Joint Venture Receivables
| | -- | -------------------------

The accompanying financial
statements as of March 31, 2007, 2006 and 2005 include the wholly-owned accounts
of the Company and its proportionate share of assets, liabilities and results of
operations in the joint venture in which it participates. The Company has
maintained a 60 percent majority ownership interest in properties in which joint
venture participation exists and acts as the operator for the joint venture. The
Company incurs 100 percent of the expenses related to the Joint Venture Partner
and bills its Joint Partner for 40 percent of applicable costs.

The Company provides for
uncollectible receivables using the allowance method of accounting for bad
debts. Under this method of accounting, a provision for uncollectible accounts
is charged to earnings. The allowance account is increased or decreased based on
past collection history and managements evaluation of the receivables. All
amounts considered uncollectible are charged against the allowance account and
recoveries of previously charged off accounts are added to the allowance.

At March 31, 2007 and 2006, net
joint venture receivables were $147,928 and $46,745, respectively. At March 31,
2007 and 2006, the Company had established no allowance for bad debt, deeming
its receivables as likely to be collected.

| | e) | Inventory
| | -- | ---------

Inventory is comprised primarily
of pipe, tubular materials and chemicals used in drilling operations. Inventory
accounting is based on the first-in, first-out cost method and is stated at the
lower of cost or market.

| | f) | Oil and Gas Properties
| | -- | ----------------------

The Company utilizes the full
cost method to account for its investment in oil and gas properties.
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including such costs as leasehold acquisition costs,
interest costs relating to unproved properties, geological expenditures and
direct internal costs are capitalized into the full cost pool. As of March 31,
2007, the Company has no properties with proven reserves. When the Company
obtains proven oil and gas reserves, capitalized costs, including estimated
future costs to develop the reserves and estimated abandonment costs, net of
salvage, will be depleted on the units-of-production method using estimates of
proved reserves. Investments in unproved properties and major development
projects including capitalized interest, if any, are not amortized until proved
reserves associated with the projects can be determined. If the future
exploration of unproved properties is determined uneconomical, the amount of
such properties will be added to the capitalized cost to be amortized. As of
March 31, 2007, all of the Companys oil and gas properties were unproved and
were excluded from amortization.

59

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The capitalized costs included in
the full cost pool are subject to a ceiling test, which limits such costs to
the aggregate of the estimated present value, using an estimated discount rate,
of the future net revenues from proved reserves, based on current economic and
operating conditions and the estimated value of unproven properties. This
ceiling test is performed by the Company on an annual basis. As of March 31,
2007, none of the Companys unproved oil and gas properties were considered
impaired.

| | g) | Other Assets
| | -- | ------------

Equipment, fixtures and mobile
  trailers are stated at cost and depreciated over the estimated useful lives
  of the assets, which range from three to fifteen years, using the straight-line
  method. Repairs and maintenance are charged to expense as incurred. When assets
  are sold or retired, the cost and related accumulated depreciation are removed
  from the accounts and any resulting gain or loss is included in income. The
  Company amortizes leasehold improvements over the life of the lease. During
  the fiscal year 2007, the Company recorded leasehold improvements of $75,000
  in Other Assets which was borrowed at 0% interest from the landlord and is being
  repaid during the term of the lease. As of March 31, 2007, the total liability
  for repayment of leasehold improvements was $46,875. For the fiscal year ended
  March 31, 2007, the Company incurred $25,000 in amortization of leasehold improvements.
  Depreciation expense of the fiscal year ended March 31, 2007 was $16,229 (2006
  -$6,111; 2005  Nil).

| | h) | Stock Subject to Mandatory Redemption
| | -- | -------------------------------------

In May 2003, FASB issued SFAS No.
150. Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity. This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. In applying SFAS No. 150, the Company has
determined that a portion of the Series E Convertible Preferred Stock (Series E
Stock) met the characteristics of a liability and, therefore, has been
classified as a current liability on the Companys balance sheet as of March 31,
2007. (See Note 12).

| | i) | Accounting Estimates
| | -- | --------------------

The preparation of the consolidated
  financial statements in conformity with U.S. generally accepted accounting principles
  requires management to make estimates and assumptions that affect the reported
  amounts of assets and liabilities at the date of the consolidated financial
  statements and the reported amounts of revenues and expenses during the reporting
  period. Management makes its best estimate of the ultimate outcome for these
  items based on the historical trends and other information available when the
  financial statements are prepared. Changes in the estimates are recognized in
  accordance with the accounting rules for the estimate, which is typically in
  the period when new information becomes available to management. Actual results
  could differ from those estimates and assumptions. Certain amounts reported
  in prior years have been reclassified to conform to the disclosures in the current
  fiscal year.

60

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

| | j) | Concentration of Credit Risk
| | -- | ----------------------------

The Company maintains its cash
and cash equivalents with high credit quality financial institutions that are
guaranteed by either the Federal Deposit Insurance Corporation (FDIC), up to
$100,000, or by the Canadian Deposit Insurance Corporation (CDIC), up to
CDN$60,000. At March 31, 2007 and 2006, cash in banks exceeded aggregate deposit
insurance limits by $5,589,611 and $2,506,579, respectively. The Company has not
experienced any losses on deposits.

| | k) | Foreign Currency Transactions
| | -- | -----------------------------

The Company and its wholly owned
subsidiaries maintain their accounting records in U.S. dollars, their functional
currency. The Company translates foreign currency transactions into its
functional currency in the following manner:

At the transaction date, each
asset, liability, revenue and expense is translated into U.S. dollars by the use
of the exchange rate in effect at that date. At the period end, monetary assets
and liabilities are remeasured by using the exchange rate in effect at that
date. Differences in the values of monetary assets and liabilities resulting
from changes in exchange rates are recorded as foreign exchange gains and losses
and are included in results of operations.

| | l) | Fair Value of Financial Instruments
| | -- | -----------------------------------

The fair values of financial instruments
  are estimated at a specific point-in-time, based on relevant information about
  financial markets and specific financial instruments. As these estimates are
  subjective in nature, involving uncertainties and matters of significant judgment,
  they cannot be determined with precision. Changes in assumptions can significantly
  affect estimated fair values. The carrying value of cash and cash equivalents,
  accounts payable and accrued liabilities, accounts payable - related parties
  and stock subject to mandatory redemption approximate their fair value because
  of the short term nature of these instruments. The Company is not exposed to
  significant currency or interest risks arising from these financial instruments.

| | m) | Income Taxes
| | -- | ------------

The Company has adopted Statement
  of Financial Accounting Standards (SFAS) No. 109, Accounting
  for Income Taxes, which requires the Company to recognize deferred
  tax liabilities and assets for the expected future tax consequences of events
  that have been recognized in the Companys financial statements or tax
  returns using the liability method. Under this method, deferred tax liabilities
  and assets are determined based on the temporary differences between the financial
  statements and tax bases of assets and liabilities using enacted tax rates in
  effect in the years in which the differences are expected to reverse.

61

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The difference between taxes
computed by applying the U.S. tax rate in affect and the actual tax benefit
recorded is due to the valuation allowance on the Companys deferred tax assets.
The Company evaluates its valuation allowance requirements on an annual basis
based on projected future operations. When circumstances change and this causes
a change in managements judgment about the realization of deferred tax assets,
the impact of the change on the valuation allowance is reflected in current
income.

| | n) | Comprehensive Income
| | -- | --------------------

The Company has adopted SFAS No.
  130, "Reporting Comprehensive Income", which for instance requires inclusion
  of foreign currency translation adjustments, reported separately in its Statement
  of Stockholders' Equity (Deficit), in other comprehensive income. The Company
  has no other comprehensive income for the years ended March 31, 2007, 2006 and
  2005.

| | o) | Stock-Based Compensation
| | -- | ------------------------

The Company has three stock-based
compensation plans, which are described more fully in Note 7. Effective April 1,
2006, the Company adopted SFAS No. 123R Share-based Payments (SFAS No.
123R) using the modified prospective method. Prior to April 1, 2006, the
Company accounted for those plans under the recognition and measurement
provision of SFAS No. 123 "Accounting for Stock-based Compensation (as
amended by SFAS No. 148 Accounting for Stock-based Compensation - Transition
and Disclosure) using a fair value based method to recognize stock-based
compensation expense. Accordingly, the adoption of SFAS No. 123R did not have a
material effect on the Companys income from operations, cash flows or basic and
diluted loss per share, as compared to results that would have resulted from a
continuation of the accounting the Company used under SFAS No. 123.

| | p) | Loss Per Share
| | -- | --------------

Loss per share is computed using
the weighted average number of shares outstanding during the year. The Company
has adopted SFAS No. 128, Earnings Per Share. Diluted loss per share is
equivalent to basic loss per share as the stock options, warrants and
convertible preferred stock to acquire common shares as disclosed in the notes
are anti-dilutive.

62

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

|Fiscal Year
      Ended March 31,          |   | 2007       |   |   | 2006       |   |   | 2005        |  
|------------------------------------------ | - | ---------- | - | - | ---------- | - | - | ----------- | -
|Net Loss                                   | $ | (6,359,978 | ) | $ | (4,036,286 | ) | $ | (2,418,625  | )
|Less Preferred stock dividends             |   | (695,339   | ) |   | (308,442   | ) |   | (72,672     | )
|Less Dividend accretion on preferred stock |   | (710,110   | ) |   | (950,844   | ) |   | (210,163    | )
|beneficial conversion                      |   |            |   |   |            |   |   |             |  
|Net loss applicable to common stockholders | $ | (7,765,427 | ) | $ | (5,295,572 | ) | $ | ( 2,701,460 | )
|Weighted Average Shares Outstanding        |   | 32,677,984 |   |   | 24,407,133 |   |   | 15,678,187  |  
|Basic and Diluted Earnings per Share       | $ | ( 0.24     | ) | $ | ( 0.22     | ) | $ | ( 0.17      | )

| | q) | Long-Lived Assets Impairment
| | -- | ----------------------------

Long-term assets of the Company
are reviewed when changes in circumstances require as to whether their carrying
value has become impaired, pursuant to guidance established in SFAS No. 144 ,
Accounting for the Impairment or Disposal of Long-Lived Assets.
Management considers assets to be impaired if the carrying value exceeds the
future projected cash flows from the related operations (undiscounted and
without interest charges). If impairment is deemed to exist, the assets will be
written down to fair value, and a loss is recorded as the difference between the
carrying value and the fair value. Fair values are determined based on the
quoted market values, discounted cash flows or internal and external appraisal,
as applicable. Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value.

| | r) | Asset Retirement Obligations
| | -- | ----------------------------

It is the Companys policy
  to recognize a liability for future retirement obligations associated with the
  Companys oil and gas properties. The estimated fair value of the asset
  retirement obligation is based on the current cost escalated at an inflation
  rate and discounted at a credit adjusted risk-free rate. This liability is capitalized
  as part of the cost pool of the related asset and amortized using the units
  of production method. The liability accretes until the Company settles the obligation.
  As of March 31, 2007, the Company has not yet assessed the value of any asset
  retirement obligation that may be associated with the exploration activities.

| | s) | Recent Accounting Pronouncements
| | -- | --------------------------------

In September 2006, FASB issued
  SFAS No. 157 (SFAS 157), Fair Value Measurements.SFAS 157 addresses differences in the definition of fair value and guidance
  in applying the definition of fair value to the many accounting pronouncements
  that require fair value measurements. SFAS 157 emphasizes that (1) fair value
  is a market-based measurement that should be determined based on assumptions
  that market participants would use in pricing the asset or liability for sale
  or transfer and (2) fair value is not entity-specific but based on assumptions
  that market participants would use in pricing the asset or liability. Finally,
  SFAS 157 establishes a hierarchy of fair value assumptions that distinguishes
  between independent market participant assumptions and the reporting entitys
  own assumptions about market participant assumptions.

63

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

SFAS 157 is effective for financial statements issued for fiscal
  years beginning after November 15, 2007, and interim periods within those fiscal
  years. We do not expect that FAS 157 will have a material impact on our consolidated
  results of operations, financial position or liquidity.

In July 2006, FASB issued FASB
  Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income
  Taxes-an interpretation of FASB Statement No. 109.FIN 48 provides
  guidance for recognizing and measuring uncertain tax positions, as defined in
  SFAS No. 109, Accounting for Income Taxes.FIN 48 prescribes
  a threshold condition that a tax position must meet for any of the benefit of
  an uncertain tax position to be recognized in the financial statements. Guidance
  is also provided regarding derecognition, classification and disclosure of uncertain
  tax positions. FIN 48 is effective for fiscal years beginning after December
  15, 2006. The Company does not expect that this Interpretation will have a material
  impact on its financial position, results of operations or cash flows.

In September 2006, the SEC staff
  issued Staff Accounting Bulletin 108 (SAB 108), Financial
  StatementsConsidering the Effects of Prior Year Misstatements When Quantifying
  Misstatements in Current Year Financial Statements. SAB 108 addresses how a
  registrant should quantify the effect of an error on the financial statements
  and concludes that a dual approach should be used to compute the amount of a
  misstatement. Specifically, the amount should be computed using both the rollover
  (current year income statement perspective) and iron curtain (year-end
  balance sheet perspective) methods. The provisions of SAB 108 are effective
  for the Company beginning April 1, 2007. The Company does not expect that the
  implementation of SAB 108 will have a material impact on its consolidated results
  of operations, financial position or liquidity.

In February 2007, FASB issued SFAS
  No. 159, “*The Fair Value Option for Financial Assets and Liabilities*”
  (“SFAS 159”). SFAS 159 provides the option to report certain financial
  assets and liabilities at fair value, with the intent to mitigate volatility
  in financial reporting that can occur when related assets and liabilities are
  record on different bases and is effective for fiscal years beginning after
  November 15, 2007. The Company is in the process of evaluating the impact of
  SFAS 159 on its results of operations and financial position.

|Note 3. | Related Party Transactions
|------- | --------------------------

During the year ended March 31,
2007, the Company paid or accrued $857,766 (2006 - $447,661; 2005 - $164,690) in
consulting fees to directors and officers of the Company. In addition, the
Company paid officers and directors of the Company $46,558 (2006 - $169,767;
2005 - $116,030) in compensation for activities relating to the Companys oil
and gas leases and $56,823 (2006 - $261,785; 2005 - $138,894) for geological and
geophysical activities both of which are included in the costs of the oil and
gas properties.

As of March 31, 2007, there was
$8,545 (2006 - $87,131; 2005 - $242,936) representing unpaid expense
reimbursement owing to directors and officers. See Notes 4 and 13.

|Note 4. | Oil and Gas Properties, Unproven
|------- | --------------------------------

The
  Company’s oil and gas properties are currently unproven and ongoing exploration
  activities are planned and will require the additional significant expenditures
  for the fiscal year ending March 31, 2008, which funding must be raised from
  outside sources. These exploration activities include formation stimulation
  and production testing of existing wells drilled in our Coos Bay project and
  formation coring and gas desorption testing of wells still to be drilled in
  our Chehalis project. There can be no assurance that financing will be available
  in amounts or on terms acceptable to the Company, if at all. Assuming that additional
  funding from outside sources is obtained, management estimates that it will
  take approximately six to twelve months to complete the first phase of exploration
  activities on certain of its unproved properties and at that time an assessment
  will be made for reclassification of a portion of the unproved reserves to proved
  reserves. Once properties have been classified as proven, then certain of the
  costs incurred would be included in the amortization computation.

64

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to Consolidated
      Financial Statements

Coos Bay Basin Property.On
  May 11, 2004, Methane Energy Corp. entered into a Lease Purchase and Sale Agreement
  (the Agreement) with GeoTrends-Hampton International LLC (GHI)
  to purchase GHIs undivided working interest in certain oil and gas leases
  in the Coos Bay Basin of Oregon. As consideration for the acquisition of these
  oil and gas leases, the Company paid a total of $300,000 in cash and issued
  1,800,000 restricted common shares in three performance based tranches.The
  shares were valued at $0.38 per share, which was the fair value at the time
  that the agreement was negotiated. GHI also maintains an undivided overriding
  royalty interest of 4% upon production in the Coos Bay project area. The agreement
  closed on June 22, 2004. Subsequent to the completion of the Agreement, the
  principals of GHI were appointed as officers and directors of the Company and
  its subsidiaries.

Pursuant to the GHI Agreement,
the Company acquired certain mineral leases located in the Coos Bay area of
Oregon, which are prospective properties for oil and gas exploration and total
approximately 50,000 acres. On July 1, 2004, the Company completed the
negotiations with the State of Oregon on an additional leasing of 10,400 acres
of land within the Coos Bay Basin in Oregon. The 10,400 acres of land are
subject to annual lease payments of $1 per acre.

Related to its exploration
program, Methane Energy Corp. had escrowed $1,000,000 through an attorney to
provide assurance of payment to the company from which it obtained the drilling
rig being used to complete a Pilot Exploration Program in the Coos Bay Basin. On
March 13, 2005 the escrow was reduced by $749,650 by mutual agreement to satisfy
a portion of the amounts then owing. The remaining balance, including interest
earned on the escrowed funds, totaled $284,848 at March 31, 2007. The balance of
the deposit remains fully refundable upon payment of all obligations owed to the
owner of the drilling rig or, alternatively, may be applied to satisfy all or a
portion of sums owed at that time. As of March 31, 2007, amounts owing and
attributable to this arrangement totaled $536,570 and are included in accounts
payable.

Chehalis Basin Property.On August 9, 2005, Cascadia Energy Corp., the Companys wholly-owned
subsidiary, executed a lease option agreement with Weyerhaeuser Company to lease
100,000 acres that it may select from an overall 365,000 acreage in the Chehalis
Basin located in Washington State. Cascadia Energy Corp. commenced an
exploratory work program in 2006 for possible hydrocarbon deposits on acreage it
selected from the acreage block. Cascadia Energy Corp. also has been granted a
two-year first right of refusal on the balance of the Weyerhaeuser acreage that
it does not select during its initial selection process. Cash consideration of
$100,000 was paid for the lease option of which the Company paid $60,000 (See
Joint Venture below). In addition, Cascadia Energy Corp. may extend the term
of its option for an additional year by committing to a work program of
$285,715, pertaining to the full 100,000 acres with proportional reduction
should the Company reduce the number of acres selected for exploration activity
during the initial option period. Alternatively, the Company may simply execute
a lease agreement on the acreage at a rate of $1.00 per acre per year. In
February 2007, Weyerhaeuser Company extended the initial period for completion
of the $285,715 work commitment to August 2007. The Company has scheduled a
drilling program in the project area sufficient to extend the term of the lease
option agreement.

65

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

From October 2006 through May
2007, Cascadia Energy Corp has entered into three additional lease agreements
with Weyerhaeuser totaling 36,991 acres, two of which required payment of
upfront lease bonuses of $428,610 and one which requires annual lease payments
of $1,275. Certain provisions of these agreements require Cascadia Energy Corp.
to commence a well within the first two years of the lease, or the lease will
terminate and the Company would be required to make a payment of $75,000 to
Weyerhaeuser.

Since January 2006, Cascadia
Energy Corp. has also acquired 23,735 acres from the State of Washington Trust,
which acreage lies directly adjacent or contiguous to Cascadia Energy Corp.s
initial 100,000 acres leased from Weyerhaeuser. This acreage was acquired in
lease auctions for aggregate lease consideration of $37,719, and has been
included in the Chehalis Basin project.

On May 9, 2006, Cascadia Energy
Corp. entered into an option to acquire oil & gas lease with Pope Resources
LP. This option provides Cascadia Energy Corp. with the right to earn oil and
gas leases covering 15,280 acres of mineral rights interests held by Pope
Resources LP in Cowlitz and Lewis Counties, Washington, for a purchase price of
$1 per net mineral acre or $15,280. The initial term of this option is for a
period of 18 months ending on November 9, 2007. If Cascadia Energy Corp. expends
$200,000 on operations and activities in the overall Cedar Creek area during the
initial term, the initial term shall be extended for an additional year. If the
conditions for extension of the initial term are not satisfied, this option will
terminate as of the expiration of the initial term and, as additional
consideration, Cascadia Energy Corp. will pay Pope Resources LP an additional
sum of $30,560.

On October 10, 2006, the Company
acquired an additional 25,664 leased acres in southwestern Washington,
contiguous to its existing controlled acreage. The additional leased acreage,
having an initial lease term of four years, brings the Companys total holdings
in the Cedar Creek area of Washington to approximately 155,000 acres under terms
that include approximately $500,000 in exploration expenditure commitments prior
to November 2007.

Coincident with the Weyerhaeuser
transaction, Cascadia Energy Corp. has also entered into a joint venture
agreement (Joint Venture) dated August 12, 2005 with St. Helens Energy LLC
(St. Helens), a 100% owned subsidiary of Comet Ridge Limited, an Australian
coal seam gas exploration company which is listed on the Australian Stock
Exchange. Pursuant to this agreement, Cascadia Energy Corp. will serve as
operator of the Joint Venture with a 60% interest in the Joint Venture; while
St. Helens will actively assist in evaluating the area, developing exploratory
leads and prospects, and providing 40% of the funding to pursue exploration and
development of the prospect. Cascadia Energy Corp. records its investment and
related expenses associated with the Chehalis Basin project net of St. Helens
contribution. During the period commencing with the inception of the Chehalis
Basin project and ending March 31, 2007, the Joint Venture had expended a total
of $580,246 of which St. Helenss unpaid share as of March 31, 2007 equaled
$147,928 (2006 - $46,745) and is included in Joint Venture Receivables.

66

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The total costs incurred and
currently excluded from amortization for the Companys oil and gas properties
are summarized as follows:

|                  |   | Acquisition Costs |  |   | Exploration
      Costs |  |   | Development Costs |  |   |             | 
|----------------- | - | ----------------- |  | - | ----------------------- |  | - | ----------------- |  | - | ----------- | 
|                  |   |                   |  |   |                         |  |   |                   |  |   | Geological  | 
|                  |   |                   |  |   | Seismic                 |  |   | Drilling and      |  |   | and         | 
|                  |   |                   |  |   | and land                |  |   | gathering         |  |   | geophysical | 
|Coos Bay Basin    |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Property          |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2007    | $ | -                 |  | $ | 414,067                 |  | $ | 13,343,032        |  | $ | 588,510     | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2006    |   | 228,000           |  |   | 524,396                 |  |   | 11,828,139        |  |   | 733,378     | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2005    |   | 756,000           |  |   | 499,847                 |  |   | 1,262,564         |  |   | 257,023     | 
|Inception through |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2004    |   | -                 |  |   | -                       |  |   | -                 |  |   | -           | 
|Total             | $ | 984,000           |  | $ | 1,438,310               |  | $ | 26,433,735        |  | $ | 1,578,911   | 
|                  |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Chehalis Basin    |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Property          |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March31, 2007     | $ | -                 |  | $ | 354,756                 |  | $ | 93,899            |  | $ | 62,913      | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2006    |   | -                 |  |   | 224,588                 |  |   | -                 |  |   | 63,150      | 
|Year ended        |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2005    |   | -                 |  |   | -                       |  |   | -                 |  |   | -           | 
|Inception through |   |                   |  |   |                         |  |   |                   |  |   |             | 
|March 31, 2004    |   | -                 |  |   | -                       |  |   | -                 |  |   | -           | 
|Total             | $ | -                 |  | $ | 579,344                 |  | $ | 93,899            |  | $ | 126,063     | 
|Total Oil and Gas |   |                   |  |   |                         |  |   |                   |  |   |             | 
|Properties        | $ | 984,000           |  | $ | 2,017,654               |  | $ | 26,527,634        |  | $ | 1,704,974   | 

As of March 31, 2007, the Company
has commitments for future land lease payments for the next five years as
follows:

For Fiscal Year Ended March 31,

| | 2008       | $ | 132,307 | 
| | ---------- | - | ------- | 
| | 2009       |   | 111,389 | 
| | 2010       |   | 111,389 | 
| | 2011       |   | 113,084 | 
| | 2012       |   | 104,469 | 
| | Thereafter |   | 350,251 | 
| | Total      | $ | 922,889 | 

67

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

If production occurs on these
leases, then the Company is obligated to pay the a royalty to landowners equal
to an average 12.5% on gross sales of methane gas, in addition to the Coos Bay
Basin Property 4% overriding royalty discussed above.

As of March 31, 2007, all of the
Companys oil and gas properties are considered unproven. Based on the status of
the Companys exploration activities, management has determined that no
impairment has occurred.

|Note 5. | Environmental Matters
|------- | ---------------------

The Company has established
procedures for continuing evaluation of its operations to identify potential
environmental exposures and to assure compliance with regulatory policies and
procedures. Management monitors these laws and regulations and periodically
assesses the propriety of its operational and accounting policies related to
environmental issues. The nature of the Companys business requires routine
day-to-day compliance with environmental laws and regulations. The Company
incurred no material environmental investigation, compliance and remediation
costs in the year ending March 31, 2007. The Company is unable to predict
whether its future operations will be materially affected by these laws and
regulations. It is believed that legislation and regulations relating to
environmental protection will not materially affect the results of operations of
the Company.

|Note 6. | Income Tax
|------- | ----------

In filing its fiscal year 2006 federal income tax return, the
Company changed its method of accounting for Intangible Drilling Costs (IDC)
from expensing in the year incurred to amortizing over a ten year period. The
effect of this change was to decrease the net operating loss carry-forwards
available to offset future income and to decrease deferred tax liabilities as of
March 31, 2006. The change in net deferred tax assets is offset by corresponding
change in the valuation allowance of $254,000. This change in accounting for IDC
did not affect the financial statements for the years ending March 31, 2006 and
2005. The table below reflects the new method of accounting of IDC for fiscal
years ending March 31, 2007, 2006, and 2005.

There was no income tax benefit attributable to net losses for
fiscal years 2007, 2006 and 2005. The significant deferred tax assets and
(liabilities) are comprised of the following:

|Amounts cumulative through March 31,         |   | 2007       |   |   | 2006       |   |   | 2005       |  
|-------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Net operating loss carry-forwards            | $ | 4,103,000  |   | $ | 1,873,000  |   | $ | 840,000    |  
|Stock-based compensation and warrant expense |   | 1,849,000  |   |   | 1,011,000  |   |   | 305,000    |  
|Intangible drilling costs                    |   | (919,000   | ) |   | (227,000   | ) |   | -          |  
|Valuation
      allowance                    |   | (5,033,000 | ) |   | (2,657,000 | ) |   | (1,145,000 | )
|Net deferred tax assets                      | $ | -          |   | $ | -          |   | $ | -          |  

68

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The valuation allowance increased
by $2,376,000 for the fiscal year ended March 31, 2007 (2006: $1,512,000; 2005:
$1,145,000).As of March 31, 2007, the Company has an estimated cumulative net
operating loss carry-forward for tax purposes of $12,067,200 (2006 - $5,509,200;
2005 - $2,470,000). This amount may be applied against future federal taxable
income, which if not used, will expire commencing 2024 to 2027. Due to stock
ownership changes, the Companys ability to utilize these losses to offset
future taxable income may be limited.

|Note 7. | Stock Options
|------- | -------------

On March 31, 2007, the Company
  had three stock-based compensation plans as described below. On February 10,
  2004, the Company adopted the 2004 Non-Qualified Stock Option Plan (the 2004
  Plan) authorizing 1,800,000 shares to be issued. The 2004 Plan terminates
  upon the earlier of February 10, 2014 or the issuance of all shares authorized
  under the 2004 Plan. The option exercise prices per share are determined by
  the Board of Directors when the stock option is granted. Each option entitled
  the holder to acquire one common share at exercise prices ranging from $0.10
  to $0.50 per share. Vesting of these options ranged from 100% immediately to
  25% immediately and 25% every six months afterward until fully vested. These
  options expire five years from the date of grant.

In addition to the 2004 Plan, the
  Company issued 600,000 options outside the 2004 Plan. Of the 600,000 stock options
  granted outside the 2004 Plan, 200,000 stock options with an exercise price
  of $1.00 per share and another 200,000 with an exercise price of $2.00 per share
  were granted pursuant to a Mail Distribution Agreement with a third party (Optionee).
  These options vested immediately and were exercisable until November 1, 2005.
  In 2005, 200,000 options with an exercise price of $1.00 were exercised. The
  200,000 options with an exercise price of $2.00 per share were forfeited due
  to the early cancellation of the service agreement for which the options were
  granted. Since the services were not provided, the compensation expense was
  reversed and is included in the Statement of Stockholders Equity (Deficit).
  The other 200,000 stock options granted outside the 2004 Plan were to a consultant
  of the Company for public and investor relations services. These options were
  exercised in January 2007 at the exercise price of $0.83 per share.

On March 17, 2005, the Company
adopted the 2005 equity incentive plan (the 2005 Plan) for executives,
employees and outside consultants and advisors. A maximum of 2,000,000 shares of
the Companys common stock were initially subject to the 2005 Plan. The 2005
Plan was later amended to increase the number of shares under the plan by
500,000 to a total of 2,500,000 shares. On August 31, 2005, a Form S-8
registration statement was filed to register the 2005 Plan.

During the year ended March 31,
2006, the Company granted 2,300,000 stock options to various directors and
consultants of the Company under the 2005 Plan. Each option entitles the holder
to acquire one common share at exercise prices ranging from $1.25 to $2.11 per
share.

69

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

These options vest 25% immediately and 25% every six months
afterward until fully vested 18 months from the date of grant. These options
expire five years from the date of grant.

On May 10, 2006, the Company adopted
  the 2006 Equity Incentive Plan (the 2006 Plan) for executives, employees
  and outside consultants and advisors with 1,800,000 options available for grant.
  The purpose of the equity incentive plan is to provide long-term performance
  incentives to those key employees and consultants of our Company and our subsidiaries
  who are largely responsible for the management, growth and protection of the
  business of the Company and its subsidiaries. Under the 2006 Plan, options vest
  25% immediately and 25% every six months afterward until fully vested 18 months
  from the date of grant and these options expire five years from the date of
  grant. As of March 31, 2007, there were 355,000 options remaining available
  for grant under the 2006 Plan.

For all the above stock-based compensation
  plans, the Company charged compensation expense $2,465,796 in fiscal year 2007
  (2006: $2,075,422; 2005: $701,740). The Company recognizes compensation cost
  using the graded vesting attribution method. Since the Company is currently
  in the exploration stage and has not yet recognized income, no income tax benefits
  have be realized. No costs related to the stock-based compensation plans have
  been capitalized as part of the Companys assets. The Company does not
  repurchase share to fulfill the requirements of options that are exercised.
  Further, the Company issues new shares when options are exercised.

A summary of stock option
activity for the year ended March 31, 2007 and changes during the year the ended
is presented below:

|                                            |  |           |   |   | Weighted | 
|------------------------------------------- |  | --------- | - | - | -------- | 
|                                            |  |           |   |   | Average  | 
|                                            |  |           |   |   | Exercise | 
|                                            |  | Shares    |   |   | Price    | 
|Options outstanding at March 31, 2006       |  | 2,700,000 |   | $ | 1.40     | 
|Granted                                     |  | 1,465,000 |   | $ | 2.09     | 
|Exercised                                   |  | (200,000  | ) | $ | .83      | 
|Options
      outstanding at March 31, 2007 |  | 3,965,000 |   | $ | 1.68     | 
|Option Exercisable at March 31, 2007        |  | 2,897,500 |   | $ | 1.58     | 

70

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

|Options Outstanding |  |             | Options Exercisable |                 
|------------------- |  | ----------- | ------------------- | ----------------
|                    |  |             |                     | Weighted        
|                    |  |             |                     | Average         
|Range of            |  |             |                     | Remaining       
|Exercise            |  | Number      |                     | Contractual Life
|Prices              |  | Outstanding |                     | (yrs.)          
|$ 0.50              |  | 200,000     |                     | 2.35            
|$ 1.25              |  | 1,500,000   |                     | 3.02            
|$ 1.27              |  | 75,000      |                     | 4.88            
|$ 1.43              |  | 665,000     |                     | 4.62            
|$ 2.00              |  | 490,000     |                     | 3.30            
|$ 2.11              |  | 310,000     |                     | 3.80            
|$ 2.18              |  | 175,000     |                     | 4.36            
|$ 2.97              |  | 550,000     |                     | 4.11            
|                    |  | 3,965,000   |                     | 3.60            

The fair value of each option
granted has been estimated as of the date of the grant using the Black-Scholes
option pricing model and uses the assumption noted in the following table. No
dividends were assumed due to the nature of the Companys current business
strategy.

|Amounts for
      Fiscal Year Ended, | 2007          | 2006          | 2005       
|------------------------------------ | ------------- | ------------- | -----------
|Expected volatility                  | 106% - 115%   | 121% - 137%   | 254% -265% 
|Weighted-average volatility          | 112%          | 133%          | 254%       
|Expected Term                        | 4 years       | 4 years       | 1 - 5 years
|Risk-free return                     | 4.56% - 5.02% | 3.55% - 4.33% | 2.75%      

The weighted average grant date
fair value of options granted during the year ended March 31, 2007 was $1.59
(2006: $1.15; 2005: $0.69) . The total intrinsic value of options exercised
during the fiscal year ended March 31, 2007 was $94,000 (2006: $182,000; 2005:
$313,750). The total aggregate intrinsic value of outstanding options and
exercisable options as of March 31, 2007 was $102,000 and $102,000,
respectively.

71

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The table below summarizes the
changes in the Companys nonvested stock options that occurred during the fiscal
year ended March 31, 2007:

|                            |             | Weighted Average Grant-
|--------------------------- | ----------- | -----------------------
|                            | Shares      | Date Fair Value        
|Nonvested at March 31, 2006 | 1,350,000   | $1.19                  
|Granted                     | 1,465,000   | 1.59                   
|Vested                      | (1,747,500) | 1.34                   
|Forfeited                   | -           | -                      
|Nonvested at March 31, 2007 | 1,067,500   | 1.50                   

As of March 31, 2007, the Company
had $550,484 of unrecognized compensation expense related to nonvested
stock-based compensation arrangements. This unrecognized compensation expense is
expected to be recognized over a weighted average period of .89 years. The total
fair value of the shares vested during the fiscal year ended March 31, 2007 was
$2,334,229 (2006: $1,251,250; 2005: $342,000), with a remaining weighted average
contractual term of 3.6 years.

|Note 8. | Warrants
|------- | --------

In May 2004, the Company issued
warrants attached to a private placement to purchase 1,442,930 shares of common
stock at $0.50 per share exercisable until May 19, 2006. These warrants were
fully exercised during fiscal years 2005 and 2006.

In July 2004, the Company issued
warrants attached to a private placement to purchase 500,000 shares of common
stock at $0.55 per share exercisable until July 7, 2006. These warrants were
fully exercised during fiscal year 2006. As of fiscal year ended March 31, 2007,
there were no remaining warrants outstanding.

|Note 9. | Series B Convertible Preferred Stock
      (Series B Stock)
|------- | -------------------------------------------------------------

On August 27, 2004, the Company
  entered into a private placement for its Series B Convertible Preferred Stock
  at $1,000 per share for $2,200,000 in gross proceeds (the Series B Stock).
  The Series B Stock are senior to the common stock with respect to the payment
  of dividends and other distribution on the capital stock of the Company, including
  distribution of the assets of the Company upon liquidation. No cash dividends
  or distributions shall be declared or paid or set apart for payment on the common
  stock in any year unless cash dividends or distributions on the Series B Stock
  for such year are likewise declared and paid or set apart for payment. No declared
  and unpaid dividends shall bear or accrue interest. Upon any liquidation, dissolution,
  or winding up of the Company, whether voluntary or involuntary before any distribution
  or payment shall be made to any of the holders of common stock or any series
  of preferred stock, the holders of Series B Stock shall be entitled to receive
  out of the assets of the Company, whether such assets are capital, surplus or
  earnings, an amount equal to $1,000 per share of the Series B Stock plus all
  declared and unpaid dividends thereon, for each shares of Series B Stock held
  by them.

72

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The Series B Stock are non-voting,
  carry a cumulative dividend rate of 5% per year, when and if declared by the
  Board of Directors of the Company, and are convertible into common stock at
  any time by dividing the dollar amount being converted (included accrued but
  unpaid dividends) by the lower of $1.20 or 80% of the lowest volume weighted
  average trading price per common share of our Company for 10 trading days. The
  holder of the Series B Stock may only convert up to $250,000 of Series B Stock
  into common shares in any 30 day period. The Company may redeem the Series B
  Stock by paying 120% of the invested amount together with any unpaid dividends.
  In the event that the volume weighted average price of the Companys common
  stock is equal to or greater than two dollars for twenty consecutive trading
  days, the Company must redeem in an amount of Series B Stock equal to 20% of
  the dollar volume of the common stock traded during the previous 20 days.

As a condition of the Series B
Stock private placement agreement, the Company to filed a registration statement
(the Registration Agreement) registering 5,000,000 shares of common stock into
which the Series B Stock would be converted. This Registration Statement became
effective on May 5, 2005.

Each share of Series B Stock was
to be automatically converted into common stock immediately upon the
consummation of the occurrence of a stock acquisition, merger, consolidation, or
reorganization of the Company.

Net proceeds received totaled
$1,935,000 after payment of $220,000 in finders fees (10% of gross proceeds)
and $45,000 in legal fees. The transaction resulted in a beneficial conversion
feature calculation in accordance with EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, of $315,244 which was accreted over nine months
commencing October 1, 2004 (the minimum period that the preferred stockholder
can convert all of their Series B Stock). The Company recorded accretion of
$210,163 as a dividend for the year ended March 31, 2005. As of March 31, 2005,
the Company accrued preferred stock dividends of $72,672, payment of which
occurred during the three months ended September 30, 2005.

73

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The Company issued the following
common shares pursuant to conversion of the Series B Preferred stocks:

|Conversion        |  | Shares of      |  | Conversion |  | Shares of Common | 
|----------------- |  | -------------- |  | ---------- |  | ---------------- | 
|Date              |  | Series B Stock |  | Price      |  | Stock            | 
|January 21, 2005  |  | 100            |  | $ 0.7824   |  | 127,812          | 
|February 8, 2005  |  | 100            |  | 0.7625     |  | 131,148          | 
|February 14, 2005 |  | 150            |  | 0.8000     |  | 187,500          | 
|February 28, 2005 |  | 100            |  | 0.8934     |  | 111,932          | 
|March 8, 2005     |  | 50             |  | 0.8934     |  | 55,966           | 
|April 1, 2005     |  | 100            |  | 0.8386     |  | 119,252          | 
|April 6, 2005     |  | 5              |  | 0.7735     |  | 6,464            | 
|April 7, 2005     |  | 100            |  | 0.7735     |  | 129,282          | 
|April 28, 2005    |  | 125            |  | 0.7860     |  | 159,033          | 
|April 29, 2005    |  | 125            |  | 0.7860     |  | 159,033          | 
|May 2, 2005       |  | 395            |  | 0.7860     |  | 502,544          | 
|May 18, 2005      |  | 125            |  | 1.0887     |  | 114,816          | 
|May 25, 2005      |  | 125            |  | 1.1962     |  | 104,498          | 
|June 1, 2005      |  | 125            |  | 1.1962     |  | 104,498          | 
|June 8, 2005      |  | 475            |  | 1.2000     |  | 395,834          | 
|Total             |  | 2,200          |  | $ 0.9130   |  | 2,409,612        | 

|Note 10. | Series C Convertible Preferred Stock
      (Series C Stock)
|-------- | -------------------------------------------------------------

On July 19, 2005, the Company
also closed a private placement in its Series C Convertible Preferred Stock at
$1,000 per share for 12,500 shares (the Series C Stock). The Series C Stock was
senior to the common stock with respect to the payment of dividends and other
distributions on the capital stock of the Company, including distribution of the
assets of the Company upon liquidation. No cash dividends or distributions shall
be declared or paid or set apart for payment on the common stock in any year
unless cash dividends or distributions on the Series C Stock for such year are
likewise declared and paid or set apart for payment. No declared and unpaid
dividends shall bear or accrue interest. Upon any liquidation, dissolution, or
winding up of the Company, whether voluntary or involuntary before any
distribution or payment shall be made to any of the holders of common stock or
any series of preferred stock, the holders of Series C Stock shall be entitled
to receive out of the assets of the Company, whether such assets are capital,
surplus or earnings, an amount equal to $1,000 per share of the Series C Stock
plus all declared and unpaid dividends thereon, for each shares of Series C
Stock held by them.

The Series C Stock are non-voting,
  carry a cumulative dividend rate of 5% per year, when and if declared by the
  Board of Directors of the Company, and are convertible into common stock at
  any time by dividing the dollar amount being converted (included accrued but
  unpaid dividends) by the lower of $3.00 or 85% of the volume weighted average
  trading price per common stock of the Company for 5 trading days.

74

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

The holder of the Series C Stock may only convert up to a maximum
  of $950,000 of Series C Stock into common stock in any 30 day period. The Company
  may redeem the Series C Stock by paying 120% of the invested amount together
  with any unpaid dividends. Each share of Series C Stock will automatically convert
  into common stock at the conversion price then in effect two years from the
  date of issuance of each share.

As a condition of the Series C
stock private placement agreement the Company filed a registration statement
(the Registration Agreement) registering 12,500,000 shares of common stock
into which the Series C Stock would be converted. This Registration Statement
was declared effective on January 12, 2006. Each share of Series C Stock will be
automatically converted into common stock immediately upon the consummation of
the occurrence of a stock acquisition, merger, consolidation, or reorganization
of the Company.

Net proceeds received as of March
31, 2006 totaled $11,552,000 after payment of finders fees and legal costs of
$937,500 and $10,500 respectively. The transaction resulted in a beneficial
conversion feature calculation in accordance with EITF 98-5 Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,and EITF 00-27 Application of
Issue No. 98-5 to Certain Convertible Instruments, of $1,555,873 which was
accreted over twenty-four months commencing July 15, 2005. Accretion of $710,110
was recorded for the fiscal year ended March 31, 2007.

75

---

|TORRENT ENERGY CORPORATION                
|------------------------------------------
|(formerly SCARAB SYSTEMS INC.)            
|(An exploration stage enterprise)         
|Notes to Consolidated Financial Statements

The Company issued the following
common shares pursuant to conversion of the Series C Stock:

|Conversion        |  | Shares of      |  | Conversion |  | Shares of    | 
|----------------- |  | -------------- |  | ---------- |  | ------------ | 
|Date              |  | Series C Stock |  | Price      |  | Common Stock | 
|December 6, 2005  |  | 375            |  | $ 1.6443   |  | 228,061      | 
|January 23,2006   |  | 375            |  | 1.8464     |  | 203,098      | 
|January 31, 2006  |  | 375            |  | 1.7447     |  | 214,937      | 
|February 2, 2006  |  | 375            |  | 1.8664     |  | 200,922      | 
|February 3, 2006  |  | 375            |  | 1.9684     |  | 190,510      | 
|February 7, 2006  |  | 375            |  | 2.2064     |  | 169,960      | 
|February 15, 2006 |  | 375            |  | 2.2599     |  | 165,937      | 
|February 16, 2006 |  | 375            |  | 2.1978     |  | 170,625      | 
|February 21, 2006 |  | 375            |  | 2.2747     |  | 164,857      | 
|March 9, 2006     |  | 375            |  | 2.0182     |  | 185,809      | 
|March 20, 2006    |  | 375            |  | 1.9852     |  | 188,898      | 
|April 5, 2006     |  | 750            |  | 1.9243     |  | 389,752      | 
|April 19, 2006    |  | 1,100          |  | 1.7255     |  | 637,496      | 
|May 5, 2006       |  | 1,750          |  | 1.5423     |  | 1,134,669    | 
|May 8, 2006       |  | 4,775          |  | 1.5028     |  | 3,177,403    | 
|Total             |  | 12,500         |  | $ 1.6840   |  | 7,422,934    | 

During the fiscal years 2007 and
  2006, the Company accrued dividends on the Series C Stock of $35,270, and $308,442,
  respectively. On May 10, 2006, the Company reached agreement with the purchaser
  of the Series C Stock to accept shares of common stock in lieu of cash in payment
  of the aggregate accrued dividend due of $343,712. A total of 228,714 shares
  of the Company's common stock were issued on May 10, 2006 in satisfaction of
  the accrued dividend obligation.

|Note 11. | Series D Convertible Preferred Stock
      (Series D Stock)
|-------- | -------------------------------------------------------------

In anticipation of entering into
an investment agreement under which it was planned to sell 25,000 shares of its
Series D Stock, the Companys Board of Directors authorized 50,000 shares of
preferred stock.

No shares of Series D Stock have
been issued; and on September 29, 2006, the Companys Board of Directors
approved the cancellation of the Series D Stock designation.

|Note 12. | Series E Convertible Preferred Stock
      (Series E Stock)
|-------- | -------------------------------------------------------------

On June 28, 2006, the Company closed
  a private placement agreement under which it sold 25,000 shares of its Series
  E Convertible Preferred Stock at $1,000 per share (the Series E Stock).
  The Series E Stock is senior to the common stock with respect to the payment
  of dividends and other distributions on the capital stock of the Company, including
  distribution of the assets of the Company upon liquidation.

76

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

No cash dividends or distributions shall be declared or paid
  or set apart for payment on the common stock in any year unless cash dividends
  or distributions on the Series E Stock for such year are likewise declared and
  paid or set apart for payment. No declared and unpaid dividends shall bear or
  accrue interest. Upon any liquidation, dissolution, or winding up of the Company,
  whether voluntary or involuntary before any distribution or payment shall be
  made to any of the holders of common stock or any series of preferred stock,
  the holders of Series E Stock shall be entitled to receive out of the assets
  of the Company an amount equal to $1,000 per share of the Series E Stock plus
  all declared and unpaid dividends thereon, for each share of Series E Stock
  held by them.

The Series E Stock are
non-voting, carry a cumulative dividend rate of 5% per year, when and if
declared by the Board of Directors of the Company, and are convertible into
common stock at any time by dividing the dollar amount being converted (included
accrued but unpaid dividends) by $2.50 per share if the Companys common shares
are trading at an average price of $2.50 per share or higher for the five
trading days preceding a conversion date. If the Companys common shares are
trading at an average price greater than $1.67 but less than $2.50 per share the
Company may, at its exclusive option, force conversion at a price of $1.67 per
share or may redeem the Series E Stock for cash at the original investment
amount plus a 20% redemption premium.

As a condition of the Series E
  Stock, the Company filed a registration statement (the Registration Agreement)
  registering 15,000,000 shares of common stock into which the Series E Stock
  would be converted. This Registration Statement was declared effective on February
  9, 2007. Subsequently, the Series E Stock investor agreed to an initial registration
  of 10,000,000 shares to facilitate the Company's compliance with a revision
  of SEC guidelines related to the form of registration. The 5,000,000 additional
  shares of Series E Stock will be registered on a separate registration statement.

Net proceeds from the Series E
Stock received during the fiscal year ended March 31, 2007 was $23,115,000,
after the payment of issuance costs of $1,885,000.

Beginning December 1, 2006, the
  Company has a conditional mandatory redemption requirement equal to the pro
  rata amortization of the remaining outstanding Series E Stock over the period
  that ends August 2008. If the Companys common shares are trading at an
  average price less than $1.67 per share on a conditional mandatory redemption
  date, the Company will pay cash at the original investment amount per share
  plus a 20% redemption premium. The holder of the Series E Stock may only convert
  up to a maximum of $1,250,000 of Series E Stock into common stock in any 30
  day period. Each share of Series E Stock will be automatically converted into
  common stock immediately upon the consummation of the occurrence of a stock
  acquisition, merger, consolidation, or reorganization of the Company. The Series
  E Convertible Preferred Stock investor, Cornell Capital Partners, chose to waive
  the monthly conditional mandatory redemption payments otherwise due on December
  1, 2006 through March 31, 2007.

77

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

In accordance with SFAS No. 150,
  Accounting for Certain Instruments with Characteristics of Both Liabilities
  and Equity, the Company has determined that the limited redemptions due
  from April 1, 2007 through July 1, 2007 totalling $2,350,000 have met the characteristics
  of a liability and, therefore, have been classified as a current liability in
  the Companys financial statements for its fiscal year ended March 31,2007.
  Subsequent to March 31, 2007 and through July 1, 2007, the investor has elected,
  in lieu of a cash payment, to accept a limited redemption, totaling $2,350,000
  plus accrued and unpaid dividends, which has been converted into 4,767,038 shares
  of the Company's common stock at a conversion rate of $0.50 per share. These
  shares met the condition of being mandatorily redeemable based on the trailing
  five day stock price preceeding the assessment date. See Note 16 for additional
  discussion regarding this subsequent event related to the conditional mandatory
  redemption of the Series E Stock.

|Note 13. | Common Stock
|-------- | ------------

On July 21, 2006, the Company
entered into an agreement with GeoMechanics International, Inc. (GMI) pursuant
to which GMI shall provide certain technical services to the Coos Bay project
during the 2006/2007 drilling season in return for 125,000 shares of the common
stock of the Company. These technical services were valued at $227,500 and
include geomechanical evaluation, modeling and advisory services. The Company
recorded the related services as prepaid expense, subject to amortization as the
services are provided. During the fiscal year ended March 31, 2007, a total of
$167,318 in related services was amortized from the prepaid expense account and
recorded in oil and gas properties.

On July 19, 2005, the Company
received gross proceeds of $3,300,000 pursuant to a private placement of
1,650,000 shares of common stock at $2.00 per share. Finders fees paid on this
transaction totalled $25,000.

|Note 14. | Shareholder Loan
|-------- | ----------------

During the year ended March 31,
2005, the Company received proceeds of $80,000 from a shareholder. On January
17, 2005, the shareholder loan was repaid in full with no interest. No imputed
interest was recorded as it is deemed insignificant.

78

---

|TORRENT ENERGY CORPORATION                      
|------------------------------------------------
|(formerly SCARAB SYSTEMS INC.)                  
|(An exploration stage enterprise)               
|Notes to
      Consolidated Financial Statements

|Note 15. | Commitments
|-------- | -----------

On January 1, 2007, the Company
entered into a consulting agreement for public and investor relations services
with a third party for a twelve month period ending December 31, 2007. The
agreement provides for payment of CND $7,500 per month with reimbursement of
certain expenses incurred by the consultant.

On January 1, 2007, the Company
entered into an additional consulting agreement for public and investor
relations services with a third party for a six-month period ending June 30,
2007. The agreement provides for payment of $7,000 per month with reimbursement
of certain expenses incurred by the consultant.

The Company has entered into
various operating lease agreements involving office spaces and equipment. These
leases are non-cancellable and expire in various dates through fiscal year 2009.
Future minimum lease payments under these non-cancellable operating leases as of
March 31, 2007 were $106,992 for fiscal year 2008 and $45,855 for the fiscal
year 2009. Rent expense incurred by the Company for the fiscal year ended March
31, 2007 was $132,273 (2006: $59,472; 2005: $19,520).

|Note 16. | Subsequent Events
|-------- | -----------------

As described in Note 12 regarding
  the Companys Series E Convertible Preferred Stock, the Company is obliged
  under certain circumstances to redeem its Series E shares from the investors
  in ratable monthly increments ending with a final redemption on August 1, 2008.
  The investor elected to waive the conditional mandatory redemption requirement
  through March 31, 2007. Subsequent to March 31, 2007, the investor has elected,
  in lieu of a cash payment, to accept temporarily a limited redemption, totaling
  to date $2,350,000 or 2,350 shares of the Series E Stock, plus accrued and unpaid
  dividends which has been converted into 4,767,038 shares of common stock based
  on a conversion rate of $.50 per share. The Company has no assurance that the
  investor will continue to limit the contractual redemption or to accept payment
  in shares of commons stock for the contractual redemption in the future.

On May 22, 2007, Cascadia Energy
Corp. acquired an additional 8,194 acres from the State of Washington Trust,
which acreage is adjacent or contiguous to Cascadia Energy Corp.s other acreage
in the Chehalis Basin. This acreage was acquired in a lease auction for the
aggregate consideration of $48,949 and this acreage has been included in the
Joint Venture referenced in Note 4 above.

79

---

Supplemental Information  Quarterly Financial Data (
Unaudited)

Financial Information by Quarter (Unaudited)June 30
    September 30
    December 31
    March 31For the fiscal year ended March 31, 2007 Net
      Loss Basic and diluted (loss) per share For the fiscal year
      ended March 31, 2006 Net Loss Basic and diluted (loss) per
      share For the fiscal year ended March 31, 2005 Net Loss
      Basic and diluted (loss) per share
    $( 2,405,440) $( 0.08) $(
      1,345,998) $( 0.06) $( 675,319) $( 0.05)
    $( 2,023,157) $( 0.06) $(
      1,172,269) $( 0.05) $( 442,507) $( 0.03)
    $( 1,717,966) $( 0.05) $(
      1,118,433) $( 0.04) $( 1,053,514) $( 0.07)
    $( 1,618,864) $( 0.05) $(
      1,658,872) $( 0.07) $( 530,120) $( 0.01)


|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON **ACCOUNTING AND FINANCIAL DISCLOSURES**
|------- | -----------------------------------------------------------------------------------------------

Ernst & Young LLP was
dismissed on March 28, 2006 as our independent auditors. Ernst & Young LLPs
report dated June 3, 2005, on our consolidated balance sheet as of March 31,
2005, and the related consolidated statement of stockholders equity (deficit)
from October 8, 2001 (inception) to March 31, 2005, consolidated statement of
operations for the year ended March 31, 2005 and for October 8, 2001 (inception)
to March 31, 2005 and consolidated statement of cash flows for the years ended
March 31, 2005 and for October 8, 2001 (inception) to March 31, 2005, did not
contain an adverse opinion or disclaimer of opinion, or qualification or
modification as to uncertainty, audit scope, or accounting principles. However
Ernst & Young LLP included an explanatory paragraph in their report with
respect to uncertainty as to our ability to continue as a going concern.

In connection with the audit of
our consolidated financial statements, and in the subsequent interim periods,
there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Ernst &
Young LLP would have caused Ernst & Young LLP to make reference to the
matter in their report. Ernst & Young LLP furnished us with a letter
addressed to the Commission stating that they agree with the above statements. A
copy of that letter, dated April 26, 2006, is filed as Exhibit 16 to our Form
8-K filed on April 27, 2006. We engaged Peterson Sullivan PLLC on March 28, 2006
as our principal accountant to audit our consolidated financial statements. The
decision to change accountants was approved by our board of directors.

During the years ended March 31,
  2005 and 2004, neither we nor anyone on our behalf consulted with Peterson Sullivan
  PLLC regarding either the application of accounting principles to a specified
  transaction, either completed or proposed, or the type of audit opinion that
  might be rendered on our consolidated financial statements, nor has Peterson
  Sullivan PLLC provided to us a written report or oral advice regarding such
  principles or audit opinion or any matter that was the subject of a disagreement
  or reportable events set forth in Item 304(a)(iv) and (v), respectively, of
  Regulation S-K with our former accountant.

80

---

|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

As required under the Securities
Exchange Act of 1934, as of the end of the period covered by this annual report,
being March 31, 2007, we have carried out an evaluation of the effectiveness of
the design and operation of our Companys disclosure controls and procedures.
This evaluation was carried out under the supervision and with the participation
of our Companys management, including our Companys president and chief
executive officer and our chief financial officer. Based upon that evaluation,
our Companys president and chief executive officer and our chief financial
officer concluded that our Companys disclosure controls and procedures are
effective as at the end of the period covered by this report. There have been no
changes in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect our internal controls
over financial reporting.

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

|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

81

---

PART III

|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND
      CORPORATE **GOVERNANCE**
|-------- | -----------------------------------------------------------------

As of July 6, 2007, our directors
and executive officers, their ages, positions held, and duration as such, are as
follows:

Name
    Position Held with our Company
    Age
    Date First Elected or
      AppointedJohn D. Carlson
    President, Chief Executive Officer and Director
    53
    June
      30, 2004George L. Hampton
      III
    Director
    54
    August
      3, 2004Curtis Hartzler
    Director
    50
    October 6, 2006William A. Lansing
    Chairman and Director
    61
    May 2,
      2006Michael Raleigh
    Director
    50
    October 6, 2006Michael D. Fowler
    Chief
      Financial Officer, Treasurer and Secretary
    63
    January 16, 2006


All directors of our Company hold
office until the next annual meeting of the stockholders or until their
successors have been elected and qualified. Currently there are four seats on
our board of directors. Currently, each non-executive director receives $7,500
per quarter for their services and is reimbursed for their expenses incurred to
attend meetings. The officers of our Company are appointed by our board of
directors and serve until their successors are appointed by the board of
directors or until their death, resignation or removal from office. During the
past fiscal year, there have been no changes to the procedures by which security
holders may recommend nominees to our board of directors.

Business Experience

The following is a brief account
of the education and business experience of each of our directors, executive
officers and key employees during at least the past five years, indicating each
persons principal occupation during the period, and the name and principal
business of the organization by which he or she was employed.

John D. Carlson, President, Chief Executive Officer and
Director

John D. Carlson became president
and chief executive officer of our Company on January 16, 2006 and has been a
director since June 2004. Mr. Carlson has also been chief operating officer of
our Company's wholly owned subsidiary, Methane Energy Corp. since May 2005 and a
director since January 2006. Mr. Carlson was also appointed director of our
wholly owned subsidiary, Cascadia Energy Corp. in January 2006.

Mr. Carlson brings to our Company
  over 25 years experience as a registered professional petroleum engineer with
  work experience ranging from Amoco Canada to Sproule Associates Ltd. to several
  private and public oil and gas companies in Alberta. Since June 2005, Mr. Carlson
  has been a director of Triangle Petroleum Corporation. From February 2004 to
  July 2004, Mr. Carlson was president and a director of Pacific Rodera Energy
  Inc., a Calgary-based oil and gas exploration and development company.

82

---

From September 2003 to January 2004, Mr. Carlson was vice president,
  operations for Pacific Rodera Energy Inc. From September 2001 to December 2003,
  Mr. Carlson was president of Samson Oil and Gas Inc., a Hobbema, Alberta-based
  oil and gas exploration and development company where he was also general manager
  from January 2001 to August 2001. From 1984 to 2000, Mr. Carlson was an associate
  and senior petroleum engineer for Sproule Associates, Ltd. Mr. Carlson received
  a bachelor of science degree in civil engineering from the University of Calgary
  in 1977.

George L. Hampton III, Director

George L. Hampton III has been a
director of our Company since August 2004. From 1994 to 1997, and from 2000 to
present, Mr. Hampton has been a partner of GeoTrends-Hampton International, LLC,
a coalbed methane exploration company based out of the Pacific Northwest. From
1998 to May 2005, Mr. Hampton was a member and geologic consultant for Hampton,
Waechter & Associates, LLC, a Denver, Colorado-based geological company.
Since June 1986, Mr. Hampton has been president and chief geological consultant
for Hampton & Associates, Inc., a Denver, Colorado-based coalbed methane
exploration company. From April 1998 to April 1999, Mr. Hampton was project
manager and senior geologist for Pennaco Energy Corporation, a Denver,
Colorado-based coalbed methane exploration company. From 1996 to 1997, Mr.
Hampton was chief geologist for Thermal Energy Corporation, a Tulsa,
Oklahoma-based coalbed methane exploration company. From 1995 to 2001, Mr.
Hampton was founding partner and technical manager of Cairn Point Publishing,
Inc., a Denver, Colorado-based publishing company that published International
Coal Seam Gas Directory (1996) and The International Coal Seam Gas Report
(1997). Mr. Hampton has written and co-written a half-dozen articles on coalbed
methane exploration and has provided testimony before several state oil and gas
commissions. Mr. Hampton received a bachelor of sciences degree in geology from
Brigham Young University in 1977 and a masters degree in geology from Brigham
Young University in 1979.

Curtis Hartzler, Director

Curtis Hartzler has been a
director of our Company since October 2006. Mr. Hartzler has extensive oil and
gas industry experience, having served in an executive capacity for both public
and private resource companies in Calgary, Alberta. Since 2005, Mr. Hartzler has
served as president of G2 Resources Ltd., a Calgary-based public oil and gas
company. From 2003 to 2005, he was the president of Goose River Resources Ltd.,
also a Calgary-based public oil and gas company. Prior thereto, Mr. Hartzlers
experience includes advisory board service with Rosetta Exploration Ltd. from
2001 to 2004 and service as a Director of Epic Oil & Gas Ltd., a public
company which held coalbed methane leases in Washington state. He was president
of Birchill Resources Ltd., a private oil and gas company from 1991 to 2000. Mr.
Hartzler received a degree in mechanical engineering from the University of
Calgary in 1972.

William A. Lansing, Director

William A. Lansing has been a director
  since May 2, 2006 and was appointed chairman of the board of directors in October
  2006. Mr. Lansing has extensive experience in the forest products industry in
  senior executive roles.

83

---

From 2001 to April 2006, Mr. Lansing served as president, chief
  executive officer and a director of Menasha Forest Products Corporation. From
  1970 to 2001, he was involved with Menasha Corporation, a family-owned multi-product
  company that is located in 23 states and foreign countries. Mr. Lansing took
  on various roles at Menasha Corporation including research forester from 1970
  to 1973, chief forester from 1973 to 1975, assistant general manager from 1975
  to 1978, general manager from 1978 to 1982, vice president and general manager
  from 1982 to 1995, and president from 1995 to 2001. Mr. Lansing received his
  bachelor of sciences degree from Humboldt State University in 1967 and a master
  of finance degree from Yale University in 1970 as well as completed post graduate
  advanced management programs at Stanford University.

Michael Raleigh, Director

Michael Raleigh has been a
director of our Company since October 2006 and has 27 years of experience in the
oil and gas industry. Since 2005, Mr. Raleigh has served as managing director of
Domain Energy Advisors, LLC, an advisory service providing technical and
commercial expertise to independently managed funds investing in private and
public small cap exploration and production companies. From 1985 through 2004,
Mr. Raleigh was affiliated with Schlumberger Oilfield Services and served in a
variety of senior technical advisory roles providing petroleum engineering,
management and business development expertise for projects ranging across North
and South America, the United Kingdom North Sea, Russia, the Caspian Sea and the
Middle East. Mr. Raleigh holds a 1979 bachelor of science degree in chemical
engineering from Queens University in Ontario, Canada and an MBA from the
University of Colorado awarded in 1993.

Michael D. Fowler, Chief Financial Officer, Treasurer and
Secretary

Michael Fowler became the chief
financial officer, treasurer and secretary of our Company on January 16, 2006
and has been providing consulting services to our Company since September 2005.
Mr. Fowler was also appointed chief financial officer, treasurer and secretary
of our wholly-owned subsidiaries, Methane Energy Corp. and Cascadia Energy
Corp., effective January 16, 2006.

Mr. Fowler brings to our Company
30 years of senior financial management experience from a variety of companies
including Northwest Energy Company, Grand Valley Gas Company, First Interstate
Bank of Utah, Pacific West Bank and Tatum LLC. From April 2000 to November 2000,
Mr. Fowler served as chief financial officer of Asphalt Exchange Inc., a
start-up e-commerce operation. From April 2001 to December 2002, he served as
chief financial officer of Wellpartner Inc., a mail-order/on-line pharmacy
operation. From February 2003 to November 2005, Mr. Fowler acted as consultant
to various companies including Vanguard National Mortgage, MILA Financial Inc.,
Qsent, Inc., United Pacific Mortgage, Inc., Schnitzer Steel Corporation,
Portland Teachers Credit Union, Endovascular Instruments, Inc., Apex
Construction Systems, Inc. and Swan Island Networks, Inc. From July 2004 to
November 2005, Mr. Fowler was part-time chief financial officer for Pacific West
Bank, a start-up state-chartered bank. Mr. Fowler has more than twelve years of
public company, senior financial management experience in various segments of
the energy industry. He holds a master of business administration and a bachelor
of sciences electrical engineering.

84

---

Family Relationships

There are no family relationships
among our directors or officers.

Involvement in Certain Legal
Proceedings

Our directors, executive officers
and control persons have not been involved in any of the following events during
the past five years:

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

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

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

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

Audit Committee Financial Expert

The Companys Audit Committee
  of the Board of Directors is comprised of Mr. Lansing, Mr. Raleigh, and Mr.
  Hartzler. Our board of directors has determined that Mr. Lansing qualifies as
  an audit committee financial expert as defined in Item 401(e) of
  Regulation S-B, and is independent as the term is used in Item 7(d)(3)(iv)
  of Schedule 14A under the Securities Exchange Act of 1934, as amended.

Code of Ethics

Our Companys board of directors
adopted a Code of Business Conduct and Ethics that applies to, among other
persons, our Companys president and chief executive officer (being our
principal executive officer) and our Companys chief financial officer (being
our principal financial and accounting officer and controller), as well as
persons performing similar functions.

85

---

As adopted, our Code of Business Conduct and Ethics sets forth
written standards that are designed to deter wrongdoing and to promote:

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

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

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

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

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

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

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

Our Code of Business Conduct and
Ethics for Senior Financial Officers was filed with the Securities and Exchange
Commission as Exhibit 14.1 to our annual report on Form 10-KSB for the year
ended March 31, 2005. We will provide a copy of the Code of Business Conduct and
Ethics for Senior Financial Officers to any person without charge, upon request.
Requests can be sent to: Torrent Energy Corporation, 1 SW Columbia Street, Suite
640; Portland, Oregon 97258.

86

---

Section 16(a) Beneficial Ownership Compliance

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

Based solely on our review of the
copies of such forms received by our Company, or written representations from
certain reporting persons that no Form 5s were required for those persons, we
believe that, during the fiscal year ended March 31, 2007, all filing
requirements applicable to our officers, directors and greater than 10%
beneficial owners as well as our officers, directors and greater than 10%
beneficial owners of our subsidiaries, Methane Energy Corp. and Cascadia Energy
Corp. were complied with, with the exception of the following:

Name
      Number of
      Late Reports
      Number of Transactions Not Reported on a Timely Basis
      Failure to File
      Requested FormsJohn Douglas
      Carlson
    Nil
    Nil
    NilGeorge L. Hampton III
    2(1)
    2
    NilCurtis Hartzler
    Nil
    Nil
    NilWilliam A. Lansing
    Nil
    Nil
    NilMichael Raleigh
    Nil
    Nil
    NilMichael D. Fowler
    Nil
    Nil
    NilThomas J. Deacon
    1(1)
    1
    NilSteve Pappajohn
    4(1)
    4
    Nil


(1) The named officer, director
or greater than 10% shareholder, as applicable, filed a late Form 4 - Statement
of Changes in Beneficial Ownership.

87

---

|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The following tables set forth
certain information regarding our chief executive officer and each of our most
highly-compensated executive officers whose total annual salary and bonus for
the fiscal years ending March 31, 2007, 2006 and 2005 exceeded $100,000:

SUMMARY COMPENSATION TABLEName and principal position
      Fiscal 
        Year
      Salary 
        ( $ )
      Bonus 
        ( $ )
      Stock 
        Awards 
        ( $ )
      Option 
        Awards 
        ( $ )
      Non-equity 
        Incentive Plan 
        Compensation 
        ( $ )
      Change in 
        Pension Value 
        and Non-qual. 
        Deferred 
        Comp 
        Earnings 
        ( $ )
      All Other 
        Compensation 
        ( $ )
      Total 
        ( $ )John D. Carlson, President & 
        Chief Executive Officer, 
        Director
      2007
        2006
        2005
      198,584(1) 
        157,627(1) 
        -
      500(2)
        -
      -
        -
      575,000(3)
        177,626(3)
        42,477(3)
      -
        -
      -
        -
      -
        10,000(4)
        2,500(4)
      774,084
        345,253
        44,977Mark Gustafson, Chairman, 
        President & Chief Executive 
        Officer, Treasurer & Secretary
      2007
        2006
        2005
      65,045(5)
        152,261(5)
        60,990(5)
      79,500(6)
        -
        -
      -
        -
        -
      - 
        355,252(7)
        199,112(7)
      -
        -
        -
      -
        -
        -
      -
        5,000(8)
        2,500(8)
      144,545
        512,513
        262,602Michael D. Fowler, Chief 
        Financial Officer, Treasurer & 
        Secretary
      2007
        2006
        2005
      180,000(9) 
        45,000(9) 
        -
      15,500(2),(10) 
        5,000(10) 
        -
      -
        -
        -
      -
        417,617(11) 
        -
      -
        -
        -
      -
        -
        -
      -
        -
        -
      195,500 
        467,617 
        -


88

---

(1) John D. Carlson became our
president and chief executive officer on January 16, 2006. On January 16, 2006,
we entered into a letter of employment with Mr. Carlson where we agreed to pay
him an annual base salary of $200,000 commencing January 16, 2006. Of the
$157,627 that was paid to Mr. Carlson in fiscal 2006, $41,667 relates to annual
salary and $115,960 relates to payments for consulting services prior to his
appointment as president and chief executive officer.

(2) John D. Carlson was paid a
Christmas bonus of $500 as were all other employees of our Company.

(3) We granted to Mr. Carlson
stock options to purchase 250,000 shares of our common stock on May 10, 2006 as
consideration for his service as president and chief executive officer. The
options are exercisable at $2.97 per share until May 10, 2011 and vest over 18
months with 25% vesting immediately and additional 25% increments vesting every
six months until November 10, 2007.

We granted to Mr. Carlson stock
options to purchase 200,000 shares of our common stock on April 1, 2005 as an
incentive for acting as a director of our Company. The options are exercisable
at a price of $1.25 per share until April 1, 2010. These options vest over 18
months, as to 25% immediately and 25% every six months until September 17, 2006.

We granted to Mr. Carlson stock
options to purchase up to 45,000 shares of our common stock on August 3, 2004 as
an incentive for acting as a director of our Company. The options are
exercisable at a price of $0.50 per share until August 3, 2009. These options
vest over 18 months, as to 25% immediately and 25% every six months until fully
vested on December 31, 2005.

(4) John D. Carlson was paid a
retainer of $2,500 in fiscal 2005 and $10,000 in fiscal 2006 as compensation for
acting as a director of our Company.

(5) Mark Gustafson was our
chairman and a director from September 21, 2004 to October 6, 2006. He was also
our president, chief executive officer, acting chief financial officer from
September 21, 2004 to January 16 2006. On December 17, 2004, we entered into a
consulting agreement with MGG Consulting (wholly-owned by Mr. Gustafson), to
provide for services as our president, chief executive officer and acting chief
financial officer. We agreed to pay MGG Consulting $8,000 per month commencing
December 1, 2004 unless terminated at any time by either party upon written
notice. We then entered into a consulting agreement with MGG Consulting on
January 1, 2005 whereby the agreement was revised to pay MGG Consulting the sum
of $1,000 per day commencing January 1, 2005. Effective April 1, 2005, the
agreement was again amended to reduce the compensation rate to $800 per day.
Effective January 16, 2006, the compensation rate was restored to $1,000 per
day, which was his rate of compensation for service as our chairman and director
until his resignation on October 6, 2006. Please also refer to Item 12  Certain
Relationships and Related Transactions in this annual report.

(6) Mr. Gustafson was paid a
bonus of $79,500 for his work in completing the Series E convertible preferred
stock financing during fiscal 2007.

(7) We granted to Mr. Gustafson
stock options to purchase up to 400,000 shares of our common stock on April 1,
2005 as compensation for services as our president, chief executive officer and
acting chief financial officer. The options are exercisable at a price of $1.25
per share until April 1, 2010. These options vest over 18 months, as to 25%
immediately and 25% every six months until fully vested on September 17, 2006.

We granted to Mark Gustafson
stock options to purchase up to 540,000 shares of our common stock on May 7,
2004 as compensation for consulting services provided to our Company prior to
becoming our president, chief executive officer, acting chief financial officer
and a director. The options are exercisable at a price of $0.10 per share until
May 7, 2009. All of these options have been exercised.

(8) Mr. Gustafson was paid a
retainer of $2,500 in fiscal 2005 and $5,000 in fiscal 2006 as compensation for
acting as a director of our Company

89

---

(9) Michael D. Fowler became our
chief financial officer, treasurer and secretary on January 16, 2006. Prior to
this time, he was acting as a consultant to our Company. In December 2005, we
entered into a letter of employment with Mr. Fowler where we agreed to pay him
an annual base salary of $180,000 and to pay an annual performance-based bonus
of up to $20,000. The terms of the letter of employment were approved at our
board meeting held on January 13, 2006 where we officially appointed Mr. Fowler
as our chief financial officer, treasurer and secretary effective January 16,
2006. During the year ended March 31, 2007, Mr. Fowler received $15,000 in
performance-based bonuses and a $500 Christmas bonus, which was also paid to all
other employees of the Company.

(10) On August 11, 2005, we
entered into a contract with Tatum LLC to provide the services of Michael D.
Fowler as a consultant to our Company. During fiscal 2005, we paid Tatum LLC
$66,500 for consulting services provided by Mr. Fowler to December 31, 2005 and
$50,000 for a resource placement fee when we hired Mr. Fowler. Since January
2006, we have paid Tatum LLC a resource fee of $1,000 per month; and during this
period, Mr. Fowler has held less than a 0.05 percent interest in Tatum LLC (see
Item 12. Certain Relationships and Related Transactions).

(11) We granted to Mr. Fowler
stock options to purchase up to 250,000 shares of our common stock on January
16, 2006 as compensation for services as our chief financial officer, treasurer
and secretary. The options are exercisable at a price of $2.11 per share until
January 16, 2011. These options vest over 18 months, as to 25% immediately and
25% every six months until July 16, 2007.

Compensation Discussion and Analysis

General Philosophy. We
compensate our senior management using a combination of salary, bonus and equity
compensation designed to be competitive with comparable oil and gas companies
while aligning managements incentives with the long-term interests of our
stockholders. To date, our compensation setting process has consisted of
targeting an overall compensation package sufficient to entice our senior
management to accept the risks inherent in a development-stage enterprise and
join our Company. Consequently we have provided no salary increases to our
existing senior management team since their respective hire dates. We anticipate
developing a comprehensive incentive compensation program at such time as we
have further advanced the development of our Company to encompass gas production
activities.

Base Salaries. We want to
provide our senior management with a level of assured cash compensation in the
form of base salary that is compatible with the financial resources of a
development-stage company but which facilitates an appropriate lifestyle for our
executives given their professional status and accomplishments. For our
president and chief executive officer, we concluded that an initial base salary
of $200,000 was appropriate in this regard. For our chief financial officer, we
concluded that an initial base salary of $180,000 was appropriate.

Bonuses. Our objective is
to award cash bonuses based on performance objectives. For our chief financial
officer, we elected to select specific objectives related to successful
completion of SEC filings for which he may earn up to a maximum of $20,000 per
year. For the fiscal year ended March 31, 2007, he was paid cash bonuses
totaling $15,000 in this regard and received a Christmas bonus of $500, which
was paid to all employees of our Company. During the year ended March 31, 2007,
our president and chief executive officer has received only the $500 Christmas
bonus.

Equity Compensation. Our
  only form of equity compensation has been to award non-qualified stock options.
  We selected this form of equity compensation because of the accounting and tax
  treatments existing early in our Companys history and an expectation by
  our employees that stock options would provide upside to their compensation
  to balance their risk/reward expectations.

90

---

Other. We have no
severance benefits policy for our senior executives and employment is at will.
Similarly we have no company-funded retirement plans but do sponsor a 401(k)
plan for which no company matching contributions have been made. Finally, we
have no change of control protection for our executive management or for our
employees.

Board Process. The Board
of Directors has established a Compensation Committee, comprised exclusively of
independent outside directors. Two members of the Compensation Committee have
extensive executive level experience in other companies in the oil and gas
industry and bring a perspective of reasonableness to compensation matters
within our Company. Additionally, the chairman of the Compensation Committee
currently serves in a similar board position on two other publicly traded
companies and, in that capacity, regularly review compensation surveys for chief
executive officers and other executive level personnel.

The Compensation Committee
approves all compensation and awards to executive management, which includes the
president and chief executive officer and the chief financial officer. Generally
on its own initiative the Compensation Committee reviews the performance of the
president and chief executive officer and the chief financial officer and will
establish their compensation levels based on both the performance evaluation and
on comparable position studies provided by independent sources. With respect to
equity compensation, the Compensation Committee approves all option grants,
generally based on the recommendation of the president and chief executive
officer, and has delegated granting authority to the president and chief
executive officer.

91

---

The following table provides a summary of plan-based equity
awards to our current and past executive officers.

GRANTS OF PLAN-BASED AWARDSName and principal
      position
      Grant
      date
      Estimated future payouts under 
        non-equity incentive plan awards
      Estimated future payouts under 
        equity incentive plan awards
      All other stock awards:
        Number of shares of stock or units 
        (#)
      All other option
        awards: Number of securities underlying options 
        (#)
      Exercise or base price
        of option awards 
        ($)
      Market price at date
        of grant 
        ($)Threshold 
        ($)
      Target 
        ($)
      Maximum 
        ($)
      Threshold 
        (#)
      Target 
        (#)
      Maximum 
        (#)John D. Carlson, President & Chief 
        Executive
      Officer, Director
      July 28, 2004 
        April 1, 2005 May 10,
      2006
      - 
        - -
      - 
        - -
      - 
        - -
      - 
        - -
      - 
        - -
      - 
        - -
      - 
        - -
      45,000 
        200,000 250,000
      $ 0.50 
        $ 1.25 $ 2.97
      $ 0.95 
        $ 1.07 $ 2.97Mark Gustafson, Chairman, President & Chief
      Executive Officer, Treasurer & Secretary
      April 1, 2005
      -
      -
      -
      -
      -
      -
      -
      400,000
      $ 1.25
      $ 1.07Michael D. Fowler, Chief Financial 
        Officer,
      Treasurer & Secretary
      January 16, 2006
      -
      -
      -
      -
      -
      -
      -
      250,000
      $ 2.11
      $ 2.11


92

---

|Outstanding equity awards as of March 31, 2007 are
      summarized as follows:
|-------------------------------------------------------------------------------

OUTSTANDING EQUITY AWARDS AT FISCAL
      YEAR-ENDName and principal position
      Option Awards
      Stock AwardsNumber of securities underlying
        unexercised options 
        (#) Exercisable
      Number of securities underlying
        unexercised options 
        (#) Unexercisable
      Equity incentive plan awards:
        Number of securities underlying unexercised unearned options 
        (#)
      Option exercise price 
        ($)
      Option expiration date
      Number of shares of stock that
        have not vested 
        (#)
      Market value of shares that
        have not vested 
        ($)
      Equity incentive plan awards:
        Number of unearned shares that have not vested 
        (#)
      Equity incentive plan awards:
        Market or payout value of unearned shares that have not vested 
        ($)President John D. Carlson, & Chief 
        Executive
      Officer, Director
      45,000 
        200,000 
        125,000
      - 
        - 
        125,000
      - 
        - 
        -
      $ 0.50 
        $ 1.25 
        $ 2.97
      July 27, 2009 
        April 1, 2010 
        May 10, 2011
      - 
        - -
      - 
        - -
      - 
        - -
      - 
        - -Mark Gustafson, Chairman, President & Chief
      Executive Officer, Treasurer & Secretary
      400,000
      -
      -
      $ 1.25
      April 1, 2010
      -
      -
      -
      -Michael D. Fowler, Chief Financial Officer,
      Treasurer & Secretary
      125,000
      125,000
      -
      $ 2.11
      January 16, 2011
      -
      -
      -
      -


93

---

As indicated in the table below,
no stock options were exercised by our executive officers during the fiscal year
ended March 31, 2007.

OPTION EXERCISES AND STOCK VESTINGName and principal position
    Number of shares acquired on
      exercise ( # )
    Value realized on exercise
      ( $ )
    Number of shares acquired on
      vesting ( # )
    Value realized on vesting
      ( $ )John D. Carlson, President & Chief Executive
      Officer, Director
    -
    -
    -
    -Mark Gustafson, Chairman, President & Chief
      Executive Officer, Treasurer & Secretary
    -
    -
    -
    -Michael D. Fowler, Chief Financial Officer, Treasurer
      & Secretary
    -
    -
    -
    -


Compensation of Directors

Compensation paid to our board of
directors during the fiscal year ended March 31, 2007 is summarized as follows:

DIRECTOR
      COMPENSATIONName
    Fees earned or paid in cash
      ($)
    Stock awards ($)
    Option awards ($)
    Non-equity incentive plan
      compensation ($)
    Non-qualified deferred compensation
      earnings ($)
    All other compensation ($)
    Total ($)George L. Hampton
      III
    22,500
    -
    -
    -
    -
    12,540 (1)
    35,040Curtis Hartzler
    15,000
    -
    268,632 (2)
    -
    -
    -
    283,632William A. Lansing
    25,000
    -
    690,000 (3)
    -
    -
    -
    715,000Michael Raleigh
    15,000
    -
    268,632 (4)
    -
    -
    -
    283,632


|(1) | Mr. Hampton performed certain consulting services for our
      Company during the year ended March 31, 2007.                 
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(2) | Fair value of the 250,000 options granted October 6, 2006
      was computed pursuant to Financial Accounting Standard 123R.  
|(3) | Fair value of the 300,000 options granted May 10, 2006
      was computed pursuant to Financial Accounting Standard 123R.     
|(4) | Fair value of the 250,000 options granted October 6, 2006
      was computed pursuant to Financial Accounting Standard
  123R.

Except as noted below, we have
  no formal plan for compensating our directors for their service in their capacity
  as directors, although such directors are expected in the future to receive
  stock options to purchase shares of common stock as awarded by our board of
  directors. On December 17, 2004, our board of directors approved a resolution
  to pay our directors a quarterly retainer of $2,500 commencing January 1, 2005.

94

---

On May 1, 2006, our board of directors
  approved a resolution to pay new non-executive directors a quarterly retainer
  of $5,000 commencing April 1, 2006. Directors are also entitled to reimbursement
  for reasonable travel and other out-of-pocket expenses incurred in connection
  with attendance at meetings of our board of directors. On September 29, 2006,
  our board approved a resolution to pay non-executive directors a quarterly retainer
  of $7,500 commencing October 1, 2007. Our board of directors may award special
  remuneration to any director undertaking any special services on our behalf
  other than services ordinarily required of a director.

Employment Contracts and Termination of Employment and
Change in Control Arrangements

We employed Mark Gustafson as our
president, chief executive officer, acting chief financial officer and a
director until January 16, 2006 pursuant to a consulting agreement dated
December 17, 2004 between our Company and MGG Consulting, a company that is
wholly-owned by Mr. Gustafson. We agreed to pay MGG Consulting $8,000 per month
commencing December 1, 2004 unless terminated at any time by either party upon
written notice. We then entered into a consulting agreement with MGG Consulting
on January 1, 2005 whereby the agreement was revised to pay MGG Consulting the
sum of $1,000 per day commencing January 1, 2005. Effective April 1, 2005, the
agreement was again amended to reduce the compensation rate to $800 per day.
Effective January 16, 2006, the compensation rate was restored to $1,000 per
day, which was his rate of compensation for service as our chairman and director
until his resignation on October 6, 2006.

Prior to Mr. Gustafson becoming
our president, chief executive officer, acting chief financial officer and a
director, we had entered into a consulting agreement dated February 16, 2004
with MGG Consulting where we granted 490,000 options to Mr. Gustafson as
compensation for acting as a consultant to our Company. All of these options
have been exercised. We entered into a consulting agreement dated March 24, 2004
with MGG Consulting where we granted 320,000 options to Mr. Gustafson as
compensation for acting as a consultant to our Company. We also granted to Mr.
Gustafson stock options to purchase up to 540,000 shares of our common stock on
May 7, 2004 as compensation for consulting services provided to our Company. All
of these options have been exercised.

We employ both John Carlson, our
president and chief executive officer, and Michael Fowler, our chief financial
officer, on an at will basis whereby no formal employment agreements exist. Both
Mr. Carlson and Mr. Fowler have signed agreements to provide a minimum of 30
days notice in the event they chose to resign their positions.

We have no plans or arrangements
in respect of remuneration received or that may be received by our executive
officers to compensate such officers in the event of termination of employment
as a result of resignation, retirement, change of control or a change of
responsibilities following a change of control, where the value of such
compensation exceeds $100,000 per executive officer.

95

---

|ITEM 12. | SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
      OWNERS AND **MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
|-------- | ----------------------------------------------------------------------------------------------------------

The following table sets forth
certain information regarding beneficial ownership of our shares of common stock
as of July 6, 2007,

- by each person who is known by us to beneficially own more than 5% of our
  shares of common stock;
- by each of our officers and directors; and
- by all of our officers and directors as a group.

Name and Address of Beneficial
      Owner
    Title of Class
    Amount and Nature of
      Beneficial Owner(1)
    Percentage of
      Class(2)John D. Carlson Box 13, Site 8, RR #1 Priddis,
      Alberta, Canada T0L 1W0
    common stock
    487,500(3)
    1.32%George L. Hampton III 11 Inverness Way South
      Englewood, Colorado, USA 80112
    common stock
    920,000(4)(5)
    2.50%Curtis Hartzler 49 Tuscany Estates Cres. NW
      Calgary, Alberta, Canada T3L 0B2
    common stock
    125,000(6)
    0.34%William A. Lansing 93962 Bridge View Lane North
      Bend, Oregon, USA 97459
    common stock
    230,000(7)
    0.63%Michael Raleigh Suite 550 10000 Memorial Drive
      Houston, Texas, USA 77024
    common stock
    125,000(8)
    0.34%Michael D. Fowler 17385 Wall Street Lake Oswego,
      Oregon, USA, 97034
    common stock
    250,000(9)
    0.68%All Officers and Directors As a Group (6 persons)
    common stock
    2,137,500
    5.63%


| | (1) | Beneficial ownership is determined in accordance with the
      rules of the Securities and Exchange Commission and generally includes
      voting or investment power with respect to securities. Shares of common
      stock subject to options or warrants currently exercisable or convertible,
      or exercisable or convertible within 60 days of July 9, 2007 are deemed
      outstanding for computing the percentage of the person holding such option
      or warrant but are not deemed outstanding for computing the percentage of
      any other person.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

96

---

| | (2) | Percentage based on 36,561,953 shares of common stock
      outstanding on June 27, 2007 plus additional shares for options
    above.                                                                                               
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                      
| | (3) | Includes 257,500 options currently exercisable, which
      includes the exercisable portion of 250,000 options granted on May 10,
      2006.                                                                                       
| |     |                                                                                                                                                                                                                                      
| | (4) | Includes 245,000 options currently exercisable.                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                      
| | (5) | Mr. Hampton owns 50% of GeoTrends-Hampton International
      LLC. On August 8, 2005, GeoTrends-Hampton International LLC transferred
      450,000 shares of our common stock into the personal name of George L.
      Hampton III.
| |     |                                                                                                                                                                                                                                      
| | (6) | Includes 125,000 options currently exercisable, which
      includes the exercisable portion of 250,000 options granted on October 6,
      2006.                                                                                    
| |     |                                                                                                                                                                                                                                      
| | (7) | Includes 225,000 options currently exercisable, which
      includes the exercisable portion of 300,000 options granted on May 10,
      2006.                                                                                       
| |     |                                                                                                                                                                                                                                      
| | (8) | Includes 125,000 options currently exercisable, which
      includes the exercisable portion of 250,000 options granted on October 6,
      2006.                                                                                    
| |     |                                                                                                                                                                                                                                      
| | (9) | Includes 187,500 options currently exercisable, which
      includes the exercisable portion of 250,000 options grated on January 16,
      2006.                                                                                    

Changes in Control

We are unaware of any contract or
other arrangement the operation of which may at a subsequent date result in a
change in control of our Company.

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS
|-------- | ----------------------------------------------------

Other than as disclosed below,
there have been no transactions, or proposed transactions, which have materially
affected or will materially affect us in which any director, executive officer
or beneficial holder of more than 10% of the outstanding shares of common stock,
or any of their respective relatives, spouses, associates or affiliates, has had
or will have any direct or material indirect interest.

We received proceeds of $80,000
pursuant to a shareholder loan from Ettinger Investment Corp. The loan was to be
repaid by January 22, 2005 or we would be required to pay interest at 12% per
annum in respect of the loan. If the loan was repaid prior to January 22, 2005,
the loan would bear no interest. On January 17, 2005, we repaid the shareholder
in full with no interest.

During the fiscal years ended
March 31, 2007, 2006 and 2005, we incurred consulting charges from MGG
Consulting, which is wholly-owned by Mark Gustafson, our previous president,
chief executive officer, acting chief financial officer until January 16, 2006.
Please refer to Item 10  Executive Compensation  Summary Compensation Table of
this annual report.

97

---

During the year ended March 31,
2007, our Company recorded $780,266 in consulting fees to our directors and
officers. In addition, we paid our officers and directors $46,558 for consulting
fees relating to our oil and gas leases and $56,823 for geological and
geophysical consulting fees, both of which are included in the costs of the oil
and gas properties. During the year ended March 31, 2007, our Company also paid
directors fees to related parties serving in that capacity, a total of $77,500.

During the year ended March 31,
2006, our Company paid Tatum LLC a total of $119,500 of which $3,000 was paid
during the period Michael Fowler became our chief financial officer. During the
year ended March 31, 2007, we paid Tatum LLC a total of $26,250. During this
period, Mr. Fowler held an ownership interest in Tatum LLC of less than 0.05
percent.

We have no policy regarding entering into transactions with
affiliated parties.

Transactions with Promoters

The promoters of our Company are our directors and officers.

|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

Audit Fees

The aggregate fees billed by
Peterson Sullivan PLLC for professional services rendered for the audit of our
annual consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ended March 31, 2007 are estimated at $38,000. During
the fiscal year ending March 31, 2007, fees billed by Peterson Sullivan PLLC for
quarterly interim financial statement reviews and services in connection with
registration statements and other filings with the Securities and Exchange
Commission were $30,577.

The aggregate fees billed by
Peterson Sullivan PLLC for professional services rendered in connection with the
audit of our consolidated financial statements included in our Annual Report on
Form 10-KSB for the fiscal year ended March 31, 2006 were $33,935. The aggregate
fees billed by Peterson Sullivan PLLC for professional services rendered for the
audit of our consolidated financial statements for the fiscal year ended March
31, 2005 and included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2007 are estimated at $15,000.

The aggregate fees billed by
Ernst & Young LLP for professional services rendered for the audit of our
annual consolidated financial statements included in our Annual Report on Form
10-KSB for the fiscal year ended March 31, 2005 were CDN$30,000. During the
fiscal year ending March 31, 2006, fees billed by Ernst & Young LLP for
quarterly interim financial statement reviews and services in connection with
registration statements and other filings with the Securities and Exchange
Commission were CDN$26,300.

Audit Related Fees

For the fiscal years ended March
  31, 2007 and March 31, 2006, the aggregate fees billed for assurance and related
  services by Peterson Sullivan PLLC relating to the performance of the audit
  of our consolidated financial statements which are not reported under the caption
  Audit Fees above, were nil.

98

---

For the fiscal year ended March 31, 2006, the aggregate fees
  billed for assurance and related services by Ernst & Young LLP relating
  to the performance of the audit of our consolidated financial statements which
  are not reported under the caption Audit Fees above, were nil.

For the fiscal year ended March
31, 2005, the aggregate fees billed for assurance and related services by Ernst
& Young LLP relating to the performance of the audit of our consolidated
financial statements which are not reported under the caption Audit Fees
above, were nil.

Tax Fees

For the fiscal year ended March
31, 2007, the aggregate fees billed by Peterson Sullivan PLLC for other
non-audit professional services, other than those services listed above, were
$5,010.

For the fiscal year ended March
31, 2007, the aggregate fees billed by Ernst & Young LLP for other non-audit
professional services, other than those services listed above, were nil.

This category includes the fees
for professional services rendered for tax compliance, tax advice and tax
planning.

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

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

- approved by our audit committee (which currently consists of our entire
  board of directors); or
- entered into pursuant to pre-approval policies and procedures established
  by the audit committee, provided the policies and procedures are detailed as
  to the particular service, the audit committee is informed of each service,
  and such policies and procedures do not include delegation of the audit
  committees responsibilities to management.

The audit committee requires advance
  approval of all audit engagements, audit-related activities, tax services, and
  any other services performed by the independent auditor. Unless the specific
  service has been previously pre-approved with respect to that year, the audit
  committee must approve the permitted service before the independent auditor
  is engaged to perform it. The audit committee has delegated to the chair of
  the audit committee authority to approve permitted services provided that the
  chair reports any decisions to the committee at its next scheduled meeting.

99

---

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

PART IV

|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES
|-------- | ------------------------------------------------

Exhibit Number and Exhibit Title

|(3) | Articles of Incorporation and Bylaws
|--- | ------------------------------------

|3.1 | Restated Articles of
      Incorporation (incorporated by reference from our Annual Report on Form
      10-KSB/A filed on February 11, 2004).                                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2 | Articles of Amendment to the Restated Articles
      of Incorporation, changing the name to Torrent Energy Corporation
      (incorporated by reference from our Registration Statement on Form SB-2
      filed on March 30, 2005).
|3.3 | Articles of Amendment to the
      Restated Articles of Incorporation, creating Series B convertible
      preferred stock (incorporated by reference from our Current Report on Form
      8-K filed on September 1, 2004).        
|3.4 | Bylaws of our Company (incorporated by
      reference from our Annual Report on Form 10-KSB/A filed on February 11,
      2004).                                                                                                   
|3.5 | Articles of Amendment dated
      July 13, 2005 creating Series C convertible preferred stock (incorporated
      by reference from our Current Report on Form 8-K filed on July 20, 2005).                                         
|3.6 | Articles of Amendment dated June 16, 2006
      creating Series D convertible preferred stock (incorporated by reference
      from our Current Report on Form 8-K filed on June 30, 2006).                                         
|3.7 | Articles of Amendment dated
      June 28, 2006 creating Series E convertible preferred stock (incorporated
      by reference from our Current Report on Form 8-K filed on June 30, 2006).                                         
|(4) | Instruments Defining the Rights of Security
      Holders, including Indentures                                                                                                                                                     
|4.1 | Scarab Systems, Inc. 2004
      Non-Qualified Stock Option Plan (incorporated by reference from our
      Registration Statement on Form S-8 filed on February 19, 2004).                                                           
|4.2 | Amended 2005 Equity Incentive Plan, effective
      March 17, 2005 (incorporated by reference from our Registration Statement
      on Form S-8 filed on August 31, 2005).                                                          

100

---

|4.3   | Form of Stock Option Agreement for Amended 2005 Equity
      Incentive Plan (incorporated by reference from our Registration Statement
      on Form S-8 filed on August 31, 2005).                                                              
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10)  | Material Contracts                                                                                                                                                                                                                               
|10.1  | Lease Purchase and Sale Agreement between our Company,
      Methane Energy Corp. and Geo-Trends-Hampton International, LLC dated May
      11, 2004 (incorporated by reference from our Current Report on Form 8-K
      filed on May 20, 2004).
|10.2  | Amending Agreement to Lease Purchase and Sale Agreement
      dated May 19, 2004 (incorporated by reference from our Current Report on
      Form 8-K filed on June 23, 2004).                                                                   
|10.3  | Second Amending Agreement to Lease Purchase and Sale
      Agreement dated June 11, 2004 (incorporated by reference from our Current
      Report on Form 8-K filed on June 23, 2004).                                                           
|10.4  | Investment Rights Agreement dated August 27, 2004 between
      our Company and Cornell Capital Partners, L.P. (incorporated by reference
      from our Current Report on Form 8-K filed on September 1, 2004).                                 
|10.5  | Registration Rights Agreement dated August 27, 2004
      between our Company and Cornell Capital Partners, L.P. (incorporated by
      reference from our Current Report on Form 8-K filed on September 1, 2004).                               
|10.6  | Consulting Agreement dated January 1, 2005 between our
      Company and MGG Consulting (incorporated by reference from our
      Registration Statement on Form SB-2 filed on March 30, 2005).                                                  
|10.7  | Securities Purchase Agreement dated February 11, 2005
      between our Company and Placer Creek Investors (Bermuda) L.P.
      (incorporated by reference from our Registration Statement on Form SB-2
      filed on March 30, 2005).          
|10.8  | Securities Purchase Agreement dated February 11, 2005
      between our Company and Placer Creek Partners, L.P. (incorporated by
      reference from our Registration Statement on Form SB-2 filed on March 30,
      2005).                    
|10.9  | Securities Purchase Agreement dated July 11, 2005 between
      our Company and Placer Creek Partners, L.P. (incorporated by reference
      from our Current Report on Form 8-K filed on July 20, 2005).                                        
|10.10 | Securities Purchase Agreement dated July 11, 2005 between
      our Company and Placer Creek Investors (Bermuda) L.P. (incorporated by
      reference from our Current Report on Form 8-K filed on July 20, 2005).                              
|10.11 | Securities Purchase Agreement dated July 11, 2005 between
      our Company and SDS Capital Group SPC, Ltd. (incorporated by reference
      from our Current Report on Form 8-K filed on July 20, 2005).                                        

101

---

|10.12 | Investment Agreement dated July 12, 2005 between our
      Company and Cornell Capital Partners, L.P. (incorporated by reference from
      our Current Report on Form 8-K filed on July 20, 2005).                                                  
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13 | Investor Registration Rights Agreement dated July 12,
      2005 between our Company and Cornell Capital Partners, L.P. (incorporated
      by reference from our Current Report on Form 8-K filed on July 20, 2005).                                
|10.14 | Lease Option Agreement dated August 9, 2005 between
      Torrents wholly-owned subsidiary, Cascadia Energy Corp. and Weyerhaeuser
      Company (incorporated by reference from our Current Report on Form 8-K
      filed on August 18, 2005).    
|10.15 | Joint Venture Agreement dated August 12, 2005 between
      Torrents wholly-owned subsidiary, Cascadia Energy Corp. and St. Helens
      Energy, LLC (incorporated by reference from our Current Report on Form 8-K
      filed on August 18, 2005).
|10.16 | Option to Acquire Oil & Gas Lease with Pope Resources
      LP dated May 9, 2006 (incorporated by reference from our Current Report on
      Form 8-K filed on May 19, 2006).                                                                        
|10.17 | Investment Agreement dated June 28, 2006 between our
      Company and Cornell Capital Partners, L.P. (incorporated by reference from
      our Current Report on Form 8-K filed on June 30, 2006).                                                  
|10.18 | Registration Rights Agreement dated June 28, 2006 between
      our Company and Cornell Capital Partners, L.P. (incorporated by reference
      from our Current Report on Form 8-K filed on June 30, 2006).                                         
|(11)  | Statements regarding computation of per share earnings
      (See Note 2 to the **consolidated financial statements included
      in Item 8).**                                                                                                     
|(14)  | Code of Ethics                                                                                                                                                                                                                                       
|14.1  | Code of Business Conduct and Ethics (incorporated by
      reference from our Annual Report on Form 10-KSB filed on June 30, 2005).                                                                                                                  
|(16)  | Letter on change in certifying accountant                                                                                                                                                                                                            
|16.1  | Letter from Moore Stephens Ellis Foster Ltd. dated August
      25, 2005 regarding change in independent accountant (incorporated by
      reference from our Current Report on Form 8-K/A filed on September 13,
      2005).                       
|16.2  | Letters from Ernst & Young LLP dated March 30, 2006
      and April 26, 2006 regarding change in independent accountant
      (incorporated by reference from our Current Reports on Forms 8-K/A filed
      on April 7, 2006 and April 27, 2006).   
|(21)  | Subsidiaries                                                                                                                                                                                                                                         
|      | Methane Energy Corp., an Oregon company                                                                                                                                                                                                              

102

---

|     | Cascadia Energy Corp., a Washington company                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(23) | Consent of Experts and Counsel                                                                                                                                                      
|23.1 | Consent of Peterson Sullivan
        PLLC to incorporation by reference of audit report to the registration
        statement on Form S-8 filed on August 31, 2005 (filed herewith).
|(24) | Power of Attorney                                                                                                                                                                   
|24.1 | Power of Attorney (included on signature
        page).                                                                                                                             
|(31) | Section 302 Certifications                                                                                                                                                          
|31.1 | Section 302 Certification (filed
        herewith).                                                                                                                                 
|31.2 | Section 302 Certification (filed
        herewith).                                                                                                                                 
|(32) | Section 906 Certifications                                                                                                                                                          
|32.1 | Section 906 Certification (filed
        herewith).                                                                                                                                 
|32.2 | Section 906 Certification (filed
        herewith).                                                                                                                                 

103

---

SIGNATURES

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

TORRENT ENERGY CORPORATION

|By: */s/ John D. Carlson*                                     
|--------------------------------------------------------------
|John D. Carlson                                               
|President, Chief Executive Officer and Director               
|(Principal Executive Officer)                                 
|                                                              
|                                                              
|By: */s/ Peter Craven*                                        
|Peter Craven                                                  
|Chief Financial Officer, Treasurer and Secretary              
|(Principal Financial Officer and Principal Accounting Officer)
|                                                              
|Date: February 25, 2008                                       

104

---

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints John Carlson as his true and lawful attorney-in-fact and agent, with
full power of substitution and re-substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this annual report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of them, or of their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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 and in the capacities and on the
dates indicated.

|Signature                   |  | Title                              | Date             
|--------------------------- |  | ---------------------------------- | -----------------
|                            |  |                                    |                  
|*/s/ John D. Carlson*       |  |                                    |                  
|John D. Carlson             |  | President, Chief Executive Officer | February 25, 2008
|                            |  | and Director                       |                  
|                            |  |                                    |                  
|*/s/ George L. Hampton III* |  |                                    |                  
|George L. Hampton III       |  | Director                           | February 25, 2008
|                            |  |                                    |                  
|*/s/ Curtis Hartzler*       |  |                                    |                  
|Curtis Hartzler             |  | Director                           | February 25, 2008
|                            |  |                                    |                  
|*/s/ William A. Lansing*    |  |                                    |                  
|William A. Lansing          |  | Chairman and Director              | February 25, 2008
|                            |  |                                    |                  
|*/s/ Michael Raleigh*       |  |                                    |                  
|Michael Raleigh             |  | Director                           | February 25, 2008

105

---