---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

FORM 20-F

[]
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES
  EXCHANGE ACT OF 1934

OR

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2006 (with other information to September
  28, 2006 except where noted)

OR

[]
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934For the transition period from _______________to _______________

Commission file number 0-22500

TAG OIL LTD.(Exact name of
Registrant specified in its charter)

Not Applicable(Translation of Registrants
name into English)

YUKON TERRITORY, CANADA(Jurisdiction of
incorporation or organization)

Suite 1407, 1050 Burrard Street Vancouver, British
Columbia, Canada, V6Z 2S3(Address of principal executive
offices)

COMMON SHARES WITHOUT PAR VALUE(Title of
Class)

Securities registered or to be registered pursuant to Section
12(b) of the Act.

|Title of Each Class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|None                | Not applicable                           

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

Common Shares without Par Value
  (Title of Class)

---

Securities for which there is a reporting obligation pursuant
  to Section 15(d) of the Act.           None

Number of outstanding shares of TAG Oils only class of capital
stock as on March 31, 2006.

46,631,081 Common Shares Without Par Value (91,631,081
outstanding at September 28, 2006)

Indicate by check mark whether Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934during the preceding 12 months (or for such shorter
period that 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 which financial statement item Registrant
has elected to follow:

Item 17 [ X ]             Item
  18 []

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act):

Yes []            No
  [ X ]

(End of Cover Page)

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3

TABLE OF CONTENTS of the Form 20F of TAG Oil Ltd.

|GLOSSARY | 6                                                                                 
|-------- | ----------------------------------------------------------------------------------
|         |                                                                                   
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                             
|         |                                                                                   
|ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE                                           
|         |                                                                                   
|ITEM 3.  | KEY INFORMATION                                                                   
|         |                                                                                   
|ITEM 4.  | INFORMATION ON THE COMPANY                                                        
|         |                                                                                   
|ITEM 5.  | OPERATING, FINANCIAL REVIEW AND PROSPECTS                                         
|         |                                                                                   
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                        
|         |                                                                                   
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                 
|         |                                                                                   
|ITEM 8.  | FINANCIAL INFORMATION                                                             
|         |                                                                                   
|ITEM 9.  | THE OFFER AND LISTING                                                             
|         |                                                                                   
|ITEM 10. | ADDITIONAL INFORMATION                                                            
|         |                                                                                   
|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK                  
|         |                                                                                   
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                            
|         |                                                                                   
|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                   
|         |                                                                                   
|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
      AND USE OF PROCEEDS
|         |                                                                                   
|ITEM 15. | CONTROLS AND PROCEDURES                                                           
|         |                                                                                   
|ITEM 16. | AUDIT COMMITTEE, CODE OF ETHICS, ACCOUNTANTS FEES                                 
|         |                                                                                   
|ITEM 17. | FINANCIAL STATEMENTS                                                              
|         |                                                                                   
|ITEM 18. | FINANCIAL STATEMENTS                                                              
|         |                                                                                   
|ITEM 19. | EXHIBITS                                                                          

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- 4 -

Currency, Measurement and Glossary of Industry Terms

Currency and Measurement

All currency amounts are stated in Canadian dollars unless
otherwise indicated.

Conversion from metric into imperial units of measurement is as
follows:

|Metric Units   | Imperial Units          
|-------------- | ------------------------
|               |                         
|hectare        | 2.471 acres             
|metre (m)      | 3.281 feet              
|kilometre (km) | 0.621 miles (3,281 feet)

Industry Expressions

The following are industry expressions that may be used in this
Annual Report:

TAG, We, Our, CompanyorRegistrantrefers to TAG
Oil Ltd., a corporation organized and registered under the laws of Yukon,
Canada, and unless the context clearly requires, includes its subsidiaries.

AMIis an Area of Mutual Interest relating to joint
venture partners of two or more permits that have agreed to explore together, a
defined area within their permits.

Basin is a segment of the crust of the Earth which has
been downwarped and in which thick layers of sediments have accumulated over a
long period of time.

Depletion is the reduction in petroleum reserves due to
production.

Discovery is the location by drilling of a well of an
accumulation of gas, condensate or oil reserves, the size of which may be
estimated but not precisely quantified and which may or may not be commercially
economic, depending on a number of factors.

Entrapment is the geological structure in which
hydrocarbons build up to form an oil, condensate or gas field.

Exploration Well is a well drilled in a prospect without
knowledge of the underlying sedimentary rock or the contents of the underlying
rock.

Farm-In or Farm-Out refers to a common form of
agreement between petroleum companies where the holder of the petroleum interest
agrees to assign all or part of an interest in the ownership to another party
that is willing to fund agreed exploration activities which may be more or less
than the proportionate interest assigned to them.

Fault is a fracture in a rock or rock formation along
which there has been an observable amount of displacement.

Formation is a reference to a group of rocks of the same
age extending over a substantial area of a basin.

Geology is the science relating to the history and
development of the Earth, and is also used to refer to the make-up of the rocks
in a particular area.

Hydrocarbons is the general term for oil, gas,
condensate and other petroleum products.

Joint Ventureor JVrefers to a standard form of
participation in petroleum exploration, via unincorporated joint arrangements
between a number of industry participants, with one party operating

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- 5 -

the permit (ie managing the operations) on behalf of all the
participants, and Joint Venturers has a corresponding meaning.

Participating Interest or Working Interest is an
equity interest, compared with a royalty interest, in an oil and gas property
whereby the participating interest holder pays its proportionate percentage
share of development and operating costs and receives the equivalent share of
the proceeds of hydrocarbon sales after deduction of royalties or other imposts
due on gross income.

Permit or Licence is an area that is granted for
a prescribed period of time for exploration, development or production under
specific contractual or legislative conditions.

Preemptionis the right granted to a party in a Joint
Venture Operating Agreement to require another party, which party is proposing
to assign its interest in a permit or licence, to assign that interest to the
first party on the terms of the proposed assignment.

Prospect is a potential hydrocarbon trap which has been
confirmed by geological and geophysical studies to the degree that drilling of
an exploration well is warranted.

Reservoir is a porous and permeable sedimentary rock
formation containing adequate pore space in the rock to provide storage space
for oil, gas or water.

Royalty is the entitlement to a stated or determinable
percentage of the proceeds received from the sale of hydrocarbons calculated as
prescribed in applicable legislation or in the agreement reserving the royalty
to the owner of the royalty.

Seismic refers to a geophysical technique using low
frequency sound waves to determine the subsurface structure of sedimentary
rocks.

Shut-inrefers to a well that is suspended from
production, usually for operational reasons, such as in order to build up
pressure in the reservoir.

Trap is a geological structure covered by a seal in
which hydrocarbons build up to form an oil or gas reservoir.

Forward Looking Statements

Certain statements in this Annual Report constitute
forward-looking statements. These forward-looking statements are not guarantees
of our future operational or financial performance and are subject to risks and
uncertainties. When used in this Annual Report, the words estimate, intend,
expect, anticipate and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these statements, which speak only as of the date of this Annual Report. These
statements are subject to risks and uncertainties that could cause results to
differ materially from those contemplated in such forward-looking statements.

Such risks and uncertainties include, but are not limited to,
those identified under the subheading Risk Factors in Item 3 hereof.

Actual operational and financial results may differ materially
from our expectations contained in the forward-looking statements as a result of
various factors, many of which are beyond the control of the Company. These
factors include, but are not limited to, changes in the price of crude oil and
natural gas, adverse technical factors associated with exploration, changes or
disruptions in the political or fiscal regimes in our areas of activity, changes
in tax, energy or other laws or regulations, changes in significant capital
expenditures, delays in production starting up due to an industry shortage of
skilled manpower, equipment and or materials.

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- 6 -

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS

Not applicable

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable

ITEM 3. KEY INFORMATION

Selected financial data

The selected historical financial information presented in the
table below for each of the years ended March 31, 2006, 2005, 2004, 2003 and
2002, is derived from the audited consolidated financial statements of the
Company. The audited consolidated financial statements of the Company for the
years ended March 31, 2006, 2005 and 2004 are included in this filing. The
selected historical financial information for the years ended March 31, 2003 and
2002 presented in the table below are derived from audited consolidated
financial statements of the Company that are not included in this filing. The
selected financial information presented below should be read in conjunction
with our consolidated financial statements and the notes thereto (Item 17) and
the Operating and Financial Review and Prospects (Item 5) included elsewhere in
this filing.

The selected consolidated financial data has been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("Canadian
GAAP"). The consolidated financial statements included in Item 17 in this filing
are also prepared under Canadian GAAP. Included within these consolidated
financial statements in Note 9 is a reconciliation between Canadian and US
GAAP.

Under Canadian Generally Accepted Accounting Principles (in
Cdn$)

|                       | Year Ended March 31
|---------------------- | -------------------
|                       | 2006               
|                       | $                  
|Current Assets         | 20,072,798         
|Oil and Gas Properties | 9,155,763          
|Property and           |                    
|Equipment              | 30,836             
|Incorporation Costs    | -                  
|Total Assets           | 29,259,397         
|Share Capital          | 39,134,809         
|Deficit                | (12,104,977)       
|Interest Income        | 399,684            
|Rental Income          | -                  
|Net Loss               | (1,425,562)        
|Net Loss per Share     | (0.04)             

Please refer to Note 2 of Item 17, which includes the Companys
adopted recommendations of the Canadian Institute of Chartered Accountants.

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- 7 -

Under U.S. Generally Accepted Accounting Principles (in
Cdn$)

|                       | Year Ended March 31
|---------------------- | -------------------
|                       | 2006               
|                       | $                  
|Current Assets         | 20,072,798         
|Oil and Gas Properties | 7,982,969          
|Property and           |                    
|Equipment              | 30,836             
|Incorporation Costs    | -                  
|Total Assets           | 28,086,603         
|Share Capital          | 41,467,807         
|Deficit                | (15,111,523)       
|Cumulative             |                    
|Comprehensive Adj.     | (27,000)           
|Interest Income        | 399,684            
|Rental Income          | -                  
|Net Loss               | (1,425,562)        
|Net Loss per Share     | (0.04)             

Please refer to Note 9 of Item 17, which includes all material
differences between Canadian and US GAAP that are relevant in preparation of our
financial statements.

Given the nature of our operations and assets we are of the
view that for the two years ended March 31, 2006 and 2005 the foregoing
difference in Canadian and U.S. GAAP would not have resulted in any material
disclosure differences insofar as our financial results are concerned.

Exchange Rates

Our financial statements, as provided under Item 8 and 17 are
presented in Canadian Dollars. On March 31, 2006 the buying rate for Canadian
dollars was US $1.00 for Cdn$ 1.168. At the close of business on September 14,
2006 the buying rate for Canadian dollars was US$1.00 for Cdn$1.1178. Rates of
exchange are obtained from the Bank of Canada and believed by the Company to
approximate closely the rates certified for customs purposes by the Federal
Reserve Bank in New York.

The following table sets out the buying rate for Canadian
dollars for the six months preceding March 31, 2006:

|          | Oct 2005 | Nov 2005 | Dec 2005 | Jan 2006 | Feb 2006 | Mar 2006
|--------- | -------- | -------- | -------- | -------- | -------- | --------
|Month End | 1.1812   | 1.1669   | 1.1630   | 1.1390   | 1.1366   | 1.1680  
|Average   | 1.1770   | 1.1809   | 1.1613   | 1.1570   | 1.1489   | 1.1572  
|High (2)  | 1.1882   | 1.1937   | 1.1731   | 1.1706   | 1.1584   | 1.1719  
|Low (2)   | 1.1627   | 1.1669   | 1.1518   | 1.1390   | 1.1366   | 1.1314  

The following table sets out the buying rate for Canadian
dollars for the last five fiscal years:

|             | 2006   | 2005   | 2004   | 2003   | 2002  
|------------ | ------ | ------ | ------ | ------ | ------
|             |        |        |        |        |       
|Year End (1) | 1.1680 | 1.2096 | 1.3113 | 1.4678 | 1.5942
|Average      | 1.1935 | 1.2782 | 1.3527 | 1.5491 | 1.5655
|High (2)     | 1.2696 | 1.2834 | 1.4924 | 1.5988 | 1.6125
|Low (2)      | 1.1314 | 1.2742 | 1.2683 | 1.4628 | 1.5583

Notes:(1) Year end is March 31.(2) The high and low
buying rate figures are selected from daily high and low closing figures.

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- 8 -

Capitalization and indebtedness

Not applicable.

Reasons for the offer and use of proceeds

Not applicable.

Risk Factors

The common shares of our Company must be considered a
speculative investment due to a number of factors. An investment in our common
shares should only be made by persons who can afford to lose their entire
investment and there can be no assurance that our common shares will increase in
value. The purchase of the common shares involves a number of significant risk
factors. Purchasers of common shares should consider the following:

1. Failure to Locate Commercial Quantities of Hydrocarbons
and Geological Risks

Exploration for hydrocarbons is a speculative venture
necessarily involving substantial risk. There is no certainty that the
expenditures we incur on our exploration properties will result in discoveries
of commercial quantities of hydrocarbons. In addition, even if hydrocarbons are
discovered, the costs of extraction and delivering the hydrocarbons to market,
and variations in the market price may render any deposit found uneconomic.
Geological conditions are variable and unpredictable. Even if production is
commenced from a well, the production will inevitably decline and may be
affected or terminated by geological conditions that cannot be foreseen.

2. Marketability and Price of Oil and Natural Gas

The marketability and price of oil and natural gas that may be
acquired or discovered may be affected by numerous factors beyond our control.
We may be affected by the differential between the price paid by refiners for
light, quality oil and various grades of oil produced. We are subject to market
fluctuations in the prices of oil and natural gas, deliverability uncertainties
related to the proximity of reserves to pipeline and processing facilities and
government regulation relating to prices, taxes, royalties, land tenure,
allowable production, the export of oil and natural gas and many other aspects
of the oil and natural gas business.

Our operations will be further affected by the remoteness of,
and restrictions on access to, certain properties as well as climatic
conditions.

3. Limited Financial Resources

We have limited financial resources and, if our business is not
profitable, we may not be able to raise sufficient funds to sustain, continue or
expand our business. Although we currently have some operating revenues, these
revenues are not sufficient to sustain our exploration and development
activities and we continue to rely principally on the issuance of common shares
to raise funds to finance our business. There is no assurance that market
conditions will continue to permit us to raise necessary funds at all or on
acceptable terms.

4. History of Losses

The Company, at the date of this report, has one oil and gas
property in the production stage. The Company has an accumulated deficit from
its historical operating results and there is no assurance that the business of
the Company will be profitable in the future. A failure to generate sufficient
revenues may cause the Company to eventually go out of business. The Company has
not paid dividends at any time in its history to date and there is no assurance
that the Company will pay a dividend at any time in the future.

5. Dilution

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- 9 -

Our Articles of Continuance authorize the issuance of an
unlimited number of shares of common stock. We have several types of dilutive
securities outstanding and our Board of Directors has the power to issue further
shares without stockholder approval. Our Board of Directors may issue some of
such shares to acquire further capital in order to carry out our intended
operations or expand our current operations, or to provide additional financing
in the future. The issuance of any such shares may result in a reduction of the
book value or market price of our outstanding common shares. If we issue any
such additional shares, such issuance will also cause a reduction in the
proportionate ownership and voting power of all other shareholders. Further, any
such issuance may result in a change of control. TSX-V policies may require the
Company to obtain shareholder approval of any transaction which will result in
the creation of a new control person.

6. Environmental Risks

We are subject to laws and regulations that control the
discharge of materials into the environment, require removal and cleanup in
certain circumstances, require the proper handling and disposal of waste
materials or otherwise relate to the protection of the environment. In operating
and owning petroleum interests, we may be liable for damages and the costs of
removing hydrocarbon spills for which we are held responsible. Laws relating to
the protection of the environment have in many jurisdictions become more
stringent in recent years and may, in certain circumstances, impose strict
liability, rendering our Company liable for environmental damage without regard
to negligence or fault on the part of our Company. Such laws and regulations may
expose us to liability for the conduct of, or conditions caused by others or for
acts of our Company that were in compliance with all applicable law at the time
such acts were performed. The application of these requirements or the adoption
of new requirements could have a material adverse effect on our business. We
believe that we have conducted our business in substantial compliance with all
applicable environmental laws and regulations.

7. Indemnities may be Unenforceable or Uncollectable

The operating agreements we have with participants in a
property generally provide for the indemnification of the company that is the
operator. We do not operate all of our programs on our oil and gas properties
and may be requested to reimburse the company that is the operator for losses or
damages caused or incurred in the course of operations.

8. Title to Properties and Consequences of Failure to
Satisfy Prescribed Permit or Licence Terms and Conditions

In all cases, the terms and conditions of the permit or licence
granting us, or the party from which we acquired, the right to explore for, and
develop, hydrocarbons, prescribe a work program and the date or dates before
which such work program must be done. Varying circumstances, including the
financial resources available to us, rig availability and reliance on third
party operators of permits and licenses, or other circumstances beyond our
control or influence may result in the failure to satisfy the terms and
conditions of a permit or license and result in the complete loss of the
interest in the permit or license without compensation.

Such terms and conditions may be renegotiated with applicable
regulatory authorities, but there is no assurance that if a term or condition of
a license or permit that is required to be satisfied has not been met, that such
term or condition will be successfully renegotiated with the applicable
authority.

We participate in permits or licences with industry partners
with access to greater resources to meet their joint venture capital
commitments. If we are unable to meet our commitments, the other joint venture
participants may assume some or all of our deficiency and thereby assume a
pro-rata portion of our interest in any production from the joint venture area.
We are a majority interest owner in only seven of our properties and in those
that we do not have a majority interest, we do not have sole control over the
future course of development in those properties. Property interests may be
subject to joint venture and other like agreements, which can give rise to
interpretive disputes with other parties who are financially interested in the
property. If a participant in a joint venture, which participant has fewer
resources than the

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- 10 -

Company, is unable to meet its commitments, it may delay or
veto exploration or development plans which it cannot afford. This may delay the
Companys desired exploration and development program and lead to the Company
and other participants assuming all or some of the share of the non-committing
entitys interest, and therefore meeting a pro-rata share of its required
contributions, as well as receiving a pro-rata share of its revenue.

We do not maintain title insurance over our any of our
properties. See also Risk Factor 12 regarding title assurance.

9. Possible Lack of or Inadequacy of Insurance

The Company maintains insurance against certain public
liability, operational and environmental risks on behalf of the Company and
where applicable, on behalf of the respective joint venture, but there is no
assurance that an event causing loss will be covered by such insurance, that
such insurance will continue to be available to our Company, or that the
benefits of such insurance will be adequate to cover our liability.

10. Effect of Different Currencies

We hold cash reserves in CDN and US dollars and to a lesser
extent in New Zealand dollars. We incur the majority of our petroleum property
expenditures in New Zealand dollars. The Company does not currently hedge its
exposure to current rate changes, although it may choose to selectively hedge
exposure to foreign currency exchange rate risk. The Company manages some of
this risk by shifting a portion of its cash on hand from one currency to another
in a timely manner. A decrease in the value of the New Zealand currency against
the value of the CDN and US will be a benefit to the Company. An increase in
value of the New Zealand dollar relative to the CDN or US dollar would have a
detrimental effect on us as our expenses incurred would, in turn, increase in
CDN and US dollars.

11. Penny Stock Regulation and Difficulties in Selling
Shares

The Securities and Exchange Commission (the SEC) has rules
that regulate broker-dealer practices in connection with transactions in penny
stocks. Penny stocks generally are equity securities with a price of less than
$5.00 per share (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ Stock Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system). The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market value of each
penny stock held in the customers account. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
such rules, the broker-dealer must make a special written determination that a
penny stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction. These disclosure requirements
often have the effect of reducing the level of trading activity in any secondary
market for a stock that becomes subject to the penny stock rules. Our common
stock is currently subject to the penny stock rules, and accordingly, investors
may find it difficult to sell their shares, if at all.

12. No Title Assurance

The possibility exists that title to one or more properties may
be lost due to an omission in the claim of title. We do not maintain title
insurance and there is no guarantee of title. The properties may be subject to
prior unregistered agreements or transfers or native land claims, and title may
be affected by undetected defects. The Company has investigated the rights to
explore the various oil and gas properties it holds or proposes to participate
in and to the best of our knowledge, those rights are in good standing. In
addition many of the Companys properties are located on private property and
may be subject to

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- 11 -

delays and/or disputes with landowners in certain
circumstances. Such delays/disputes may affect the Companys ability to explore
for, produce or develop its oil and gas properties.

13. Uncertainty of Reserves Figures

Estimates of production expenditures, revenues and reserves
will likely vary from actual results, and these variances may be material.
Estimates of oil and gas reserves referred to below and in Exhibit 4.9 are
interpreted through geological, petro-physical and reservoir engineering data.
Such interpretations are inherently uncertain, as are the projections of future
rates of production and timing of development expenditures. The accuracy of the
reserves estimates is a function of the quality of available data, engineering
and geological interpretation and judgement. Factors such as historical
production from the area compared with the production from other producing
areas, assumed effects of governmental regulations, assumptions of future oil
and gas prices, future operating costs, development costs and remedial work-over
costs, will affect the estimates of economically recoverable quantities and of
future net cash flow. Any significant variance in the assumptions could
materially affect the estimated quantity and value of reserves.

14. Competition

We encounter strong competition from other independent
operators and from major oil companies in acquiring properties suitable for
development, in contracting for drilling equipment and in securing trained
personnel. Many of these competitors have financial resources and staffs
substantially larger than our own. The availability of a ready market for any
oil and gas that may be discovered by the Company depends on numerous factors
beyond our control, including the proximity and capacity of natural gas
pipelines and the effect of regional or national regulations.

15. Foreign Jurisdiction Risks; Governmental Laws and Local
Conditions

Claims of aboriginal peoples in New Zealand may adversely
affect the rights or operations of our Company and there is no assurance that
governmental regulation will not vary, including regulations relating to prices,
royalties, allowable production, environmental matters, import and export of
hydrocarbons and protection of water resources and agricultural lands. Our
exploration interests in New Zealand are subject to regulations that relate
directly and indirectly to our operations, including title to the petroleum
interests, production, marketing and sale of hydrocarbons, taxation,
environmental matters, restriction on the withdrawal of capital from a country
and other factors. There is no assurance that the laws relating to the ownership
of petroleum interests and the operation of our business in New Zealand will not
change in a manner that may materially and adversely affect our business.

16. Value of Properties

The amounts attributed to our properties in our financial
statements represent acquisition and exploration expenditures to date, and
should not be taken to in any way reflect realizable value.

17. Legal Proceedings Against Foreign Directors

The Company is incorporated under the laws of the Yukon
Territory, Canada, and three of the Companys directors and officers are
residents of Canada and one is a resident of New Zealand. Consequently, it may
be difficult for United States investors to effect service of process within the
United States upon the Company or upon its directors or officers, or to realize
in the United States upon judgements of United States courts predicated upon
civil liabilities under the United States Securities Exchange Act of 1934, as
amended. Furthermore, it may be difficult for investors to enforce judgements of
the U.S. courts based on civil liability provisions of the U.S. federal
securities laws in a foreign court against the Company or any of the Companys
non-U.S. resident officers or directors.

Please refer to Corporate Actions below for information on the
Companys pending continuation to British Columbia as approved by shareholders
on September 22, 2006.

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- 12 -

18. Labour Requirements

The Company may be required to hire and train local workers in
its petroleum and natural gas operation. Some of these workers may organize into
labour unions and any strike or labour unrest could adversely affect the
Companys ongoing operations and its ability to explore for, produce and market
its oil and gas production.

ITEM 4. INFORMATION ON THE COMPANY

History and Development of the Company

Corporate Actions

Our legal and corporate name is TAG Oil Ltd. although we have
had the name changes disclosed below. We are a Vancouver, British Columbia
Canada based hydrocarbon resource company that holds varying interests in 21 New
Zealand exploration permits as detailed below.

As a company domiciled in the Yukon Territiory, Canada, our
legally registered office is Suite 2600, Three Bentall Centre, 595 Burrard
Street, Vancouver, B.C. V7X 1L3. Our principal business office is located at
Suite 1407-1050 Burrard Street, Vancouver, B.C. V6Z 2S3, our operational office
is located at 117 Powderham Street, PO Box 183, New Plymouth, New Zealand and
our technical headquarters is located at Braemar Building, 32 The Terrace,
4th Floor, Wellington, New Zealand.

We were incorporated in British Columbia on December 12, 1990
under the name "398052 B.C. Ltd." by the registration of memorandum and articles
under the Company Act (British Columbia). We changed our name to "Aldus Energy
(Canada) Corp." on January 28, 1991, to "Aldus Energy Corp." on April 4, 1991,
to "Durum Energy Corp." on July 18, 1991, to Durum Cons. Energy Corp. on
October 27, 1998 and to our current name TAG Oil Ltd. on June 12, 2002. We
became a reporting company in British Columbia on obtaining a receipt for our
initial prospectus in British Columbia in February 1992. We obtained a listing
on the Vancouver Stock Exchange (the VSE) and commenced trading through the
facilities of the VSE on March 16, 1992. Trading in our common shares was halted
by the VSE on September 12, 1996 and recommenced on May 5, 1997.

On October 29, 1997 we were continued (or re-domiciled) from a
company subsisting under the jurisdiction of the Company Act (British Columbia)
to a company subsisting under the Business Corporations Act (Yukon). Our
authorized share capital was originally 25,000,000 common shares without par
value. Effective April 5, 1995, we subdivided our shares on a two new for one
old basis. Effective October 27, 1998, we increased our authorized share capital
to an unlimited number of common shares without par value and consolidated our
shares on a one new for five old basis.

Effective with the October 27, 1998 share consolidation (or
reverse-split), we changed our name to Durum Cons. Energy Corp. and then
changed our name again to our current name TAG Oil Ltd. on June 12, 2002. Our
common shares were listed on the Canadian Venture Exchange (CDNX) under the
trading symbol DUR until we voluntarily delisted on September 21, 2000.

During the 2005 fiscal year, we implemented a forward stock
split on the basis of one additional new share issued for every two old shares
held, resulting in 3,989,025 new shares being issued to existing shareholders of
record on April 27, 2004.

All references to our outstanding common shares, issuances
of common shares, options and warrants and prices associated with the above
corporate actions and their effects on share capital have been shown on a
retroactive basis.

Effective July 18, 2005, TAG Oil Ltd. commenced trading on the
TSX Venture Exchange (TSXV) under the symbol TAO. We continue to trade on
the United States Over-the-Counter Bulletin Board (OTCBB) under the trading
symbol TAGOF.

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- 13 -

On September 22, 2006 shareholders of the Company approved a
continuance (or re-domiciled) from a company subsisting under the Business
Corporations Act (Yukon) back to the jurisdiction of the Business Corporations
Act (B.C.). The Company expects to effect this continuation in the coming
months.

Principal Petroleum Property Activities and Material Capital
Expenditures for the year ended March 31, 2006

PEP 38741 (45% interest): $1,015,849 of expenditures
were made during the year relating to the costs of drilling, completing and
testing the Supplejack-1 well on this permit. Supplejack-1 encountered two
potential hydocarbon zones and, to date, the lower gas zone has been tested and
flowed at a maximum rate of 640,000 cubic feet per day with the joint venture
incorporating the short-term flow testing results into the Kaimata 3-D data to
consider its options to maximize the development potential of this discovery.
The SuppleJack-1 well is currently suspended pending the outcome of the
Ratanui-1 well scheduled for the second half of the 2007 fiscal year.

PEP 38745 (83.33% interest): $554,925 of expenditures
were made during the year primarily relating to the drilling of the Richmond-1
well. This well was drilled in October 2005 and although the main objective
sandstones were encountered and a number of thick reservoir sands were
penetrated, electrical logs indicated the reservoir was not likely to produce
commercial quantities of hydrocarbons and the well was plugged and
abandonded.

PEP 38751 (66.66% interest): $563,522 of expenditures
were made during the year relating to the drilling of the Konini-1 well in
November of 2005. Konini-1 reached the target sandstones and after evaluating
the well data the well was plugged and abandoned.

PEP 38757 (100% interest): $1,934,631 of expenditures
were made this year relating mainly to the the costs of drilling the Arakamu-1
well. Arakamu-1 was drilled in January 2006 and encountered good quality oil and
gas shows but did not find significant reservoir zones so the well was plugged
and abandoned.

PEP 38758 (100% interest): $980,609 of expenditures were
incurred this year to conduct the Companys 35 kilometer 2-D seismic program.
This program was completed in January 2006 resulting in processed data that is
of excellent quality and the Company expects to drill a well on the permit based
on this data in the 2007 fiscal year.

PEP 38765 (38.30% interest): $483,289 of expenditures
were made during the year relating to the drilling, completion and testing of
the SuppleJack South-1 and the SuppleJack South-1a wells between November 2005
and February of 2006. Both wells penetrated high quality sands with SuppleJack
South 1a yielding gas utilising under-balanced perforation techniquies. Both
wells are currently suspended awaiting the outcome of the Ratanui-1 well
scheduled for the second half of 2007 in the neighbouring permit, PEP 38741.

PEP 38256 (53.84% interest):$250,594 of expenditures
were made during the year relating to a 30 kilometer 2-D seismic program
recently completed that identified a closure over the Companys Salmon prospect.
This seismic information is being incorporated with other permit data in order
to determine an optimal drilling location for late 2007. Subsequent to year-end
the Companys interest in PEP 38256 increased to 100%.

PEP 38260 (30.00% interest):$512,885 of expenditures
were made during the year relating to the two seismic programs carried out
during the year to acquire 27 kilometers of 2-D seismic that have confirmed the
existence of a large rollover structure at depth in the Kate prospect that is
expected to be drilled in November 2006. The Company, to earn its 30% interest
in the permit, paid 100% of all costs associated with onshore exploration on PEP
38260.

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- 14 -

PEP 38341 and PEP 38342 (35.50% interest):$1,025,785 of
expenditures were made during the year relating to the Companys participation
in a 67 kilometer seismic program carried out over both permits during the
year.

During the 2006 fiscal year the Company acquired interests in
fourteen new petroleum interests; PMP 38153, PMP 38157, PEP 38260, PEP 38341,
PEP 38342, PEP 38732, PEP 38736, PEP 38744, PEP 38745, PEP 38746, PEP 38748, PEP
38751, PEP 38766 and PEP 38767. Consideration paid for the interests include
gross overriding royalties, participation in exploration activities and payment
of past costs related to certain permits. Please refer to property plant and
equipment below for more information.

Subsequent to the 2006 fiscal year end:

| | a. | The Company drilled the Radnor 1a well starting on July
      25, 2006. At the date of this report the well has been logged, cased and
      suspended. Although gas was discovered the inflowing rates of gas are
      sub-economic and a go-forward plan using the data on the well will be
      prepared. The joint venture drilled Radnor-1a on PMP 38157 on an extension
      to the permit term that expires on September 30, 2006. The Company expects
      to file a further request to extend the permit.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | b. | On June 16, 2006, the Company acquired all of the
      outstanding shares of Cheal Petroleum Limited (Cheal), PEP 38757 Limited
      and PEP 38758 Limited which are all located in New Zealand. Please refer
      to Exhibit 4.8 and 4.12. Cheal owns a 30.5% interest in PEP 38738-S
      containing the Cheal Oil Field and a 15.1% interest in PEP 38738-D
      containing the Cardiff deep gas prospect. Consideration paid for these
      companies was:                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | i.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | ii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | iii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

In July of 2006 the Ministry of Economic Development granted
Petroleum Mining Permit 38156 (PMP 38156) that covers 30 square kilometers and
includes both the Cheal Oil Field and the Cardiff deep gas prospect. The Cheal
Oil Field currently has one well producing a gross average of 350 barrels of oil
per day (Net: 105 bbls) and 150mcf/d of natural gas (Net: 45mcf/d).

2005

During the 2005 fiscal year the Company continued its
exploration and acquisition focus in New Zealand as described below.

The material aspects of the Companys 2005 exploration program
related to the completion of a 16 square kilometer 3-D seismic program on its
100% held property PEP 38757 during the last quarter of the 2005 fiscal year,
along with drilling three unsuccessful, non-operated, wells during the year
being the Honeysuckle-1 well on PEP 38741 (TAG interest 20%) in June 2004, the
Miromiro-1 well on PEP 38765 (TAG interest 10%) in December 2004 and the
Hursthouse-1 well (TAG interest 12.5%) in December 2004, located within the Area
of Mutual Interest covering portions of PEP 38745 and PEP 38732.

During the year the Company also acquired interests in three
new interests; PEP 38757 (100% interest), PEP 38758 (100% interest) and
AMI-Hursthouse (12.5% interest). In return for the assignment of interests in
PEP 38757 and PEP 38758 the Company granted a 5% overriding royalty to PEP 38757
Limited and PEP 38758 Limited, in lieu of any cash consideration. In addition to
secure the services of an independent professional to provide geotechnical
services to the Company on PEP 38757 and 38758 at 50% of New Zealand standard
consulting rates, the Company granted the geotechnical consultant a 0.5%
overriding royalty based on Net Sales Revenue on PEP 38757 and PEP 38758. As
part of the acquisition

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- 15 -

of the interest in the AMI-Hursthouse area, the Company paid
NZ$65,000 in past costs relating to the interest as well as committing to paying
for its percentage share of the drilling costs of the Hursthouse-1 well
described above.

General and Administrative costs relating to exploration and
acquisitions of $829,333 were similar to the 2004 fiscal year ($650,680) with
the exception of travel costs, filing, listing and transfer agent fees, as well
as professional fees also increasing materially due to the Companys forward
stock split, the successful application for listing on the TSX Venture Exchange
and additional costs relating to the acquisition of additional exploration
interests.

2004

In our 2004 fiscal year, we focussed on our current work
programs associated with our New Zealand permits and we also sought to expand
our exploration interests in New Zealand. The Company completed the required
work commitments on its existing permits and acquired two new permits as
described below.

During the 2004 fiscal year the Company (25%) and Austral
Pacific Energy Ltd. (75%) as operator, were awarded a new exploration permit
(PEP 38258) located in the offshore Canterbury Basin. In addition the Company
(10%), Austral Pacific (27.5%), Tap (New Zealand) Pty Ltd (50%) and Magellen
Petroleum (NZ) Ltd. (12.5%) were awarded new exploration permit (PEP 38765)
(formerly PPP 38761 and Block M) located in the onshore Taranaki Basin. We
also increased our interest in the onshore Canterbury Basin Project (PEP
38256) in New Zealand from 10% to 40.38% . As the activity of the Company
increased during 2004, so did the general and administrative costs associated
with operating our Company. The Company incurred significant general and
administrative costs totalling $650,680 (2003: $622,388) plus incurring stock
option compensation expenses totalling $290,030 (2003: $110,606).

The Company also retained key oil and gas exploration
personnel, included as a significant cost in our general and administrative
expenses, in order for the Company to maintain our work commitments and
acquisition efforts in New Zealand.

Financing:

On March 4, 2004, we issued 300,000 shares from treasury upon
the exercise of share purchase warrants at a price of US$0.35 per share for
proceeds of US$105,000.

In May of 2004, we completed a non-brokered private placement
financing of 542,495 units at a price of US$1.67 per unit, for proceeds of
US$905,967. Each unit consists of one common share and a two-year share warrant
entitling the purchaser to acquire an additional share for US$1.83 per share for
the first year and thereafter at a price of US$2.00 per share until expiry at
the end of the second year.

The Company, primarily in the fourth quarter of the 2005 fiscal
year issued 6,150,000 common shares from treasury pursuant to the exercise of
certain share purchase warrants at a price of US$0.23 per share, for proceeds of
US$1,414,500 and 100,000 common shares from treasury pursuant to the exercise of
certain stock options at a price of US$0.267 per share, for proceeds of
US$26,700.

On December 24, 2004 the Company re-purchased 1,800,000
incentive shares for cancellation and return to treasury at the owners cost,
that had been previously issued to the Companys President for US$5,940.

Our final capital raising transaction for the 2005 fiscal year
occurred in March of 2005 and consisted of a private placement financing of
9,066,500 units at a price of US$0.40 per unit for proceeds of US$3,626,600.
Each unit consists of one common share and a two-year share purchase warrant
entitling the purchaser to acquire an additional common share for US$0.60 per
share for the first year and thereafter at a price of US$0.80 per share until
expiry at the end of the second year, subject to an accelerated expiry if a
market trigger price is reached of US$1.00 in year one and US$1.20 in year two,
in which event the warrant will expire 30 days after notice is given to the
holder that the trigger price was reached.

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- 16 -

On May 19, 2005, the Companys Board of Directors approved an
amendment to the terms of the Companys 542,495 share purchase warrants issued
May 4, 2004. The amendment, was approved by the warrant holders, and reduced the
exercise price of the warrants from US$2.00 to US$0.80 in consideration for the
warrant holders accepting an accelerated expiry provision whereby the warrants
will expire 30 days after notice is given by the Company that the Companys
shares have traded over US$1.20 for 10 consecutive days. These warrants expired
unexercised during the 2006 fiscal year.

On August 19, 2005, the Company accelerated the 9,066,500 share
purchase warrants outstanding described above, as the market trigger price was
reached in year one. As a result, the expiry of the 9,066,500 share purchase
warrants, exercisable at US$0.60 per share was changed to September 26, 2005.
All affected warrants were exercised prior to expiry for proceeds of
US$5,439,900.

On September 22, 2005 the Company completed a brokered private
placement financing of 11,538,500 shares at a price of $1.30 per share for gross
proceeds of $15,000,050.

Subsequent to the 2006 fiscal year end the Company, on June 16,
2006, completed a brokered private placement financing of 40,000,000 shares at a
price of $0.75 per share for gross proceeds of $30,000,000.

Business Overview

Nature of Operations

We are an independent oil and gas acquisition, exploration and
production company, incorporated in Canada, with all our interests in
hydrocarbon exploration prospects currently being in New Zealand. We are
involved in the exploration for and production of hydrocarbons and all of our
current property holdings, with the exception of PEP 38738-S that was acquired
subsequent to fiscal 2006, are in the grassroots or primary exploration stage.
As of the date of this report and subsequent to year end we have started
generating a small amount of revenues from the sale of hydrocarbons and the
extent of such revenue is not of any significant size at this time for the
Company to be affected by principal markets for hydrocarbon products,
seasonality of products, or marketing channels. We do not have a reliance on raw
materials, or any significant patents or licences, as we operate in an
extractive industry.

We compete with other companies in bidding for the acquisition
of petroleum interests from various authorities, and in exploring for oil and
gas in the Austral Pacific region. We are also subject to government regulation
of the oil and gas properties we hold and in the operations we conduct on those
properties. The effects of these regulations are described in Item 4. Property,
Plant and Equipment.

Organizational Structure

Our operations are conducted in part through our wholly-owned
subsidiaries, being;

|1. | TAG Oil (NZ) Limited;                                        
|-- | -------------------------------------------------------------
|2. | TAG Oil (Canterbury) Limited;                                
|3. | Cheal Petroleum Limited;                                     
|4. | PEP 38757 Limited;                                           
|5. | PEP 38758 Limited; and                                       
|6. | Durum Energy (PNG) Limited (deregistration in
      progress)

All of the above noted subsidiaries are owned 100% and we hold
100% of the voting rights.

Petroleum Exploration Regime in New Zealand

Unless otherwise indicated and subject to the conditions of the
permit, a petroleum exploration permit granted in New Zealand provides for the
exclusive right to explore for petroleum in the land covered by the exploration
permit. Exploration permits have an initial term of five years, but are
renewable for a

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- 17 -

further term of up to five years over an area of land not
exceeding one-half of the original area (with a possible further short appraisal
extension where necessary).

An exploration permit holder may apply to the Minister of
Energy for amendments to an exploration permit, including changes to the Work
Programme or the area covered by the exploration permit, if circumstances
require and the conditions of the exploration permit have been substantially
complied with. This remains, however, a matter for the Ministers discretion.
Exploration permit holders may exceed the requirement of the Work Programme in
relation to any permit.

If an exploration permit holder does not satisfy the Minister
that it has complied with the obligations under the Work Programme (or such
variation as may have been agreed with the Minister), the New Zealand government
has the power to revoke the exploration permit. A NZ$250,000 bond is now payable
with all applications for a new permit.

Unless an earlier date is specified in the permit, an
exploration permit holder has a right to be granted a petroleum mining permit
with a term of up to 40 years if the exploration permit holder satisfies the
Minister that, as a result of the activities authorised by the exploration
permit, a deposit of petroleum has been found in the land covered by the
exploration permit.

The annual royalties payable in relation to a permit depend on
when the relevant petroleum discovery in the permit was made, and whether an
exploration permit or a mining permit is held.

On deposits of petroleum known to exist before 30 June 2004 or
discovered after 31 December 2009, the New Zealand Government reserves a royalty
of:

| | (a) | where an exploration permit is held, a royalty of 5% of
      the net sales revenue from all petroleum obtained from the exploration
      permit; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                       
| | (b) | where a mining permit is held, a royalty of the greater
      of:                                                                                     
| |     |                                                                                                                                                       
| |     | (i)                                                                                                                                                   
| |     |                                                                                                                                                       
| |     | (ii)                                                                                                                                                  

On deposits of petroleum discovered in the period 30 June 2004
to 31 December 2009, where an exploration permit is held, the New Zealand
Government reserves a royalty of:

| | (a) | 1% of the net sales revenue from the sale of all natural
      gas products obtained from the exploration permit; and
| | --- | ---------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                      
| | (b) | 5% of the net sales revenue from the sale of all oil
      products from the exploration permit.                     

On deposits of petroleum discovered during the period 30 June
2004 to 31 December 2009 that are produced under a mining permit, the New
Zealand Government reserves a royalty that is the greater of:

| | (a) | 1% of the net sales revenue from the sale of all natural
      gas products obtained from the mining permit or 5% of the net sales
      revenue, from the sale of all oil products from the mining permit;
    and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                    
| | (b) | a percentage of accounting profits, calculated on the
      following basis:                                                                                                                                       
| |     |                                                                                                                                                                                                                    
| |     | (i)                                                                                                                                                                                                                

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- 18 -

| | (ii) | 20% of the accounting profits on any additional petroleum
      obtained.
| | ---- | -------------------------------------------------------------------------

In calculating the accounting profits on any petroleum produced
from a discovery made during the period 30 June 2004 to 31 December 2009, a
mining permit holder may deduct, amongst other things, its prospecting and
exploration costs that it has incurred in any permit in New Zealand between 30
June 2004 and 31 December 2009. For production from all other mining permits,
only prospecting and exploration costs associated with that specific permit can
be deducted for the calculation of accounting profits for that permit.

Detailed methods for calculating net sales revenue and
accounting profits are prescribed for the purpose of royalties calculation.
Royalties are assessed annually.

On August 22, 2006 new fees were implemented with an effective
date of September 22, 2006 for all permits. For the financial year from 1 July
2006 to 30 June 2007, an exploration permit holder must pay the New Zealand
Government an annual fee of $9.47 per square kilometre for the first 1500 square
kilometres and $7.22 for each additional square kilometre of the land of any
exploration permit. In respect of the same period, a mining permit holder must
pay the New Zealand Government an annual fee of NZ$303.12 per square kilometre
of the land area of any mining permit. From 1 July 2007, or on any permit
granted or extended on or after 22 September 2006, the new annual fees require
an exploration permit holder to pay the New Zealand Government NZ$10.50 per
square kilometre for any exploration permit. A mining permit holder must pay the
New Zealand Government an annual fee of NZ$100 per square kilometre of the land
area of any mining permit and a prospecting permit holder must pay an annual fee
of NZ$4.00 per square kilometre of the land area of any prospecting permit.

Environmental Regulation in New Zealand

In New Zealand, on land and in waters within twelve miles of
the coast, the Resource Management Act 1991 controls users of natural and
physical resources, including petroleum explorers, with a view to managing
resource usage in ways that will not compromise future utilization. The Resource
Management Act 1991 places the emphasis on assessment of the effect the proposed
activity will, or might, have on the environment with a view to promoting
sustainable management. Under the Resource Management Act 1991, most of the
responsibility for managing resources and their use is given to local
authorities. Regional and district councils must produce and continuously update
planning schemes for their jurisdictions which establish procedures and
standards for assessing and approving environmental standards in accordance with
the Resource Management Act.

Property, Plant and Equipment

Our major operations and principal activities are in the oil
and gas exploration business. The following is a brief description of the
principal prospects held by the Company. For definitions of technical terms in
the following description of properties, see the Glossary of Industry Terms
found at the beginning of this report. Apart from our interests in the following
hydrocarbon exploration properties, we hold only minor office assets for the
purpose of operating our business.

The following properties are discussed in this section:

|Property    | Location | Working Interest | Gross Sq. Kms | Net Sq. Kms
|----------- | -------- | ---------------- | -------------- | ------------
|            |          |                  |                |             
|            |          |                  |                |             
|PMP 38153   | Taranaki | 15               | 6              | 0.9002      
|PMP 38156-S | Taranaki | 30.5             | 30.3           | 9.2411      
|PMP 38156-D | Taranaki | 15.1             | 30.3           | 4.5751      
|PMP 38157   | Taranaki | 33.33            | 22.48          | 7.4926      
|PEP 38732   | Taranaki | 100              | 7.778          | 7.778       
|PEP 38736   | Taranaki | 15               | 11.914         | 1.7871      
|PEP 38738-S | Taranaki | 30.5             | 46.349         | 14.1363     

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- 19 -

|PEP 38738-D   | Taranaki   | 15.1  | 46.349   | 6.9986   
|------------- | ---------- | ----- | -------- | ---------
|PEP 38741     | Taranaki   | 45    | 12.610   | 5.6745   
|PEP 38744     | Taranaki   | 100   | 110.941  | 110.941  
|PEP 38745     | Taranaki   | 83.33 | 50.517   | 42.0957  
|PEP 38746     | Taranaki   | 16.67 | 79.399   | 13.2359  
|PEP 38748     | Taranaki   | 33.33 | 64.236   | 21.4098  
|PEP 38751     | Taranaki   | 66.66 | 66.077   | 22.0235  
|PEP 38757     | Taranaki   | 100   | 29.461   | 29.461   
|PEP 38758     | Taranaki   | 100   | 49.679   | 49.679   
|PEP 38765     | Taranaki   | 38.3  | 12.715   | 4.8699   
|PEP 38766     | Taranaki   | 33.33 | 2.489    | 0.8295   
|PEP 38767     | Taranaki   | 100   | 43.767   | 43.767   
|PEP 38256     | Canterbury | 100   | 2795.965 | 2795.965 
|PEP 38258     | Canterbury | 25    | 5460.998 | 1365.2495
|PEP 38260 (1) | Canterbury | 30    | 2429.927 | 728.9781 
|PEP 38341     | East Coast | 35.5  | 1814.979 | 644.3174 
|PEP 38342     | East Coast | 35.5  | 1723.002 | 611.6656 

|(1) | The Company has entered into an agreement, effective May
      16, 2005, with the 100% PEP 38260 permit holder where in exchange for
      completing certain work permit program requirements, at the Companys own
      cost, the Company will receive certain working interests. At the date of
      this report, the Company has earned a 30% interest and operatorship of the
      onshore portion of this permit. Notice of this agreement has yet to be
      issued by the New Zealand Ministry of Economic
  Development.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For further detail on each property and work done during the
year please refer to History and Development of the Company above and to the
Companys financial statements (Item 17). For details of planned work to be done
on each property before March 31, 2007 and the estimated cost thereof see below
Liquidity and Capital Resources.

Reserves

The Company did not have any reserves at March 31, 2006.
Subsequent to the 2006 fiscal year the Company acquired, as detailed above, a
30.5% interest in PEP 38738-S and PEP 38738-D. In July 2006 the Ministry of
Economic Development in New Zealand issued a petroleum mining permit (PMP
38156) covering 30 square kilometres (of the total 90 square kilometres
originally held under PEP 38738-S and PEP 38738-D) that contains the Cheal Oil
Field and the Cardiff deep gas prospect. The remaining 60 square kilometres
remains in PEP 38738-S and PEP 38738-D. The Company has therefore recognized
reserves subsequent to March 31, 2006 in respect to the Cheal Oil Field. An
independent report dated as of April 30, 2006 was prepared for the Company by
Sproule International Limited (Exhibit 4.9) was completed using data obtained
from the Companys subsidiary Cheal Petroleum Limited and from public sources.
As at April 30, 2006 Sproule assigned 484,859 barrels (Company share) of Proved
Undeveloped Reserves, 558,150 barrels (Company share) of Probable Reserves and
485,713 barrels (Company share) of Possible Reserves.

Although the Cardiff deep gas prospect was included in the area
of PMP 38156 Sproule did not assess the prospect and there has been no reserves
assigned to this prospect to the date of this report.

ITEM 5. OPERATING, FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis is managements opinion
of our historical financial and operating results and should be read in
conjunction with our audited consolidated financial statements. (See Item 17)
for the years ended March 31, 2006, 2005, and 2004, together with the notes
related thereto. The financial statements have been prepared in accordance with
Canadian GAAP, and a reconciliation to US GAAP is provided in note 9 to the
financial statements, under Item 17.

All dollar values are expressed in Canadian dollars, unless
otherwise stated.

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- 20 -

Operating Results

Summary

We are in the exploration and evaluation stage with respect to
all but one of our oil and gas properties and therefore we do not generate any
significant sales or revenue from operations. We have experienced losses in each
of our fiscal periods and have not yet achieved break-even cash flow. Our main
source of capital currently is the issuance of equity securities, which has a
dilutive effect on our shareholders. Total losses incurred since incorporation
to the period ending March 31, 2006 were $12,104,977. The level of future
operations may be limited by the availability of capital resources, the sources
of which are not predictable. The results of operations should be largely
measured by the success of the extent and quality of oil and gas discovered as a
result of exploration programs.

Results of Operations  2006 Compared to 2005 and
2004

We have conducted our operations as an acquisition and
exploration company for the 2006 fiscal year and our primary acquisitions over
the 2006 fiscal year was acquiring PMP 38157, PEP 38260, PEP 38341 and PEP
38342. In addition subsequent to year end we acquired an interest in Cheal
Petroleum Limited (Cheal) and Cheal holds a 30.5% interest in the Cheal Oil
Field as described above. Our primary exploration focus over the 2006 fiscal
year is also described above but includes drilling three unsuccessful
exploration wells and three exploration wells that are under evaluation to
determine if they are commercially viable in combination with future successful
wells, all of which wells are located in the Taranaki Basin, New Zealand. The
unsuccessful wells drilled during the 2006 fiscal year are: the Richmond-1 well
on PEP 38745, the Konini-1 well on PEP 38751, and the Arakamu-1 well on PEP
38757. The wells under evaluation are: The SuppleJack-1 well on PEP 38741 and
the SuppleJack South-1 and SuppleJack South-1a wells on PEP 38765. The Company
also collected a significant amount of 2-D seismic on PEP 38758 (35 kms), PEP
38256 (30 kms), PEP 38260 (27 kms), PEP 38341 and PEP 38342 combined (67 kms)
as described above.

Our objectives for the 2007 fiscal year are to participate in
the Cheal Oil Field development plan that includes drilling at least 2
development wells and 2 exploration wells on production mining permit 38156 and
participate in the development of permanent production facilities on PMP 38156.
We also intend to drill in our most prospective exploration permits where
warranted and to a lesser extent complete the required exploration work required
under our permit terms and conditions and where possible exceed those
requirements. To date we have drilled the Radnor-1a deep gas well located on PMP
38157 where we earned a 33.33% interest in the well and the Radnor production
station by paying 66.66% of the costs of the well. The Company also sole-risked
another joint venture participants 33.33% interest in the well. The Company has
also participated in a 400 kilometre 2-D seismic program offshore in PEP 38258.
The Company also intends to drill an additional four wells on PEP 38260, 38256,
38741 and 38758. The Company has a number of other prospects located on its
current interests that are suitable for drilling and if rig availability and
access to the service industry provides us the opportunity, the Company will
consider drilling additional wells during the remainder of the 2007 fiscal year.

Results of operations:

The Company incurred a net loss for the 2006 fiscal year of
$1,425,562 ($0.04 per share) compared to $1,214,377 ($0.09 per share) for the
2005 fiscal year and $938,001 (0.08 per share) for the 2004 fiscal year.

For the three years ended March 31, 2006, we generated $nil in
oil and gas revenues. Total cost of sales for the same three year period was
also $nil.

The Companys only revenue for the 2006 fiscal year consisted
entirely of interest of $399,684 and a gain on sale of marketable securities of
$39,912 compared to $17,352 of interest income in the 2005 fiscal year and
$15,737 in interest income and $23,256 gain on sale of property and equipment in
the 2004

---

- 21 -

fiscal year. The increase in interest income in 2006 was a
result of the Companys increased working capital from financings completed
during the year.

The Company incurred $1,404,864 in general and administrative
(G&A) expenses for the year ended March 31, 2006, compared to $829,233 for
the year ended March 31, 2005 and $650,680 for the year ended March 31,
2004.

General and administrative (G&A) costs increased to
$1,404,864 in 2006 from $829,233 in 2005 (a 69% increase) due to the Companys
increased activity levels related to the Companys assets and, to a lesser
extent, costs associated with successfully listing on the TSX Venture exchange.
The main items contributing to the increased G&A were wages and travel
costs. Wages accounted for 45% of the increase mainly because the Company
employed a full-time exploration manager at the start of the fiscal year, the
Company paid bonuses to the Companys executives in December of 2005 and annual
rates of compensation increased for the Companys executives during the year. At
the end of the 2006 fiscal year the Company also added a full time chief
geophysicist to manage the increase in the Companys exploration permits in New
Zealand from seven permits in fiscal 2005 to twenty four by the date of this
report. Travel costs accounted for 25% of the increase as these costs include
costs associated with the Companys President relocating to New Zealand as well
as travel costs relating to the Companys acquisition, exploration and financing
efforts.

In addition to the above, the Company recorded stock option
compensation costs of $123,829 (2005: $185,395) relating to stock options
granted during the year and wrote-off $358,699 (2005: Nil) in costs associated
with two permits, the details of which are available for review in Note 5 and
Note 3 of the accompanying audited consolidated financial statements,
respectively.

We believe that the general and administrative costs of the
Company for the 2007 fiscal year will likely increase for the 2007 fiscal year
as a result of the need to increase the amount of full-time employees to
maintain our New Zealand operations as detailed in this annual report.

Inflation

We operate primarily in New Zealand, where inflation for our
operational costs is at low levels  i.e. in the 2-5% range.

Foreign Currency Fluctuations

We hold cash reserves in CDN, US and NZ dollars, and incur the
majority of our petroleum property expenditures in New Zealand dollars. An
increase in value of the New Zealand dollar relative to the CDN or US dollar has
a detrimental effect to us as our expenses incurred would, in turn, increase in
CDN and US dollars. We do not currently hedge our exposure to currency rate
changes, although we may choose to selectively hedge exposure to foreign
currency exchange rate risk. We have no policies relating to the foregoing.

Government Regimes

We are subject to foreign governmental regulations that relate
directly and indirectly to our operations including title to the petroleum
interests, production, marketing and sale of hydrocarbons, taxation,
environmental matters, restriction on the withdrawal of capital from a country
in which we are operating and other factors. There is no assurance that the laws
relating to the ownership of petroleum interests and the operation of our
business in the jurisdictions in which it currently operates will not change in
a manner that may materially and adversely affect our business. There is no
assurance that the laws of any jurisdiction in which we carry on business may
not change in a manner that materially and adversely affects our business.

Differences between Canadian and U.S. Generally Accepted
Accounting Principles

---

- 22 -

The Company is subject to changes in accounting standards.
These financial statements accompanying the report have been prepared in
accordance with Canadian generally accepted accounting principles (Canadian
GAAP) which conform in all material respects with United States generally
accepted accounting principles (U.S. GAAP). However, there are some exceptions
and these are detailed below in Item 17, Note 9 Differences between Canadian
and United States Generally Accepted Accounting Principles.

New Accounting pronouncements

There have not been any new accounting pronouncements during
the 2006 fiscal year that have had a material affect on the Companys financial
statements.

Liquidity and capital resources 2006 Compared to 2005 and
2004

As of the date of this report, the Company has sufficient
capital to conduct its planned exploration program through the end of the 2007
fiscal year to maintain our interests in all of our New Zealand based permits.
However, owing to the inherent risks of oil & gas acquisition and
exploration, it is uncertain whether we will be able to generate sufficient
income and/or secure outside sources of capital in an amount that are sufficient
for us to continue with our expected operations beyond the end of 2007. Due to
the exploratory nature of our business, traditional forms of debt financing may
not be available to us and the Company may look at opportunities to farm-out,
reschedule or defer some of our capital expenditures.

We did not receive any revenue from our operations in 2006. We
expect to receive production revenue during the 2007 fiscal year from one
property PMP 38156 that contains the Cheal Oil Field that is currently in the
development stage. The balance of our current properties are in the exploration
stage and we do not expect to receive any revenue from them during our 2007
fiscal year.

Operating Activities:

The Company had $18,753,695 in cash and cash equivalents and
$17,843,233 in working capital at March 31, 2006. This compares to $6,368,935 in
cash and cash equivalents and $6,010,158 in working capital for year ended March
31, 2005.

The Company had a net use of cash of $2,038,848 from operating
activities for the year ending March 31, 2006 compared to a net use of cash of
$1,111,594 for the comparable year ending March 31, 2005.

Financing Activities:

2006

Financing activities for the year ended March 31, 2006
consisted of the Company receiving $20,371,485 as follows:

- During the 2006 fiscal year , the Company issued 9,066,500 shares from
    treasury upon the exercise of certain share purchase warrants at a price of
    US$0.60 per share.
- On September 22, 2005, the Company completed a brokered private placement
    financing consisting of 11,538,500 shares at a price of $1.30 per share. In
    connection with the financing the Company issued 400,000 broker warrants exercisable
    at a price of $1.30 per share that expired unexercised, subsequent to the
    2006 fiscal year end.

Refer to Item 17 Note 5 and 8 for further details.

2005

Financing activities for the year ended March 31, 2005
consisted of the Company receiving $7,430,175 as follows:

---

- 23 -

- In May 2004, the Company completed a private placement financing by issuing
    542,495 post-split units at a price of US$1.67 and for proceeds of US$905,967
    (CAD$1,247,218).
- The Company, primarily in the fourth quarter issued 6,150,000 common shares
    from treasury pursuant to the exercise of certain share purchase warrants
    at a price of US$0.23 per share, for proceeds of US$1,414,500 (CAD$1,744,978)
    and 100,000 common shares from treasury pursuant to the exercise of certain
    stock options at a price of US$0.267 per share, for proceeds of US$26,700
    (CAD$ $32,934).
- On December 24, 2004 the Company purchased 1,800,000 incentive shares for
    cancellation and return to treasury at the owners cost, that had been previously
    issued to the Companys President for US$5,940 (CAD$7,338).
- The Companys final capital raising transaction for the 2005 fiscal
    year occurred in March of 2005 and consisted of a private placement of 9,066,500
    units at a price of US$0.40 per unit for proceeds of US$3,626,600 (CAD$4,412,383).

Investing Activities:

Investing activities for the 2006 fiscal year consisted of
using $5,969,491 of cash for acquisition and exploration work on our New Zealand
oil and gas properties. Please refer to Item 17 Note 3 and 8 for additional
information relating to acquisitions and expenditures as well as Property,
Plant and Equipment above. The Company also used $21,598 in cash for the
purchase of equipment and sold 6,000 shares of Tenke Mining Corp for proceeds of
$43,212.

For the similar period last year, the Company used $822,236 of
cash for exploration work on our New Zealand oil and gas properties. The Company
also used $3,876 in cash for the purchase of equipment.

The net result for the twelve-month period ending March 31,
2006 was a net use of cash totalling $5,947,877 for investing activities. This
compares to a net use of cash from investing activities totalling $826,112 for
the same period last year.

Conclusion:

The net impact of all cash activities during the twelve months
ended March 31, 2006 resulted in a net increase in cash of $12,384,760, compared
to a net increase in cash of $5,492,469 for the year ended March 31, 2005.

Other:

- Subsequent to year-end, on June 12, 2006 the Company completed a brokered
    private placement financing of 40,000,000 common shares at a price of $0.75
    per share.
- On June 16, 2006, the Company acquired all of the outstanding shares of
    Cheal Petroleum Limited (Cheal), PEP 38757 Limited and PEP 38758
    Limited which are all located in New Zealand. Please refer to Exhibit 4.8
    and 4.12. Cheal owns a 30.5% interest in PEP 38738-S containing the Cheal
    Oil Field and a 15.1% interest in PEP 38738-D containing the Cardiff deep
    gas prospect. Consideration paid for these companies was:

| | ix.  | NZ$18,542,857 (CDN$12,800,000) consisting of a payment of
      NZ$14,625,501 at the closing of the share purchase agreement and a cash
      payment to the seller immediately after closing of NZ$3,917,356 to re-pay
      advances made by the seller to Cheal Petroleum Limited;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                      
| | ii.  | five million shares of the Company; and                                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                      
| | iii. | a 0.775% gross over riding royalty on PEP
  38738-D.                                                                                                                                                                                                                                 

---

- 24 -

The work commitments expected over the 2007 fiscal year for PEP
38738-S and PEP 38738-D amount to a total of $6,000,000 and relate materially to
the Cheal Oil Field Development Plan.

Our capital resources historically were comprised primarily of
private investors who are either existing contacts of management or who come to
our attention through brokers, financial institutions and other intermediaries.
Our capital resources, as a result of our brokered private placements in March
and September 2005 and June 2006, have expanded to a broader group than in
previous fiscal years. These capital resources are not anticipated to change
during the 2007 fiscal year. Our access to capital is always dependent upon
general financial market conditions.

ANTICIPATED MATERIAL WORK OBLIGATIONS BEFORE MARCH 31, 2007
(AS AT MARCH 31, 2006)

|                       | Description of          |           | Source of      
|---------------------- | ----------------------- | --------- | ---------------
|Property               | Work                    | CAD$(1)   | Funds          
|Unproved:              |                         |           |                
|PMP 38157              | Drill and complete well | 3,500,000 | working capital
|PEP 38260              | Drill well              | 1,400,000 | working capital
|PEP 38741              | Drill Well              | 572,000   | working capital
|PEP 38758              | Drill
      Well        | 1,540,000 | working capital
|Total Work Obligations |                         | 7,012,000 |                

(1) The Company estimates an additional $646,000 will be spent
on its various other properties during the 2007 fiscal year.

The estimates of anticipated Material Work Obligations before
March 31, 2007, have been revised for the 2007 fiscal year as at September 28,
2006, and the amended obligations for the year are as follows:

|                       | Description of                          |                 | Source of      
|---------------------- | --------------------------------------- | --------------- | ---------------
|Property               | Work                                    | CAD$(1) (2) (3) | Funds          
|Unproved:              |                                         |                 |                
|PMP 38153              | Drill well                              | 1,050,000       | working capital
|PEP 38157              | Drill and complete well                 | 8,000,000       | working capital
|PEP 38156              | Field development plan/seismic          | 6,750,000       | working capital
|PEP 38256              | Drill well                              | 750,000         | working capital
|PEP 38256              | Drill well                              | 750,000         | working capital
|PEP 38260              | Drill well                              | 750,000         | working capital
|PEP 38741              | Drill Well and Permit
      Maintenance | 590,000         | working capital
|PEP 38758              | Drill
      Well                        | 1,584,000       | working capital
|Total Work Obligations |                                         | 20,224,000      |                

| | (1) | Revised as to updated obligations and considering work
      being performed to the date of this report.                                                              
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                       
| | (2) | The Company estimates that an additional $525,000 will be
      spent on its various other properties during the 2007 fiscal
  year.                                  
| |     |                                                                                                                                                                       
| | (3) | Subject to change based on the Companys accessibility to
      drilling rigs, qualified personnel and other data and results becoming
      available to the Company.

Research and Development, Patents and Licences

Not applicable.

---

- 25 -

Trend Information

Exchange rate fluctuation is an important trend to the Company
as we hold our cash in CAD$, US$ and NZ$ and we incur our exploration
expenditures in NZ$. Refer to Item 3 Risk Factors- Effect of Different
Currencies.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The directors and officers of our Company are:

|Name and Municipality     | Position Held                     | Office Held Since
|------------------------- | --------------------------------- | -----------------
|of Residence              |                                   |                  
|                          |                                   |                  
|Drew Cadenhead            | President, Chief Executive Offier | April 24, 2003   
|New Plymouth, New Zealand | and Director                      |                  
|                          |                                   |                  
|Garth Johnson,            | Chief Financial Officer,          | April 20, 2001   
|Vancouver, BC, Canada.    | Secretary and Director            |                  
|                          |                                   |                  
|Paul Infuso (1)           | Director                          | February 2, 2005 
|Winnipeg, MB, Canada      |                                   |                  
|                          |                                   |                  
|James Smith (1)           | Director                          | February 2, 2005 
|Calgary, AB, Canada       |                                   |                  

Mr. Drew Cadenhead has been the Companys President, Chief
Executive Officer and a Director since April 24, 2003. Mr. Cadenhead began his
career in the oil and gas industry in 1979 with Amoco and Canadian Hunter where
he was responsible for exploration in Canada's Western Sedimentary Basin. Mr.
Cadenhead has held various executive positions in the energy sector, including
Vice President of Exploration and executive positions responsible for
acquisitions and divestitures. Of particular importance to the Company, is Mr.
Cadenheads international successes in New Zealand's Taranaki Basin with
Fletcher Challenge. Mr. Cadenhead is a member of the C.S.P.G. and APEGGA and
holds the professional designation P. Geol and received his Bachelor of Science
in Geology from the University of Calgary.

Mr. Garth Johnson is a Certified General Accountant who was a
Controller with a manufacturer in the lumber industry from 1994 to 1997 in
Surrey, B.C. In 1997, Mr. Johnson joined our Company as the corporate
accountant. He is currently the Chief Financial Officer, Secretary and a
Director of our Company as well as Chief Financial Officer of AMG Oil Ltd.

Mr. Paul Infuso is an independent oil & gas consultant with
more than twenty years of experience. Mr. Infuso has held executive and
leadership positions with both Ulster Petroleum and Impact Energy, where he
played a key role in their success.

Mr. James Smith is a seasoned business executive who has over
30 years of experience with public equity, financial management and reporting.
He has been involved in the oil and gas industry at an executive level since
1983. Mr. Smith has formerly worked as CFO of Crestar Energy, as Vice President
of Amoco Canada and as an executive for Dome Petroleum. Mr. Smith is a member of
the board of directors of Grand Petroleum Inc., Penn West Petroleum Ltd., Grey
Wolf Exploration Inc and Pure Energy Services Ltd.

Effective July 25, 2005, the Company secured directors and
officers liability insurance. This insurance was renewed on July 25, 2006.

---

- 26 -

Compensation

The following table sets forth the aggregate compensation paid
by the Company for services rendered during the last full fiscal year
indicated:

SUMMARY COMPENSATION TABLE

Compensation
    Securities Under OptionNamed Executive Officer and Principal Position
    Year Ended
    Salary ($)
    Other Annual Compensation ($)
    Number of Options
    Exercise Price (6)
    Expiry DateDrew Cadenhead President, Chief Executive Officer and
      Director (1)
    2006 2005 2004
    190,000 165,260 147,667
    40,000 - 12,000
    50,000 400,000 -
    $1.30 $0.77 -
    Nov 22, 2010 January 1, 2010 -Garth Johnson, Chief Financial Officer and Secretary
      (2)
    2006 2006 2005 2004
    69,552 - 69,082 58,335
    25,000 - -
    100,000 75,000
      75,000(6)
    $1.30 $0.77 $0.77 $0.77
    Nov 22, 2010 May 10, 2010 May 31,
      2008Paul Infuso Director (3)
    2006 2005 2004
    12,000 2,000 -
    - - -
    - 75,000 -
    - $077 -
    - Feb 10, 2010 -James Smith Director (3)
    2006 2005 2004
    10,500 1,000 -
    - - -
    25,000 50,000 -
    $1.12 $0.77 -
    July 10, 2010 Feb 10, 2010 -Alan Hart, Chairman and Director (4)
    2006 2005 2004
    - 30,349 49,024
    - - -
    - - -
    - - -
    - - -Barry MacNeil, Chairman and Director (5)
    2006 2005 2004
    - 5,350 -
    - - -
    - - -
    - - -
    - - -


|(1) | Mr. Cadenhead was granted 400,000 options on January
        1, 2005. The options vest over a five year period. Effective December
        1, 2005 the Company and Mr. Cadenhead agreed to annual compensation of
        $200,000 with certain bonus provisions to be decided by the Companys
        compensation committee. Mr. Cadenhead is also paid a 30% cost of living
        allowance that remains in effect while he resides in New Zealand. Subsequent
        to March 31, 2006 Mr. Cadenhead was granted an additional 200,000 options
        exercisable at $0.70 per share until expiry on August 2, 2011.                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Johnson was paid $69,552 (2005: $69,082; 2004: $58,335)
        primarily through invoices submitted by DLJ Management Corp., a subsidiary
        of Trans-Orient Petroleum Ltd., as a result of Mr. Johnsons time
        spent on business of the Company. Effective December 1, 2005 the Company
        and Mr. Johnson agreed to annual compensation of $150,000 per year with
        certain bonus provisions to be decided by the Companys compensation
        committee. Subsequent to March 31, 2006 Mr. Johnson was granted an additional
        100,000 options exercisable at $0.70 per share until expiry on August
        2, 2011.
|(3) | Mr. Infuso and Mr. Smith were paid $1,000 and $500 per
        month respectively in their capacity as Directors starting from date of
        their appointment on February 10, 2005 until April 2005 when it was agreed
        that all independent directors would be compensated $1,000 per month.
        In addition Mr. Infuso and Mr. Smith were each granted 75,000 and 50,000
        options on February 10, 2005 and Mr. Smith was granted an additional 25,000
        options on July 29, 2005. Subsequent to the 2006 fiscal                                                                                                               

---

- 27 -

|    | year the Company agreed to compensate Mr. Infuso and
        Mr. Smith each $2,500 per month. Additionally Mr. Infuso and Mr. Smith
        were each granted an additional 150,000 options exercisable at $0.70 per
        share until expiry on August 2, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Mr. Hart resigned from the Board of Directors effective
        June 11, 2005.                                                                                                                                                                                    
|(5) | Mr. MacNeil resigned from the Board of Directors effective
        February 2, 2005.                                                                                                                                                                              
|(6) | Certain options are denominated in US dollars and have
        been converted to Canadian dollars using the March 31, 2006 closing exchange
        rate.                                                                                                         

We currently do not offer profit sharing, pension or retirement
benefit plans to our officers or directors and none are presently proposed.
There are no arrangements for payments on termination for any officer in the
event of a change of control, with the exception that upon a change of control
of the Company occurring, directors options and incentive shares that are
subject to vesting provisions are deemed to have vested completely, immediately
prior to a change of control occurring.

Board Practices

All directors have a term of office expiring at our next annual
general meeting, to be held in September of 2007, unless re-elected or unless a
director's office is earlier vacated in accordance with our by-laws or the
provisions of the Business Corporations Act (Yukon).

All officers have a term of office lasting until their removal
or replacement by the board of directors. As of September 28, 2006 the following
are the Companys officers and directors.

Name
    Period served in positionDrew Cadenhead, President, Chief
        Executive Officer and Director
    3 years, 5 monthsGarth Johnson, Secretary, Chief
        Financial Officer and Director
    5 years, 5 monthsJames Smith, Director
    1 year, 7 monthsPaul Infuso, Director
    1 year, 7 months


Audit and compensation committees

List of Audit committee members as at September 28, 2006:
          James
Smith           Paul
Infuso

Audit committee members do not have service contracts and are
not paid for their services as an audit committee member. The committee is
constituted to monitor the veracity of the financial and regulatory reports
produced by the Company, and the controls that are in place to ensure the
opportunities for fraud or material error in the financial statements of the
Company are minimized. Please refer to Exhibits for a copy of the Audit
Committee Charter.

The Company has a compensation committee consisting of Mr.
Infuso and Mr. Smith. Compensation Committee members do not have service
contracts and are not paid for their services as a compensation committee
member. The committee is constituted to ensure that executives, staff and board
members are provided incentives and compensated in a way that advances both the
short and long-term interests of shareholders while also ensuring that the
Company is able to attract and retain executive management talent. Please refer
to Exhibit 4.11 for a copy of the Compensation Committee Charter.

Employees and Consultants

We have four full time employees. Mr. Cadenhead, President and
CEO, Mr. Johnson, CFO and Corporate Secretary, Mr. Mark Webster, Exploration
Manager and Mr. Ricardo Bertolotti, Chief Geophysicist.

---

- 28 -

Messrs. Cadenhead, Webster and Bertolotti reside in New Zealand
and Mr. Johnson is located in Vancouver, British Columbia.

Share ownership by directors and officers of the Company at
September 28, 2006 are as follows:

Name
    Number of Shares
    Number of Options
    Exercise Price(1)
    Expiry DateDrew Cadenhead
    300,000
    400,000 50,000 200,000
    $0.77 $1.30 $0.70
    Jan 1, 2010 Nov 22, 2010 August 2,
      2011Garth Johnson
    38,000
    75,000 75,000 100,000 100,000
    $0.77 $0.77 $1.30 $0.70
    May 31, 2008 May 10, 2010 Nov 22,
      2010 August 2, 2011Paul Infuso
    200,000
    75,000 150,000
    $0.77 $0.70
    February 10, 2010 August 2, 2011James Smith
    100,000
    50,000 25,000 150,000
    $0.77 $1.12 $0.70
    February 10, 2010 July 29, 2010
      August 2, 2011


There have been no incentive stock options exercised by any
director, officer or employee to the report date.

On September 9, 2005 the Company received disinterested
shareholder approval to the Companys new share option plan where directors,
officers, employees and consultants to the Company or its affiliates are
eligible to receive grants of options. Under the new option plan the number of
shares reserved for issuance as share incentive options is equal to 10% of the
Companys issued and outstanding shares at any time. These options are
non-assignable and non transferable, and have a term of up to 5 years,
terminating within 90 days after the optionee ceases to be associated with the
Company and vesting over a period of at least 18 months. The exercise prices
will be established at the time the options are granted; subject to a minimum
exercise price of not less than the Discounted Market Price as defined in the
policies of the TSX-V.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

Major shareholders

Beneficial Holder of More Than Five Percent of Outstanding
Shares

The Company sets forth the common stock ownership of the only
individual known by us to be the beneficial owner of 5% or more of our common
stock. All ownership is of record and reflects beneficial ownership as of
September 28, 2005. Information was provided by the individual.

|Name and address of owner               | Number of Shares | Percent of Class
|--------------------------------------- | ---------------- | ----------------
|                                        |                  |                 
|RAB Energy Fund Limited Vancouver, B.C. | 6,725,000        | 7.34            
|                                        |                  |                 
|South Pacific Lease Operations Limited  | 5,000,000        | 5.46            

---

- 29 -

To the knowledge of the Company, there have been no significant
changes in percentage share ownership held by any major shareholders, during the
last three years with the exception of:

| | 1. | On September 22, 2005, RAB Energy Fund Limited acquired
      6,725,000 shares of the Company through a brokered private placement
      detailed above.                                                                                       
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                
| | 2. | On June 15, 2006, the Company issued South Pacific Lease
      Operations Limited 5,000,000 shares of the Company as part of the
      acquisition of Cheal Petroleum Limited, PEP 38757 Limited and PEP 38758
      Limited as detailed above.

Insider Reporting

The Securities Act (Yukon) does not prescribe any reporting for
insiders of our Company. The company is a reporting issuer in British Columbia
and insiders comply with the requirements of Part 12 of the Securities Act
(British Columbia). Insiders (generally officers, directors and holders of more
than ten percent of voting securities) are required to file individual insider
reports of changes in their ownership within ten days after the month in which
any trade in our securities occurs. Copies of the reports and summaries of the
insider activity as well as issuer activity are available for public inspection
at www.sedi.com, the Canadian regulatory
website for insider trading.

Major Shareholder Voting Right

There are no different voting rights attributable to the major
shareholders and every shareholder has equal rights.

Host Country Shareholders

The proportion and number of shareholders of record in the
United States as at August 31, 2006 are as follows:

Estimated proportion of shares held in the
      U.S.
    17.72%Number of shareholders
    555Number of shares held
    16,241,232


Arrangements Affecting Shareholdings

None.

Related Party Transactions

The following are reported as Related Party Transactions. The
nature of the transaction, the affiliate(s) who had an interest in the
transaction and the nature of the interest are included in the description of
each of the transactions:

|(a) | On August 2, 2006 the Company granted 600,000 options to
      four Directors all of which vest over eighteen months and are exercisable
      at a price of $0.70 per share until expiry on August 2, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                             
|(b) | On November 22, 2005 the Company granted 150,000 options
      to two Directors that vest over eighteen months and are exercisable at a
      price of $1.30 per share until expiry on November 22, 2010.   
|    |                                                                                                                                                                                                             
|(c) | On August 15, 2005 the Company entered into an agreement
      with Mr. Brian Jones to retain Mr. Jones to provide his services as the
      Companys Executive Vice President. The agreement is for
  an  

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- 30 -

|    | initial three month period with monthly compensation of
      $7,000 per month. This agreement was terminated in November
2005.                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                      
|(d) | Independent Directors of the Company received a total of
      $22,500 (2005 fiscal year - $3,000) in directors fees for the 2006 fiscal
      year.                                                
|    |                                                                                                                                                                                                      
|(h) | During the fiscal year ending March 31, 2006 the Company
      paid a total of $358,427 (2005 fiscal year - $270,041) in wages, bonuses
      and cost of living allowance to its Executive
Officers.

Interests of experts and counsel

Not applicable

ITEM 8. FINANCIAL INFORMATION

Consolidated Statements and Other Financial
Information

Consolidated financial statements are provided under PART III.
Item 17. FINANCIAL STATEMENTS There are no material legal proceedings to which
we are subject or which are anticipated or threatened. We have never paid
dividends to shareholders and no dividends are payable in the foreseeable
future.

Significant Changes

The following significant changes have occurred since March 31,
2006:

| | a) | Acquisition of Cheal Petroleum Limited, PEP 38757 Limited
      and PEP 38758 Limited:                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | On June 16, 2006, the Company acquired all of the
      outstanding shares of Cheal Petroleum Limited (Cheal), PEP 38757 Limited
      and PEP 38758 Limited which are all located in New Zealand. Please refer
      to Exhibit 4.8 and 4.12. Cheal owns a 30.5% interest in PEP 38738-S
      containing the Cheal Oil Field and a 15.1% interest in PEP 38738-D
      containing the Cardiff deep gas prospect. Consideration paid for these
      companies was:
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | i.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | ii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | iii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

The work commitments expected over the
2007 fiscal year for PEP 38738-S and PEP 38738-D amount to a total of $6,000,000
and relate materially to the Cheal Oil Field Development Plan.

| | b) | Private Placement Financing:                                                                                                                                                                
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                             
| |    | On June 12, 2006, the Company completed a private
      placement financing of 40,000,000 common shares at a price of $0.75 per
      share for net proceeds of approximately $28.1
million.

No other significant changes material to the business of the
Company has occurred since the date of the annual financial statements.

---

- 31 -

ITEM 9. THE OFFER AND LISTING

Offer and Listing Details

Price History of the stock

All values noted below are in US dollars per share for the
OTCBB and Canadian dollars for the TSX-V.

Summary trading by year, for the five most recently completed
fiscal periods ending March 31, 2006:

|     | OTCBB          | TSX-V        
|---- | -------------- | -------------
|     |                |              
|Year | High (1)(2)(3) | Low (1)(2)(3)
|     |                |              
|2002 | 1.25           | 0.20         
|2003 | 1.55           | 0.22         
|2004 | 4.50           | 0.65         
|2005 | 3.75           | 0.40         
|2006 | 1.46           | 0.38         

Summary trading by quarter for the two most recently competed
fiscal periods ending March 31, 2006:

|               | OTCBB          | **TSX-V**    
|-------------- | -------------- | -------------
|               |                |              
|Year and       |                |              
|Quarter        | High (1)(2)(3) | Low (1)(2)(3)
|               |                |              
|2005           |                |              
|First Quarter  | 3.75           | 2.00         
|Second Quarter | 2.20           | 1.01         
|Third Quarter  | 1.42           | 0.65         
|Fourth Quarter | 0.95           | 0.40         

|2006           |      |      |      |     
|-------------- | ---- | ---- | ---- | ----
|First Quarter  | 0.80 | 0.38 | -    | -   
|Second Quarter | 1.46 | 0.60 | 1.70 | 1.09
|Third Quarter  | 1.25 | 0.47 | 1.40 | 0.63
|Fourth Quarter | 1.02 | 0.58 | 1.19 | 0.69

Summary trading by quarter for any full quarter subsequent to
the year end March 31, 2006:

|                 | OTCBB          | TSX-V        
|---------------- | -------------- | -------------
|Month            | High (1)(2)(3) | Low (1)(2)(3)
|                 |                |              
|Apr 1 to June 30 | 0.88           | 0.60         

Summary trading by month for the six most recently completed
months ending August 31, 2006:

|Month | High (1)(2)(3) | Low (1)(2)(3) | High(2)(3) | Low(2)(3)
|----- | -------------- | ------------- | ---------- | ---------
|      |                |               |            |          
|Mar   | 0.78           | 0.60          | 0.85       | 0.69     
|Apr   | 0.88           | 0.60          | 1.00       | 0.70     
|May   | 0.82           | 0.61          | 0.90       | 0.70     

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- 32 -

|Jun  | 0.87 | 0.62 | 0.90 | 0.67
|---- | ---- | ---- | ---- | ----
|July | 0.84 | 0.55 | 0.83 | 0.64
|Aug  | 0.66 | 0.52 | 0.73 | 0.58

|(1) | OTCBB quotations may reflect interdealer prices, without
      retail markup, markdown or commission and may not necessarily reflect
      actual transactions.    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                    
|(2) | All market prices subsequent to May 4, 2004 reflect
      trading after the 1.5:1 forward stock split to the recorded shareholders
      as of April 27, 2004.     
|    |                                                                                                                                                                    
|(3) | All quotations for OTCBB are from the website located at
      www.finance.yahoo.comand all quotations
      for TSX-V are from the website located at www.tsx.com.

Markets

The authorized capital of the Company consists of an unlimited
number of Common Shares without par value, of which 46,631,081 were issued as of
September 28, 2005.

Our shares traded on the VSE in Vancouver, British Columbia,
Canada until September 21, 2000. On July 18, 2005, the Company commenced trading
on the TSX Venture Exchange under the symbol TAO. Beginning on December 8,
1999 our shares traded on the OTC Bulletin Board (OTCBB) under the symbol
DUREF until we changed our name to TAG Oil Ltd.on June 12, 2002. Thereafter
our shares have traded on the OTCBB under the symbol TAGOF.

ITEM 10. ADDITIONAL INFORMATION

Share Capital

Not applicable

Memorandum and Articles of association

Our Articles of Association were previously filed with our Form
20F for the Year Ended March 31, 2000. On September 22, 2006 the shareholders of
the Company approved the Board of Directors recommendation to return the
Companys incorporation to British Columbia and to adopt new Articles. The new
Articles to be adopted by the Company are attached in Exhibit 4.10 to this
annual report.

Material contracts

Attached as exhibits are material contracts the Company entered
  into during the period July 30, 2004 to September 28, 2006 as follows:

| | (a) | TAG Oil Ltd. Form of Subscription Agreement Dated
      September 2005-Canadian & Non-U.S. Persons. (1)                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                           
| | (b) | TAG Oil Ltd. Form of Subscription Agreement Dated
      September 2005-U.S. Persons. (1)                                                                                                                                                  
| |     |                                                                                                                                                                                                                                           
| | (c) | Underwriting Agreement with an Effective date of
      September 1, 2005 between the Company and Canaccord Capital Corporation is
      TAG Oil Ltd. Form of Subscription Agreement Dated June 2006-Canadian &
      Non-U.S. Persons. (1)
| |     |                                                                                                                                                                                                                                           
| | (d) | TAG Oil Ltd. Form of Subscription Agreement Dated June
      2006-U.S. Persons.                                                                                                                                                           
| |     |                                                                                                                                                                                                                                           
| | (e) | Underwriting Agreement with an Effective date of May 12,
      2006 between the Company and Canaccord Capital
  Corporation.                                                                                                              

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- 33 -

| | (f) | Share Purchase Agreement between the Company and South
        Pacifc Lease Operations Limited dated May 9, 2006.
| | --- | -----------------------------------------------------------------------------------------------------------------

(1)Incorporated by reference with our previously
filed Form 20-F dated March 31, 2005 filed on September 28, 2005.

Exchange Controls

There is no law or governmental decree or regulation in Canada
that restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares
of the Company, other than withholding tax requirements. See Taxation.

There is no limitation imposed by Canadian law or by the
charter or other constituent documents of the Company on the right of a
non-resident to hold or vote common shares of the Company, other than as
provided in the Investment Canada Act (Canada) (the Investment Act).

The following discussion summarizes the principal features of
the Investment Act for a non-resident who proposes to acquire common shares of
the Company. It is general only, it is not a substitute for independent advice
from an investors own advisor, and it does not anticipate statutory or
regulatory amendments.

The Investment Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture (each an entity) that is not
a Canadian as defined in the Investment Act (a non-Canadian), unless after
review the Director of Investments appointed by the minister responsible for the
Investment Act is satisfied that the investment is likely to be of net benefit
to Canada. The size and nature of a proposed transaction may give rise to an
obligation to notify the Director and seek an advance ruling. An investment in
common shares of the Company by a non-Canadian other than a WTO Investor (as
defined in the Investment Act and which term includes entities which are
nationals of or are controlled by nationals of member states of the World Trade
Organization) when the Company was not controlled by a WTO Investor, would be
reviewable under the Investment Act if it was an investment to acquire control
of the Company and the value of the assets of the Company, as determined in
accordance with the regulations promulgated under the Investment Act, Cdn$5
million, or if an order for review was made by the federal cabinet on the
grounds that the investment related to Canadas cultural heritage or national
identity, regardless of the value of the assets of the Company. An investment in
common shares of the Company by a WTO Investor, or by a non-Canadian when the
Company was controlled by a WTO Investor, would be reviewable under the
Investment Act if it was an investment to acquire control of the Company and the
value of the assets of the Company, as determined in accordance with the
regulations promulgated under the Investment Act, exceeds a specified amount,
which in 2003 was Cdn$237 million. A non-Canadian would acquire control of the
Company for the purposes of the Investment Act through acquisition of common
shares if the non-Canadian acquired a majority of the common shares of the
Company. The acquisition of less than a majority but one third or more of the
common shares of the Company would be presumed to be an acquisition of control
of the Company unless it could be established that, on the acquisition, the
Company was not controlled in fact by the acquirer through the ownership of
common shares.

Certain transactions relating to common shares of the Company
would be exempt from the Investment Act, including

(a) Acquisition of common shares of the Company by a person in
the ordinary course of that persons business as a trader or dealer in
securities,

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- 34 -

(b) Acquisition of control of the Company in connection with
the realization of security granted for a loan or other financial assistance and
not for a purpose related to the provisions on the Investment Act, and

(c) Acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization following which
the ultimate direct or indirect control in fact of the Company, through the
ownership of common shares, remained unchanged.

Taxation

Canadian Tax Consequences

The following, summarizes the material Canadian federal income
tax consequences generally applicable to the holding and disposition of Common
Shares by a holder (in this summary, a U.S. Holder) who, (a) for the purposes
of the Income Tax Act (Canada) (the "Tax Act"), is not resident in Canada, deals
at arm's length with the Company, holds the Common Shares as capital property
and does not use or hold the Common Shares in the course of carrying on, or
otherwise in connection with, a business in Canada, and (b) for the purposes of
the Canada-United States Income Tax Convention, 1980 (the "Treaty"), is a
resident solely of the United States, has never been a resident of Canada, and
has not held or used (and does not hold or use) Common Shares in connection with
a permanent establishment or fixed base in Canada.

This summary does not apply to traders or dealers in
securities, limited liability companies, tax-exempt entities, insurers,
financial institutions (including those to which the mark-to-market provisions
of the Tax Act apply), or any other U.S. Holder to which special considerations
apply.

This summary is based on the current provisions of the Tax Act
including all regulations there under, the Treaty, all proposed amendments to
the Tax Act, the regulations and the Treaty publicly announced by the Government
of Canada to the date hereof, and the current administrative practices of the
Canada Customs and Revenue Agency. It has been assumed that all currently
proposed amendments will be enacted as proposed and that there will be no other
relevant change in any governing law or administrative practice, although no
assurances can be given in these respects. This summary does not take into
account provincial, U.S., state or other foreign income tax law or practice. The
tax consequences to any particular U.S. Holder will vary according to the status
of that holder as an individual, trust, corporation, partnership or other
entity, the jurisdictions in which that holder is subject to taxation, and
generally according to that holder's particular circumstances. Accordingly, this
summary is not, and is not to be construed as, Canadian tax advice to any
particular U.S. Holder.

Dividends

Dividends paid or deemed to be paid to a U.S. Holder by the
Company will be subject to Canadian withholding tax. Under the Treaty, the rate
of withholding tax on dividends paid to a U.S. Holder is generally limited to
15% of the gross amount of the dividend (or 5% if the U.S. Holder is a
corporation and beneficially owns at least 10% of the Companys voting shares).
The Company will be required to withhold the applicable withholding tax from any
such dividend and remit it to the Canadian government for the U.S. Holders
account.

Disposition

A U.S. Holder is not subject to tax under the Tax Act in
respect of a capital gain realized on the disposition of a Common Share in the
open market unless the share is "taxable Canadian property" to the holder
thereof and the U.S. Holder is not entitled to relief under the Treaty. A Common
Share will be taxable Canadian property to a U.S. Holder if, at any time during
the 60 months preceding the disposition, the U.S. Holder or persons with whom
the U.S. Holder did not deal at arm's length alone or together owned, or had
rights to acquire, 25% or more of the Companys issued shares of any class or
series.

---

- 35 -

A U.S. Holder whose Common Shares do constitute taxable
Canadian property, and who might therefore be liable for Canadian income tax
under the Tax Act, will generally be relieved from such liability under the
Treaty unless the value of such shares at the time of disposition is derived
principally from real property situated in Canada. Management of the Company
believes that the value of our Common Shares is not currently derived
principally from real property situated in Canada.

United States Tax Consequences

The following is a discussion of material United States federal
income tax consequences, under current law, generally applicable to a U.S.
Holder (as hereinafter defined) of common shares of the Company. This discussion
does not address all potentially relevant federal income tax matters and it does
not address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below as excluded from the
definition of a U.S. Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences (see Taxation  Canadian Federal
Income Tax Consequences above). Accordingly, holders and prospective holders of
common shares of the Company should consult their own tax advisors about the
specific federal, state, local, and foreign tax consequences to them of
purchasing, owning and disposing of common shares of the Company, based upon
their individual circumstances.

The following discussion is based upon the sections of the
Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations,
published Internal Revenue Service (IRS) rulings, published administrative
positions of the IRS and court decisions that are currently applicable, any or
all of which could be materially and adversely changed, possibly on a
retroactive basis, at any time and which are subject to differing
interpretations. This discussion does not consider the potential effects, both
adverse and beneficial, of any proposed legislation, which if enacted, could be
applied, possibly on a retroactive basis, at any time.

U.S. Holders

As used herein, a U.S. Holder means a holder of common shares
of the Company who is a citizen or individual resident of the United States, a
corporation or partnership created or organized in or under the laws of the
United States or of any political subdivision thereof, an estate whose income is
taxable in the United States irrespective of source or a trust subject to the
primary supervision of a court within the United States and control of a United
States fiduciary as described Section 7701(a)(30) of the Code. This summary does
not address the tax consequences to, and U.S. Holder does not include, persons
subject to specific provisions of federal income tax law, such as tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals, persons or entities that have a functional
currency other than the U.S. dollar, shareholders subject to the alternative
minimum tax, shareholders who hold common shares as part of a straddle, hedging
or conversion transaction, and shareholders who acquired their common shares
through the exercise of employee stock options or otherwise as compensation for
services. This summary is limited to U.S. Holders who own common shares as
capital assets and who own (directly and indirectly, pursuant to applicable
rules of constructive ownership) no more than 5% of the value of the total
outstanding stock of the Company. This summary does not address the consequences
to a person or entity holding an interest in a shareholder or the consequences
to a person of the ownership, exercise or disposition of any options, warrants
or other rights to acquire common shares. In addition, this summary does not
address special rules applicable to United States persons (as defined in Section
7701(a)(30) of the Code) holding common shares through a foreign partnership or
to foreign persons holding common shares through a domestic partnership.

Distribution on Common Shares

In general, U.S. Holders receiving dividend distributions
(including constructive dividends) with respect to common shares of the Company
are required to include in gross income for United States federal income tax
purposes the gross amount of such distributions, equal to the U.S. dollar value
of such

---

- 36 -

distributions on the date of receipt (based on the exchange
rate on such date), to the extent that the Company has current or accumulated
earnings and profits, without reduction for any Canadian income tax withheld
from such distributions. Such Canadian tax withheld may be credited, subject to
certain limitations, against the U.S. Holders federal income tax liability or,
alternatively, may be deducted in computing the U.S. Holders federal taxable
income by those who itemize deductions. (See more detailed discussion at
Foreign Tax Credit below). To the extent that distributions exceed current or
accumulated earnings and profits of the Company, they will be treated first as a
return of capital up to the U.S. Holders adjusted basis in the common shares
and thereafter as gain from the sale or exchange of property. Preferential tax
rates for long-term capital gains are applicable to a U.S. Holder, which is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a U.S. Holder, which is a corporation.

In the case of foreign currency received as a dividend that is
not converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss. However, an
individual whose realized gain does not exceed $200 will not recognize that
gain, provided that there are no expenses associated with the transaction that
meet the requirements for deductibility as a trade or business expense (other
than travel expenses in connection with a business trip) or as an expense for
the production of income.

Dividends paid on the common shares of the Company generally
will not be eligible for the dividends received deduction provided to
corporations receiving dividends from certain United States corporations. A U.S.
Holder which is a corporation and which owns shares representing at least 10% of
the voting power and value of the Company may, under certain circumstances, be
entitled to a 70% (or 80% if the U.S. Holder owns shares representing at least
20% of the voting power and value of the Company) deduction of the United States
source portion of dividends received from the Company (unless the Company
qualifies as a foreign personal holding company or a passive foreign
investment company, as defined below). The Company does not anticipate that it
will earn any United States income, however, and therefore does not anticipate
that any U.S. Holder will be eligible for the dividends received deduction.

Under current Treasury Regulations, dividends paid on the
Company common shares generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax. However, dividends
and the proceeds from a sale of the Companys common shares paid in the U.S.
through a U.S. or U.S. related paying agent (including a broker) will be subject
to U.S. information reporting requirements and may also be subject to the 31%
U.S. backup withholding tax, unless the paying agent is furnished with a duly
completed and signed Form W-9. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or a credit against the U.S.
Holders U.S. federal income tax liability, provided the required information is
furnished to the IRS.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the ownership of common shares of the
Company may be entitled, at the option of the U.S. Holder, to either receive a
deduction or a tax credit for such foreign tax paid or withheld. Generally, it
will be more advantageous to claim a credit because a credit reduces United
States federal income taxes on a dollar-for-dollar basis, while a deduction
merely reduces the taxpayers income subject to tax. This election is made on a
year-by-year basis and generally applies to all foreign taxes paid by (or
withheld from) the U.S. Holder during that year. There are significant and
complex limitations which apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holders United States income tax liability that the U.S. Holders foreign
source income bears to his or its worldwide taxable income. In the determination
of the application of this limitation, the various items of income and deduction
must be classified into foreign and domestic sources. Complex rules govern this
classification process. In addition, this limitation is calculated separately
with respect to specific classes

---

- 37 -

of income such as passive income,  high withholding tax
interest, financial services income, shipping income, and certain other
classifications of income. Dividends distributed by the Company will generally
constitute passive income or, in the case of certain U.S. Holders, financial
services income for these purposes. The availability of the foreign tax credit
and the application of the limitations on the credit are fact specific, and U.S.
Holders of common shares of the Company should consult their own tax advisors
regarding their individual circumstances.

Disposition of Common Shares of the Company

In general, U.S. Holders will recognize gain or loss upon the
sale of common shares of the Company equal to the difference, if any, between
(i) the amount of cash plus the fair market value of any property received, and
(ii) the shareholders tax basis in the common shares of the Company.
Preferential tax rates apply to long-term capital gains of U.S. Holders which
are individuals, estates or trusts. In general, gain or loss on the sale of
common shares of the Company will be long-term capital gain or loss if the
common shares are a capital asset in the hands of the U.S. Holder and are held
for more than one year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders, which are not corporations, any
unused portion of such net capital loss may be carried over to be used in later
tax years until such net capital loss is thereby exhausted. For U.S. Holders
that are corporations (other than corporations subject to Subchapter S of the
Code), an unused net capital loss may be carried back three years and carried
forward five years from the loss year to be offset against capital gains until
such net capital loss is thereby exhausted. However, the amount that can be
carried back is limited to an amount that does not cause or increase a net
operating loss in the carry back year.

Other Considerations

Set forth below are certain material exceptions to the
above-described general rules describing the United States federal income tax
consequences resulting from the holding and disposition of common shares:

Foreign Personal Holding Company

If at any time during a taxable year more than 50% of the total
combined voting power or the total value of the Companys outstanding shares is
owned, directly or indirectly (pursuant to applicable rules of constructive
ownership), by five or fewer individuals who are citizens or residents of the
United States and 60% or more of the Companys gross income for such year is
derived from certain passive sources (e.g., from certain interest and
dividends), the Company may be treated as a foreign personal holding company.
In that event, U.S. Holders that hold common shares would be required to include
in gross income for such year their allocable portions of such passive income to
the extent the Company does not actually distribute such income. The Company
does not believe that it currently qualifies as a foreign personal holding
company. However, there can be no assurance that the Company will not be
considered a foreign personal holding company for the current or any future
taxable year.

Foreign Investment Company

If 50% or more of the combined voting power or total value of
the Companys outstanding shares is held, directly or indirectly, by citizens or
residents of the United States, United States domestic partnerships or
corporations, or estates or trusts other than foreign estates or trusts (as
defined by the Code Section 7701(a)(31)), and the Company is found to be engaged
primarily in the business of investing, reinvesting, or trading in securities,
commodities, or any interest therein, it is possible that the Company may be
treated as a foreign investment company as defined in Section 1246 of the
Code, causing all or part of any gain realized by a U.S. Holder selling or
exchanging common shares to be treated as ordinary income rather than capital
gain. The Company does not believe that it currently qualifies as a foreign
investment company. However, there can be no assurance that the Company will not
be considered a foreign investment company for the current or any future taxable
year.

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- 38 -

Passive Foreign Investment Company

United States income tax law contains rules governing passive
foreign investment companies (PFIC) which can have significant tax effects on
U.S. Holders of foreign corporations. These rules do not apply to non-U.S.
Holders. Section 1297 of the Code defines a PFIC as a corporation that is not
formed in the United States if, for any taxable year, either (i) 75% or more of
its gross income is passive income, which includes interest, dividends and
certain rents and royalties or (ii) the average percentage, by fair market value
(or, if the corporation is not publicly traded and either is a controlled
foreign corporation or makes an election, by adjusted tax basis), of its assets
that produce or are held for the production of passive income is 50% or more.
The Company appears to have been a PFIC for the fiscal year ended March 31,
2001, and in other certain prior fiscal years. In addition, the Company expects
to qualify as a PFIC for the fiscal year ending March 31, 2002 and may also
qualify as a PFIC in future fiscal years. Each U.S. Holder of the Company is
urged to consult a tax advisor with respect to how the PFIC rules affect such
U.S. Holders tax situation.

Each U.S. Holder who holds stock in a foreign corporation
during any year in which such corporation qualifies as a PFIC is subject to
United States federal income taxation under one of three alternative tax regimes
at the election of such U.S. Holder. The following is a discussion of such
alternative tax regimes applied to such U.S. Holders of the Company. In
addition, special rules apply if a foreign corporation qualifies as both a PFIC
and a controlled foreign corporation (as defined below) and a U.S. Holder
owns, actually or constructively, 10% or more of the total combined voting power
of all classes of stock entitled to vote of such foreign corporation (See more
detailed discussion at Controlled Foreign Corporation below).

A U.S. Holder who elects to treat the Company as a qualified
electing fund (QEF) will be subject, under Section 1293 of the Code, to
current federal income tax for any taxable year to which the election applies in
which the Company qualifies as a PFIC on his pro rata share of the Companys (i)
net capital gain (the excess of net long-term capital gain over net short-term
capital loss), which will be taxed as long-term capital gain, and (ii) ordinary
earnings (the excess of earnings and profits over net capital gain), which will
be taxed as ordinary income, in each case, for the shareholders taxable year in
which (or with which) the Companys taxable year ends, regardless of whether
such amounts are actually distributed. A U.S. Holders tax basis in the common
shares will be increased by any such amount that is included in income but not
distributed.

The procedure a U.S. Holder must comply with in making an
effective QEF election, and the consequences of such election, will depend on
whether the year of the election is the first year in the U.S. Holders holding
period in which the Company is a PFIC. If the U.S. Holder makes a QEF election
in such first year, i.e., a timely QEF election, then the U.S. Holder may make
the QEF election by simply filing the appropriate documents at the time the U.S.
Holder files his tax return for such first year. If, however, the Company
qualified as a PFIC in a prior year during the U.S. Holders holding period,
then, in order to avoid the Section 1291 rules discussed below, in addition to
filing documents, the U.S. Holder must elect to recognize under the rules of
Section 1291 of the Code (discussed herein), (i) any gain that he would
otherwise recognize if the U.S. Holder sold his stock on the qualification date
or (ii) if the Company is a controlled foreign corporation, the U.S. Holders
pro rata share of the Companys post-1986 earnings and profits as of the
qualification date. The qualification date is the first day of the Companys
first tax year in which the Company qualified as a QEF with respect to such U.S.
Holder. For purposes of this discussion, a U.S. Holder who makes (i) a timely
QEF election, or (ii) an untimely QEF election and either of the above-described
gain-recognition elections under Section 1291 is referred to herein as an
Electing U.S. Holder. A U.S. Holder who holds common shares at any time during
a year of the Company in which the Company is a PFIC and who is not an Electing
U.S. Holder (including a U.S. Holder who makes an untimely QEF election and
makes neither of the above-described gain-recognition elections) is referred to
herein as a Non-Electing U.S. Holder. An Electing U.S. Holder (i) generally
treats any gain realized on the disposition of his Company common shares as
capital gain; and (ii) may either avoid interest charges resulting from PFIC
status altogether, or make an annual election, subject to certain limitations,
to defer payment of current taxes on his share of the Companys

---

- 39 -

annual realized net capital gain and ordinary earnings subject,
however, to an interest charge. If the U.S. Holder is not a corporation, any
interest charge imposed under the PFIC regime would be treated as personal
interest that is not deductible.

In order for a U.S. Holder to make (or maintain) a valid QEF
election, the Company must provide certain information regarding its net capital
gains and ordinary earnings and permit its books and records to be examined to
verify such information. The Company intends to make the necessary information
available to U.S. Holders to permit them to make (and maintain) QEF elections
with respect to the Company. The Company urges each U.S. Holder to consult a tax
advisor regarding the availability of, and procedure for making, the QEF
election.

A QEF election, once made with respect to the Company, applies
to the tax year for which it was made and to all subsequent tax years, unless
the election is invalidated or terminated, or the IRS consents to revocation of
the election. If a QEF election is made by a U.S. Holder and the Company ceases
to qualify as a PFIC in a subsequent tax year, the QEF election will remain in
effect, although not applicable, during those tax years in which the Company
does not qualify as a PFIC. Therefore, if the Company again qualifies as a PFIC
in a subsequent tax year, the QEF election will be effective and the U.S. Holder
will be subject to the rules described above for Electing U.S. Holders in such
tax year and any subsequent tax years in which the Company qualifies as a PFIC.
In addition, the QEF election remains in effect, although not applicable, with
respect to an Electing U.S. Holder even after such U.S. Holder disposes of all
of his or its direct and indirect interest in the shares of the Company.
Therefore, if such U.S. Holder reacquires an interest in the Company, that U.S.
Holder will be subject to the rules described above for Electing U.S. Holders
for each tax year in which the Company qualifies as a PFIC.

In the case of a Non-Electing U.S. Holder, special taxation
rules under Section 1291 of the Code will apply to (i) gains realized on the
disposition (or deemed to be realized by reasons of a pledge) of his Company
common shares and (ii) certain excess distributions, as defined in Section
1291(b), by the Company.

A Non-Electing U.S. Holder generally would be required to pro
rate all gains realized on the disposition of his Company common shares and all
excess distributions on his Company common shares over the entire holding period
for the common shares. All gains or excess distributions allocated to prior
years of the U.S. Holder (excluding any portion of the holders period prior to
the first day of the first year of the Company (i) which began after December
31, 1986, and (ii) for which the Company was a PFIC) would be taxed at the
highest tax rate for each such prior year applicable to ordinary income. The
Non-Electing U.S. Holder also would be liable for interest on the foregoing tax
liability for each such prior year calculated as if such liability had been due
with respect to each such prior year. A Non-Electing U.S. Holder that is not a
corporation must treat this interest charge as personal interest which, as
discussed above, is wholly nondeductible. The balance, if any, of the gain or
the excess distribution will be treated as ordinary income in the year of the
disposition or distribution, and no interest charge will be incurred with
respect to such balance. In certain circumstances, the sum of the tax and the
PFIC interest charge may exceed the amount of the excess distribution received,
or the amount of proceeds of disposition realized, by the U.S. Holder.

If the Company is a PFIC for any taxable year during which a
Non-Electing U.S. Holder holds Company common shares, then the Company will
continue to be treated as a PFIC with respect to such Company common shares,
even if it is no longer definitionally a PFIC. A Non-Electing U.S. Holder may
terminate this deemed PFIC status by electing to recognize gain (which will be
taxed under the rules discussed above for Non-Electing U.S. Holders) as if such
Company common shares had been sold on the last day of the last taxable year for
which it was a PFIC.

Effective for tax years of U.S. Holders beginning after
December 31, 1997, U.S. Holders who hold (actually or constructively) marketable
stock of a foreign corporation that qualifies as a PFIC may elect to mark such
stock to the market annually (a mark-to-market election). If such an election
is made, such U.S. Holder will generally not be subject to the special taxation
rules of Section 1291 discussed above. However, if the mark-to-market election
is made by a Non-Electing U.S. Holder after the beginning of the

---

- 40 -

holding period for the PFIC stock, then the Section 1291 rules
will apply to certain dispositions of, distributions on and other amounts
taxable with respect to the Company common shares. A U.S. Holder who makes the
mark-to market election will include in income for each taxable year for which
the election is in effect an amount equal to the excess, if any, of the fair
market value of the common shares of the Company as of the close of such tax
year over such U.S. Holders adjusted basis in such common shares. In addition,
the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any,
of such U.S. Holders adjusted tax basis in the common shares over the fair
market value of such shares as of the close of the tax year, or (ii) the excess,
if any, of (A) the mark-to-market gains for the common shares in the Company
included by such U.S. Holder for prior tax years, including any amount which
would have been treated as a mark-to-market gain for any prior tax year but for
the Section 1291 rules discussed above with respect to Non-Electing U.S.
Holders, over (B) the mark-to-market losses for shares that were allowed as
deductions for prior tax years. A U.S. Holders adjusted tax basis in the common
shares of the Company will be adjusted to reflect the amount included in or
deducted from income as a result of a mark-to-market election. A mark-to-market
election applies to the taxable year in which the election is made and to each
subsequent taxable year, unless the Company common shares cease to be
marketable, as specifically defined, or the IRS consents to revocation of the
election. Because the IRS has not established procedures for making a
mark-to-market election, U.S. Holders should consult their tax advisor regarding
the manner of making such an election. No view is expressed regarding whether
common shares of the Company are marketable for these purposes or whether the
election will be available.

Under Section 1291(f) of the Code, the IRS has issued Proposed
Treasury Regulations that, subject to certain exceptions, would treat as taxable
certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally
not otherwise taxed, such as gifts, exchanges pursuant to corporate
reorganizations, and transfers at death. Generally, in such cases the basis of
the Company common shares in the hands of the transferee and the basis of any
property received in the exchange for those common shares would be increased by
the amount of gain recognized. Under the Proposed Treasury Regulations, an
Electing U.S. Holder would not be taxed on certain transfers of PFIC stock, such
as gifts, exchanges pursuant to corporate reorganizations, and transfers at
death. The transferees basis in this case will depend on the manner of the
transfer. In the case of a transfer by an Electing U.S. Holder upon death, for
example, the transferees basis is generally equal to the fair market value of
the Electing U.S. Holders common shares as of the date of death under Section
1014 of the Code. The specific tax effect to the U.S. Holder and the transferee
may vary based on the manner in which the common shares are transferred. Each
U.S. Holder of the Company is urged to consult a tax advisor with respect to how
the PFIC rules affect his or its tax situation.

Whether or not a U.S. Holder makes a timely QEF election with
respect to common shares of the Company, certain adverse rules may apply in the
event that both the Company and any foreign corporation in which the Company
directly or indirectly holds shares is a PFIC (a lower-tier PFIC). Pursuant to
certain Proposed Treasury Regulations, a U.S. Holder would be treated as owning
his or its proportionate amount of any lower-tier PFIC shares, and generally
would be subject to the PFIC rules with respect to such indirectly-held PFIC
shares unless such U.S. Holder makes a timely QEF election with respect thereto.
The Company intends to make the necessary information available to U.S. Holders
to permit them to make (and maintain) QEF elections with respect to each
subsidiary of the Company that is a PFIC.

Under the Proposed Treasury Regulations, a U.S. Holder who does
not make a timely QEF election with respect to a lower-tier PFIC generally would
be subject to tax (and the PFIC interest charge) on (i) any excess distribution
deemed to have been received with respect to his or its lower-tier PFIC shares
and (ii) any gain deemed to arise from a so-called indirect disposition of
such shares. For this purpose, an indirect disposition of lower-tier PFIC shares
would generally include (i) a disposition by the Company (or an intermediate
entity) of lower-tier PFIC shares, and (ii) any other transaction resulting in a
diminution of the U.S. Holders proportionate ownership of the lower-tier PFIC,
including an issuance of additional common shares by the Company (or an
intermediate entity). Accordingly, each prospective

---

- 41 -

U.S. Holder should be aware that he or it could be subject to
tax even if such U.S. Holder receives no distributions from the Company and does
not dispose of its common shares.

The Company strongly urges each prospective U.S. Holder to
consult a tax advisor with respect to the adverse rules applicable, under the
Proposed Treasury Regulations, to U.S. Holders of lower-tier PFIC
shares.

Certain special, generally adverse, rules will apply with
respect to Company common shares while the Company is a PFIC unless the U.S.
Holder makes a timely QEF election. For example under Section 1298(b)(6) of the
Code, a U.S. Holder who uses PFIC stock as security for a loan (including a
margin loan) will, except as may be provided in regulations, be treated as
having made a taxable disposition of such shares.

Documents on display

Documents concerning the Company which are referred to in this
  document may be inspected in our offices at 1407-1050 Burrard Street, B.C. Canada
  V6Z 2S3 or at the registered office at Suite 200 Financial Plaza, 204 Lambert
  Street, White Horse, YT, Y1A 3T2, Canada. Copies of the Companys financial
  statements and other continuous disclosure documents required under the British
  Columbia Securities Act may be viewed at www.sedar.com and documents referred to in this document
  are filed with the US Securities Commission and can be viewed on the SEC website
  at: www.sec.gov.

Subsidiary information

A list of subsidiaries of the Company to March is identified in
Note 2 (b) in the notes to the consolidated financial statements and in Item 4
Organizational Structure.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Not required as the Company is a small business issuer, in
accordance with Section 12(b)-2 of the Act.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

There has been no material default in any indebtedness, as the
Company has no debt.

We have never paid nor declared a dividend, so there are no
arrearages.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

The Company is aware of the importance of maintaining controls
and procedures and is continuously improving its controls and procedures. As the
Company is not an accelerated filer under SEC definitions, beginning with the
Companys fiscal year ending March 31, 2009, Section 404 of the U.S. Sarbanes
Oxley Act 2002 (Section 404) will require the Company to include an internal
control report from management with the annual report on Form 20-F. The internal
control report must contain (1) a statement of managements responsibility for
establishing and maintaining adequate internal control over

---

- 42 -

financial reporting of the Company, (2) a statement identifying
the framework used by management to conduct the required evaluation of the
effectiveness of the Companys internal controls over financial reporting, (3)
managements assessment of the effectiveness of the Companys internal controls
over financial reporting as of the end of the most recent fiscal year, including
a statement as to whether or not the Companys internal controls over financial
reporting are effective and (4) a statement that the Companys independent
auditors have issued an attestation report on managements assessment of the
internal controls over financial reporting.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90
days prior to the filing date of this report, have concluded that, as of such
date, our disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company would be made known to
them by others within the Company.

Changes in Internal Controls

There were no significant changes in the Companys internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, nor do we believe that
there are any significant deficiencies or material weaknesses in its internal
controls. As a result, no corrective actions were required or undertaken.

ITEM 16. [RESERVED]

ITEM 16A. Audit committee financial expert

Our Board of Directors has determined that we have one
independent audit committee financial expert serving on its audit committee.
This financial expert is James Smith who is accredited in Canada as a Chartered
Accountant.

ITEM 16B. Code of Ethics

We have adopted a code of ethics that applies to the Chief
Executive Officer and the Chief Financial Officer, as well as to all other
staff. A copy of our code of ethics is available, free of charge, from the
offices of TAG Oil Ltd., at 1407-1050 Burrard Street, Vancouver, British
Columbia, Canada, V6Z 2S3 and this can be requested in writing, addressed to the
Company Secretary.

ITEM 16C. Principal Accountants Fees and Services

Principal Accountant Service
    For the fiscal year ended March
      31, 2006
    For the fiscal year ended March
      31, 2005Audit Fees(1)
    21,497
    14,458Tax Fees(2)
    4,881
    900All Other Fees(3)
    -
    3,187


|(1) | Audit Fees include fees necessary to perform
        the annual audit and quarterly reviews of the Corporations consolidated
        financial statements and include both the fees of the Corporations
        principal auditor, DeVisser Gray, and the Corporations New Zealand
        auditor BDO Spicers. Audit fees also include fees for review of tax provisions
        and for accounting consultations on matters reflected in the financial
        statements. Audit Fees also include audit or other attest services required
        by legislation or regulation, such as comfort letters, consents, reviews
        of securities filings and statutory audits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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- 43 -

|(2) | Tax Fees include fees for all tax services
        other than those included in Audit Fees and Audit-Related
        Fees. This category includes fees for tax compliance, tax planning
        and tax advice. Tax planning and tax advice includes assistance with tax
        audits and appeals, tax advice related to mergers and acquisitions, and
        requests for rulings or technical advice from tax authorities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | All Other Fees include all other non-audit
        services.                                                                                                                                                                                                                                                                                                                                                                       

The nature of the services provided by De Visser Gray and BDO
Spicers under each of the categories indicated in the table is described
below.

Pre-Approval Policies and Procedures

It is within the mandate of the Registrants Audit Committee to
approve all audit and non-audit related fees. The Audit Committee has
pre-approved specifically identified non-audit related services, including tax
compliance, review of tax returns, documentation of processes and controls as
submitted to the Audit Committee from time to time. The Auditors also present
the estimate for the annual audit related services to the committee for approval
prior to undertaking the annual audit of the financial statements.

ITEM 16D. EXEMPTION FROM LISTING STANDARDS FOR AUDIT
COMMITTEE

ITEM 16E. Purchase of Equity Securities by the Issuer and
Affiliated Purchasers

Not Applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS.

Financial Statements begin on page 45.

INDEX TO FINANCIAL STATEMENTS

PageAuditors Report
      45Consolidated Balance Sheets
      46Consolidated Statements of Operations and
        Deficit
      47Consolidated Statements of Cash Flows
      48Notes to the Consolidated Financial Statements
      49


The financial statements and Report of the independent Auditors
are filed as part of the Companys Annual Report.

---

- 44 -

TAG OIL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006 AND 2005

---

- 45 -

D E V I S S E R G R A YCHARTERED ACCOUNTANTS

401 - 905 West Pender Street Vancouver, BC Canada V6C
1L6

Tel: (604) 687-5447 Fax: (604) 687-6737

AUDITORS' REPORT

To the Shareholders of TAG Oil Ltd.

We have audited the consolidated balance sheets of TAG Oil Ltd
as at March 31, 2006 and 2005 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three year period ended
March 31, 2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards (GAAS) in Canada and the standards of the Public Company
Accounting Oversight Board (PCAOB) (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
March 31, 2006 and 2005 and the results of its operations and its cash flows for
each of the years in the three year period ended March 31, 2006 in accordance
with generally accepted accounting principles in Canada.

DeVisser Gray

CHARTERED ACCOUNTANTS

Vancouver, British Columbia CanadaJuly 7, 2006

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA  U.S.
REPORTING DIFFERENCES

In the United States, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion paragraph) when
the financial statements are affected by significant uncertainties and
contingencies such as those referred to in note 1 to these financial statements.
Although we conducted our audits in accordance with both Canadian GAAS and the
standards of the PCAOB, our report to the shareholders dated July 7, 2006 is
expressed in accordance with Canadian reporting standards, which do not require
a reference to such matters when the uncertainties are adequately disclosed in
the financial statements.

DeVisser Gray

CHARTERED ACCOUNTANTS

Vancouver, British Columbia Canada July 7, 2006

---

- 46 -

|TAG Oil Ltd.                 
|-----------------------------
|Consolidated Balance Sheets  
|Expressed in Canadian Dollars

|As at March 31,                                |   | 2006        |   |   | 2005        |  
|---------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                               |   |             |   |   |             |  
|                                               |   |             |   |   |             |  
|Assets                                         |   |             |   |   |             |  
|Current                                        |   |             |   |   |             |  
|Cash and cash equivalents                      | $ | 18,753,695  |   | $ | 6,368,935   |  
|Amounts receivable and prepaids                |   | 376,334     |   |   | 184,344     |  
|Inventory (Note 2)                             |   | 942,769     |   |   | -           |  
|Marketable
      securities                    |   | -           |   |   | 3,300       |  
|                                               |   | 20,072,798  |   |   | 6,556,579   |  
|Oil and gas properties (Note 3)                |   | 9,155,763   |   |   | 1,933,088   |  
|Equipment (Note 4)                             |   | 30,836      |   |   | 16,834      |  
|                                               | $ | 29,259,397  |   | $ | 8,506,501   |  
|                                               |   |             |   |   |             |  
|Liabilities and Shareholders Equity           |   |             |   |   |             |  
|Current                                        |   |             |   |   |             |  
|Accounts payable
      and accrued liabilities | $ | 2,229,565   |   | $ | 546,421     |  
|                                               |   | 2,229,565   |   |   | 546,421     |  
|                                               |   |             |   |   |             |  
|Share capital (Note 5)                         |   | 38,424,949  |   |   | 18,053,464  |  
|Contributed surplus                            |   | 709,860     |   |   | 586,031     |  
|Deficit                                        |   | (12,104,977 | ) |   | (10,679,415 | )
|                                               |   | 27,029,832  |   |   | 7,960,080   |  
|                                               | $ | 29,259,397  |   | $ | 8,506,501   |  

See accompanying notes.

Nature of operations (Note 1) 
  Commitments and contingencies (Note 6)
  Subsequent events (Note 8)

Approved by the Board of Directors:

|Garth Johnson         | Drew
      Cadenhead  
|----------------------- | ------------------------
|Garth Johnson, Director | Drew Cadenhead, Director

---

- 47 -

|TAG Oil Ltd.                                     
|-------------------------------------------------
|Consolidated Statements of Operations and Deficit
|Expressed in Canadian Dollars                    

|For the Years Ended March 31                  |   | 2006        |   |   | 2005        |   |   | 2004       |  
|--------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
|                                              |   |             |   |   |             |   |   |            |  
|Expenses                                      |   |             |   |   |             |   |   |            |  
|General and administrative                    | $ | 1,404,864   |   | $ | 829,233     |   | $ | 650,680    |  
|Stock option compensation                     |   | 123,829     |   |   | 185,395     |   |   | 290,030    |  
|Directors & officers insurance                |   | 32,250      |   |   | -           |   |   | -          |  
|Foreign exchange                              |   | (62,080     | ) |   | 212,589     |   |   | 30,787     |  
|Amortization                                  |   | 7,596       |   |   | 4,512       |   |   | 5,496      |  
|Loss before other items                       |   | (1,506,459  | ) |   | (1,231,729  | ) |   | (976,993   | )
|                                              |   |             |   |   |             |   |   |            |  
|Other Items                                   |   |             |   |   |             |   |   |            |  
|Interest income                               |   | 399,684     |   |   | 17,352      |   |   | 15,737     |  
|Write-off of oil and gas properties           |   | (358,699    | ) |   | -           |   |   | (1         | )
|Gain on sale of marketable securities         |   | 39,912      |   |   | -           |   |   | -          |  
|Gain on sale of
      property and equipment  |   | -           |   |   | -           |   |   | 23,256     |  
|Net loss for the year                         |   | (1,425,562  | ) |   | (1,214,377  | ) |   | (938,001   | )
|Deficit, beginning
      of year              |   | (10,679,415 | ) |   | (9,465,038  | ) |   | (8,527,037 | )
|Deficit, end of year                          | $ | (12,104,977 | ) | $ | (10,679,415 | ) | $ | (9,465,038 | )
|                                              |   |             |   |   |             |   |   |            |  
|Loss per share                                | $ | (0.04       | ) | $ | (0.09       | ) | $ | (0.08      | )
|                                              |   |             |   |   |             |   |   |            |  
|Weighted average number of shares outstanding |   | 37,330,058  |   |   | 13,111,779  |   |   | 11,227,776 |  

See accompanying notes.

---

- 48 -

|TAG Oil Ltd.                         
|-------------------------------------
|Consolidated Statements of Cash Flows
|Expressed in Canadian Dollars        

|For the Years Ended March 31                          |   | 2006       |   |   | 2005       |   |   | 2004      |  
|----------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | --------- | -
|                                                      |   |            |   |   |            |   |   |           |  
|Operating Activities                                  |   |            |   |   |            |   |   |           |  
|Net loss for the year                                 | $ | (1,425,562 | ) | $ | (1,214,377 | ) | $ | (938,001  | )
|Changes for non-cash operating items:                 |   |            |   |   |            |   |   |           |  
|Amortization                                          |   | 7,596      |   |   | 4,512      |   |   | 5,496     |  
|Stock option compensation                             |   | 123,829    |   |   | 185,395    |   |   | 290,030   |  
|Write-off of oil and gas properties                   |   | 358,699    |   |   | -          |   |   | 1         |  
|Gain on sale of marketable securities                 |   | (39,912    | ) |   | -          |   |   | -         |  
|Gain on sale of property and equipment                |   | -          |   |   | -          |   |   | (23,256   | )
|                                                      |   | (975,350   | ) |   | (1,024,470 | ) |   | (665,730  | )
|Changes for non-cash working capital
      accounts:  |   |            |   |   |            |   |   |           |  
|Amounts receivable and prepaids                       |   | (191,990   | ) |   | (143,649   | ) |   | 89,967    |  
|Due to/from related parties                           |   | -          |   |   | (9,960     | ) |   | (71,632   | )
|Inventory                                             |   | (942,769   | ) |   | -          |   |   | -         |  
|Accounts payable and accrued liabilities              |   | 71,261     |   |   | 66,485     |   |   | (13,260   | )
|Cash used in
      operating activities               |   | (2,038,848 | ) |   | (1,111,594 | ) |   | (660,655  | )
|                                                      |   |            |   |   |            |   |   |           |  
|Financing Activities                                  |   |            |   |   |            |   |   |           |  
|Issuance of common shares                             |   | 20,371,485 |   |   | 7,437,513  |   |   | 149,150   |  
|Repurchase of
      common shares                     |   | -          |   |   | (7,338     | ) |   | -         |  
|Cash provided by financing activities                 |   | 20,371,485 |   |   | 7,430,175  |   |   | 149,150   |  
|                                                      |   |            |   |   |            |   |   |           |  
|Investing Activities                                  |   |            |   |   |            |   |   |           |  
|Exploration of oil and gas properties                 |   | (5,969,491 | ) |   | (822,236   | ) |   | (124,169  | )
|Proceeds from sale of property and
      equipment    |   | -          |   |   | -          |   |   | 404,141   |  
|Purchase of property and equipment                    |   | (21,598    | ) |   | (3,876     | ) |   | (3,268    | )
|Proceeds from sale of marketable securities           |   | 43,212     |   |   | -          |   |   | -         |  
|Cash (used in)
      provided by investing activities |   | (5,947,877 | ) |   | (826,112   | ) |   | 276,704   |  
|                                                      |   |            |   |   |            |   |   |           |  
|Net increase (decrease) in cash during the year       |   | 12,384,760 |   |   | 5,492,469  |   |   | (234,801  | )
|Cash and cash equivalents - Beginning of year         |   | 6,368,935  |   |   | 876,466    |   |   | 1,111,267 |  
|Cash and cash
      equivalents - End of year         | $ | 18,753,695 |   | $ | 6,368,935  |   | $ | 876,466   |  
|                                                      |   |            |   |   |            |   |   |           |  
|Cash                                                  | $ | 2,515,613  |   | $ | 6,368,935  |   | $ | 271,319   |  
|Cash equivalents                                      |   | 16,208,082 |   |   | -          |   |   | 605,147   |  
|                                                      | $ | 18,753,695 |   | $ | 6,368,935  |   | $ | 876,466   |  
|                                                      |   |            |   |   |            |   |   |           |  
|Supplementary disclosures:                            |   |            |   |   |            |   |   |           |  
|                                                      |   |            |   |   |            |   |   |           |  
|Interest received                                     | $ | 399,684    |   | $ | 17,352     |   | $ | 15,737    |  

Non-cash investing activities:
  The Company incurred $2,077,526 (2005: $465,643 and 2004: $Nil) in exploration
  expenditures which amounts were in accounts payable at year end.

See accompanying notes.

---

- 49 -

|TAG Oil Ltd.                                  
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|For the Years Ended March 31, 2006 and 2005   
|Expressed in Canadian Dollars                 

NOTE 1 - NATURE OF OPERATIONS

The Company was incorporated under the Business Corporations
Act (British Columbia) and continued its jurisdiction of incorporation to the
Yukon Territory under the Business Corporations Act (Yukon). Its major activity
is the acquisition and exploration of international oil and gas properties.

The Company is in the process of exploring its oil and gas
properties and has not yet determined whether they contain reserves that are
economically recoverable. The success of the Companys exploration and
development of its oil and gas properties is influenced by significant financial
and legal risks, as well as commodity prices and the ability of the Company to
discover economically recoverable reserves and to bring such reserves into
future profitable production. In addition, the Company must continue to obtain
sufficient financing to develop its properties towards planned principal
operations.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

|a) | Accounting Principles and Use of
  Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | These financial statements are prepared in accordance
      with Canadian generally accepted accounting principles (GAAP), which
      require the Companys management to make informed judgments and estimates
      that affect the reported amounts of assets and liabilities and disclosures
      of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      fiscal year. Specific items particularly subject to management estimates
      are the carrying amounts of deferred property costs, potential accruals
      for future site reclamation costs and the determination of inputs required
      in the calculation of stock based compensation. Actual results could
      differ from these estimates.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Material differences between Canadian and United States
      generally accepted accounting principles, that affect the Company, are
      described in note 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|b) | Basis of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | These consolidated financial statements include the
      accounts of the Company and its wholly-owned subsidiaries: TAG Oil (NZ)
      Limited, TAG Oil (Canterbury) Limited, and Durum Energy (PNG) Limited. The
      Company consolidates its financial statements with those of its
      subsidiaries in which it has a controlling interest. Should restrictions
      be placed on any foreign subsidiary that prevent the Company from
      exercising effective control, the Companys investment in that subsidiary
      shall be accounted for using the cost basis. All significant intercompany
      balances and transactions with subsidiaries have been eliminated on
      consolidation.                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|c) | Joint Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Substantially all of the Company's activities relate to
      the exploration for oil and gas. To the extent that these activities are
      conducted jointly with other companies, the accounts reflect only the
      Company's proportionate interest in these activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|d) | Translation of Foreign Currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company's foreign operations, conducted through its
      subsidiaries, are of an integrated nature and, accordingly, the temporal
      method of foreign currency translation is used for conversion of
      foreign-denominated amounts into Canadian dollars. Monetary assets and
      liabilities are translated into Canadian dollars at the rates prevailing
      on the balance sheet date. Other assets and liabilities are translated
      into Canadian dollars at the rates prevailing on the transaction dates.
      Revenues and expenses arising from foreign currency transactions are
      translated into Canadian dollars at the average rate for the year.
      Exchange gains and losses are recorded as income or expense in the year in
      which they occur.                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|e) | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company's financial instruments consist of current
      assets and current liabilities. The fair values of the current assets and
      liabilities approximate the carrying amounts due to the short-term nature
      of these instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|f) | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Cash and cash equivalents include term investments with
      maturities of one year or less, together with accrued interest thereon,
      which are readily convertible to known amounts of
cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

---

- 50 -

|g) | Oil and Gas Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company follows the full cost method of accounting
      for oil and gas properties whereby all costs relating to the acquisition,
      exploration, and development of oil and gas properties and equipment are
      capitalized in cost centres by country. Such costs include lease
      acquisition costs, geological and geophysical expenditures, lease rentals,
      seismic and costs of drilling productive and non- productive wells,
      together with overhead expenses related to acquisition, exploration and
      development activities. All cost centres are in the pre-development stage
      and as such are not subject to depletion. An assessment is performed at
      every reporting date to determine whether the aggregate net costs in each
      pre-development stage cost centre are recoverable. Costs which are
      unlikely to be recovered are written-off. The recovery of the costs
      incurred to date is ultimately dependent on discovering commercial
      quantities of hydrocarbons. The likelihood of such a discovery is not
      determinable at this time.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|h) | Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Furniture, office and computer equipment is recorded at
      cost less accumulated amortization. Amortization is provided for over its
      estimated useful life on a declining-balance basis at rates between 20%
      and 30%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|i) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company accounts for and measures future tax assets
      and liabilities for future tax consequences attributable to differences
      between the financial statement carrying amounts of existing assets and
      liabilities and their respective tax bases. Future tax assets and
      liabilities are measured using enacted or substantively enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on future
      tax assets and liabilities of a change in tax rates is recognized in
      income in the period that includes the date of enactment or substantive
      enactment of the change. When the future realization of income tax assets
      does not meet the test of being more likely to occur than not to occur, a
      valuation allowance in the amount of potential future benefit is taken and
      no asset is recognized. Such an allowance would apply fully to all
      potential income tax assets of the Company.                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Companys accounting policy for future income taxes
      currently has no effect on the financial statements of any of the fiscal
      years presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|j) | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Common shares issued for non-monetary consideration are
      recorded at their fair market value based upon the lower of the trading
      price of the Companys shares on the TSX Venture Exchange on the date of
      the agreement to issue shares and the date of share issuance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|k) | Stock-based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company has a stock based compensation program for
      officers, directors, employees and consultants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company uses the fair value method for valuing stock
      option grants. Under this method, compensation cost attributable to all
      stock options granted is measured at fair value at the grant date and
      expensed in the year of grant with a corresponding increase in contributed
      surplus. Consideration paid upon the exercise of the stock options will be
      recorded as an increase to share capital together with the corresponding
      amounts previously recognized in contributed surplus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|l) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Loss per share is calculated using the weighted-average
      number of common shares outstanding during the year. Diluted loss per
      share is not presented, as it is anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|m) | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Companys marketable securities are recorded at the
      lower of cost and estimated fair market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|n) | Asset retirement obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Effective March 31, 2003, the Company has adopted
      retroactively the Canadian Institute of Chartered Accountants new
      standard on Asset Retirement Obligations. The Company recognizes the fair
      value of an Asset Retirement Obligation (ARO) in the period in which it
      is incurred when a reasonable estimate of the fair value can be made. The
      fair value is determined through a review of engineering studies, industry
      guidelines and managements estimate on a site-by-site basis. The fair
      value of the ARO is recorded as a liability, with a corresponding increase
      in the amount of the related asset. The capitalized amount is depleted on
      the unit-of-production method based on proven reserves. The liability
      amount of accretion is expensed in the period. Actual costs incurred upon
      the settlement of the ARO are charged against the liability. At March 31,
      2006 the Company does not have any asset retirement
  obligations.                                                                                               

---

- 51 -

|o) | Inventory                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                         
|   | Inventory is valued at the lower of cost and net
      realizable value with cost being determined using a specific
      identification basis. Inventory consists of field operation
      consumables.

NOTE 3  OIL AND GAS PROPERTIES

|               | Working  |  |   | Net Book       |  |   | Additions  |  |   | Write-offs |   |   | Net Book       | 
|-------------- | -------- |  | - | -------------- |  | - | ---------- |  | - | ---------- | - | - | -------------- | 
|               | Interest |  |   | Value at       |  |   | During the |  |   | During the |   |   | Value at       | 
|               | %        |  |   | March 31, 2005 |  |   | Period     |  |   | Period     |   |   | March 31, 2006 | 
|Unproved:      |          |  |   |                |  |   |            |  |   |            |   |   |                | 
|New Zealand:   |          |  |   |                |  |   |            |  |   |            |   |   |                | 
|PMP 38153      | 15.00    |  | $ | -              |  | $ | 9,597      |  | $ | -          |   | $ | 9,597          | 
|PMP 38157      | 33.33    |  |   | -              |  |   | 4,342      |  |   | -          |   |   | 4,342          | 
|PEP 38256      | 53.84    |  |   | 166,974        |  |   | 250,594    |  |   | -          |   |   | 417,568        | 
|PEP 38258      | 25.00    |  |   | 59,833         |  |   | 19,334     |  |   | -          |   |   | 79,167         | 
|PEP 38260      | 30.00    |  |   | -              |  |   | 512,885    |  |   | -          |   |   | 512,885        | 
|PEP 38341      | 35.50    |  |   | -              |  |   | 523,150    |  |   | -          |   |   | 523,150        | 
|PEP 38342      | 35.50    |  |   | -              |  |   | 502,635    |  |   | -          |   |   | 502,635        | 
|PEP 38480      | 25.00    |  |   | 86,582         |  |   | 12,903     |  |   | (99,485    | ) |   | -              | 
|PEP 38732      | 100.00   |  |   | -              |  |   | 1,000      |  |   | -          |   |   | 1,000          | 
|PEP 38736      | 15.00    |  |   | -              |  |   | 29,843     |  |   | -          |   |   | 29,843         | 
|PEP 38741      | 45.00    |  |   | 622,042        |  |   | 1,015,849  |  |   | -          |   |   | 1,637,891      | 
|PEP 38744      | 25.00    |  |   | -              |  |   | -          |  |   | -          |   |   | -              | 
|PEP 38745      | 83.33    |  |   | -              |  |   | 554,925    |  |   | -          |   |   | 554,925        | 
|PEP 38746      | 16.67    |  |   | -              |  |   | 95,538     |  |   | -          |   |   | 95,538         | 
|PEP 38748      | 33.33    |  |   | -              |  |   | -          |  |   | -          |   |   | -              | 
|PEP 38751      | 66.66    |  |   | -              |  |   | 563,522    |  |   | -          |   |   | 563,522        | 
|PEP 38757      | 100.00   |  |   | 532,030        |  |   | 1,934,631  |  |   | -          |   |   | 2,466,661      | 
|PEP 38758      | 100.00   |  |   | 3,041          |  |   | 980,609    |  |   | -          |   |   | 983,650        | 
|PEP 38765      | 38.30    |  |   | 206,866        |  |   | 483,289    |  |   | -          |   |   | 690,155        | 
|PEP 38766      | 33.33    |  |   | -              |  |   | -          |  |   | -          |   |   | -              | 
|PEP 38767      | 100.00   |  |   | -              |  |   | 83,234     |  |   | -          |   |   | 83,234         | 
|AMI-Hursthouse | 12.50    |  |   | 255,720        |  |   | 3,494      |  |   | (259,214   | ) |   | -              | 
|               |          |  |   |                |  |   |            |  |   |            |   |   |                | 
|Total Unproved |          |  | $ | 1,933,088      |  | $ | 7,581,374  |  |   | (358,699   | ) | $ | 9,155,763      | 

The Companys oil and gas properties are located in New Zealand
and its interests in these properties are maintained pursuant to the terms of
exploration permits granted by the national government. The Company is satisfied
that evidence supporting the current validity of these permits is adequate and
acceptable by prevailing industry standards in respect to the current stage of
exploration on these properties.

The Company participated in three unsuccessful exploration
wells and three exploration wells that are under evaluation to determine if they
are commercially viable in combination with future successful wells, all of
which are located in onshore Taranaki, New Zealand. The unsuccessful wells
drilled during the 2006 fiscal year are: the Richmond-1 well on PEP 38745, the
Konini-1 well on PEP 38751 and the Arakamu-1 well in PEP 38757. The wells under
evaluation to determine commerciality are: the SuppleJack-1 well on PEP 38741
and the SuppleJack South-1 and SuppleJack South-1a wells on PEP 38765.

During the 2006 fiscal year the Company wrote-off PEP 38480 as
this permit was relinquished after negotiations with the Ministry of Economic
Development in New Zealand did not result in amended exploration terms for the
permit. In addition the Company wrote-off the costs related to the Hursthouse-1
well as it was determined that the costs associated with this well were unlikely
to be recovered in the future.

Refer to Notes 6 and 8

---

- 52 -

NOTE 4 - EQUIPMENT

Equipment is comprised as follows:

|                                         |   | 2006    |  |   | 2005         |  
|---------------------------------------- | - | ------- |  | - | ------------ | -
|                                         |   |         |  |   | Accumulated  |  
|                                         |   | Cost    |  |   | Amortization |  
|Furniture, office and computer equipment | $ | 125,644 |  | $ | (94,808      | )

NOTE 5 - SHARE CAPITAL

|a) | Authorized and Issued Share Capital
|-- | -----------------------------------

The authorized share capital of the Company consists
  of an unlimited number of common stock without par value.

| |                                                    |  | Number     |   |   |            |  
| | -------------------------------------------------- |  | ---------- | - | - | ---------- | -
| | Issued and fully paid:                             |  | of Shares  |   |   | Amount     |  
| |                                                    |  |            |   |   |            |  
| | Balance at March 31, 2004                          |  | 7,978,061  |   | $ | 10,623,289 |  
| | Forward stock split on the basis of one additional |  |            |   |   |            |  
| | new share for every two old shares                 |  | 3,989,025  |   |   | -          |  
| | Private placement                                  |  | 542,495    |   |   | 1,247,218  |  
| | Private placement                                  |  | 9,066,500  |   |   | 4,412,383  |  
| | Exercise of share purchase warrants                |  | 6,150,000  |   |   | 1,744,978  |  
| | Exercise of stock options                          |  | 100,000    |   |   | 32,934     |  
| | Re-purchase of shares and return to treasury       |  | (1,800,000 | ) |   | (7,338     | )
| | Balance at March 31, 2005                          |  | 26,026,081 |   | $ | 18,053,464 |  
| | Exercise of share purchase warrants                |  | 9,066,500  |   |   | 6,395,039  |  
| | Private placement                                  |  | 11,538,500 |   |   | 13,976,446 |  
| | Balance at March 31, 2006                          |  | 46,631,081 |   | $ | 38,424,949 |  

During the 2006 fiscal year, the Company issued 9,066,500
  shares from treasury upon the exercise of certain share purchase warrants at
  a price of US$0.60 per share.

On September 22, 2005, the Company completed a brokered
  private placement financing consisting of 11,538,500 shares at a price of $1.30
  per share. In connection with this financing, the Company issued 400,000 broker
  warrants exercisable at a price of $1.30 per share until expiry on September
  22, 2006.

Refer to Note 8

|b) | Share Purchase Warrants
|-- | -----------------------

The following is a continuity of outstanding share purchase
  warrants:

| |                              |  | Number of                     |   |   | Weighted Average  |  
| | ---------------------------- |  | ----------------------------- | - | - | ----------------- | -
| | Issued and fully paid:       |  | Share
      Purchase Warrants |   |   | Exercise Price (1 | )
| |                              |  |                               |   |   |                   |  
| | Balance at March 31, 2004    |  | 6,150,000                     |   | $ | 0.27              |  
| | Issued during the year       |  | 9,608,995                     |   |   | 0.71              |  
| | Exercised                    |  | (6,150,000                    | ) |   | 0.27              |  
| | Balance at March 31, 2005    |  | 9,608,995                     |   | $ | 0.71              |  
| | Exercised                    |  | (9,066,500                    | ) |   | 0.70              |  
| | Issued during the
      year |  | 400,000                       |   |   | 1.30              |  
| | Balance at March 31, 2006    |  | 942,495                       |   | $ | 1.09              |  

---

- 53 -

(1) Certain share purchase warrants are denominated
  in US dollars and have been converted to Canadian dollars using the March 31,
  2006 closing exchange rate.

At March 31, 2006, the following share purchase warrants
  are outstanding:

Number
      Price
      ExpiryOf Shares
      per
        Share
      Date542,495
      US$0.80
      May 4, 2006
    (2)400,000
      $1.30
      September 22, 2006942,495


(2) Subsequently, the warrants expired
unexercised.

|c) | Incentive Stock Options
|-- | -----------------------

At the Companys annual general meeting held on
  September 9, 2005, shareholders approved an amendment to the Companys
  stock option plan. Under the new stock option plan the number of shares reserved
  for issuance as share incentive options will be equal to 10% of the Companys
  issued and outstanding shares at any time. The exercise price of each option
  equals the market price of the Companys shares the day prior to the date
  that the grant occurs less any applicable discount approved by the Board of
  Directors and the TSX Venture Exchange. The options maximum term is five years
  and must vest over a minimum of eighteen months.

The following is a continuity of outstanding stock options:

| |                                 | Number of | Weighted Average  
| | ------------------------------- | --------- | ------------------
| | Issued and fully paid:          | Options   | Exercise Price (1)
| |                                 |           |                   
| | Balance at March 31, 2004       | 1,140,000 | $ 0.72            
| | Granted during the year         | 550,000   | 0.76              
| | Exercised                       | (100,000) | 0.32              
| | Cancelled/Expired               | (800,000) | 0.76              
| | Balance at March 31, 2005       | 790,000   | $ 0.76            
| | Cancelled/Expired               | (165,000) | 0.76              
| | Granted during the year         | 400,000   | 0.95              
| | Balance at March 31,
      2006 | 1,025,000 | $ 0.83            

(1) Certain outstanding options are denominated in US
  dollars and have been converted to Canadian dollars using the March 31, 2006
  closing exchange rate.

At March 31, 2006, the following stock options are outstanding:

Number
    Price
    Expiryof Shares
    per
      Share
    Date100,000
    US$0.65
    May 31, 2008125,000
    US$0.65
    February 10, 2010400,000
    US$0.65
    January 1, 201075,000
    US$0.65
    May 10, 201025,000
    US$0.95
    July 29, 2010150,000
    $1.30
    November 22, 2010150,000
    $0.66
    January 2, 20111,025,000


During the 2006 fiscal year, the Company granted options
  to three directors and one employee to purchase 400,000 common shares vesting
  over eighteen months with expiry dates ranging from May 10, 2010 to January
  2, 2011 and exercisable at either US$0.65,US$ 0.95, CDN$0.66 or CDN$1.30.

During the 2005 fiscal year, the Company granted options
  to two directors and to its President to purchase 125,000 common shares vesting
  over eighteen months with an expiry date of February 10, 2010 and an aggregate
  of 400,000 common shares vesting over five years with an expiry date of January
  1, 2010, respectively, exercisable at a price of US$0.65. The Company also granted
  an option to a consultant to purchase 25,000 common shares vesting over three
  years, exercisable at a price of US$0.65 until expiry on May 31, 2008.

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- 54 -

During the current fiscal year, the Company applied
  the Black-Scholes option pricing model using the closing market prices on the
  grant dates, a volatility ratio of 42% and the risk free interest rate of 3.5%
  to calculate an option benefit at the dates of grant of $0.31 per option share
  granted (2005: $0.35 per option share granted) for a total option benefit of
  $123,829 (2005: $185,395).

Refer to Note 8

NOTE 6 - COMMITMENTS AND CONTINGENCIES

The Company participates in oil and gas exploration operations
jointly with independent third and related parties and is contractually
committed under agreements to complete certain exploration programs. The
Companys management estimates that the total commitments for fiscal 2006 under
various agreements relating to permits held at March 31, 2006 are as
follows:

Work Commitment or ObligationOil and Gas Property
    Working Interest %
    to
      March 31, 2006PMP 38153
    15.00
    $ 10,500PMP 38157
    33.33
    3,500,000PEP 38256
    53.84
    35,000PEP 38258
    25.00
    175,000PEP 38260
    30.00
    1,400,000PEP 38341
    35.50
    10,500PEP 38342
    35.50
    10,500PEP 38732
    100.00
    17,500PEP 38736
    15.00
    10,500PEP 38741
    45.00
    572,000PEP 38744
    25.00
    40,000PEP 38745
    83.33
    17,500PEP 38746
    16.67
    12,000PEP 38748
    33.33
    17,500PEP 38751
    66.66
    21,000PEP 38757
    100.00
    35,000PEP 38758
    100.00
    1,540,000PEP 38765
    38.30
    193,000PEP 38766
    33.33
    23,000PEP 38767
    100.00
    17,500Total
    
    $ 7,658,000


Refer to Note 8

NOTE 7 - INCOME TAXES

2006
    
    
      2005Net loss for the year
    $
      (1,404,898
    )
    $
      (1,214,377
    )Expected income recovery
    
      (498,763
    )
    
      (431,386
    )Net adjustment for amortization, deductible
      and non-deductible amounts
    
      (32,553
    )
    
      67,533Unrecognized benefit of current non-capital loss
    
      531,316
    
    
      363,853Total income taxes
    
      -
    
    
      -


A reconciliation of income taxes at statutory rates and the
significant components of the Companys future income tax assets are as
follows:

2006
    
    
      2005Future income tax assets:Net resource property carrying amounts (in
      excess) of tax pools
    $
      (5,220,591
    )
    $
      2,144,990Equipment tax pool in excess of carrying value
    
      93,876
    
    
      93,954Non-capital loss carryforwards
    
      17,042,504
    
    
      8,565,63611,915,789
    
    
      10,804,580Valuation allowance
    
      (11,915,789
    )
    
      (10,804,580
    )Net future tax assets
    $
      -
    
    $
      -


The Company has non-capital losses of approximately $3.3
million (2005 - $2.32 million), which are available to reduce future taxable
income in Canada, which expire between 2007 and 2016. Subject to certain
restrictions the Company also has mineral property expenditures of approximately
$4.1 million (2005 - $4.2 million) available to reduce taxable income in future
years. The Company has not recognized any future benefit for these tax losses
and resource deductions, as it is not considered likely that they will be
utilized.

At March 31, 2006, the Company also has losses and deductions
of approximately NZ$16.9 million (March 31, 2005 - NZ$8.0 million) available to
offset future taxable income earned in New Zealand.

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- 55 -

NOTE 8  SUBSEQUENT EVENTS

During the period subsequent to March 31, 2006 the following
occurred:

| | a) | Acquisition of Cheal Petroleum, PEP 38757 Limited and
      PEP 38758 Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On June 16, 2006, the Company acquired all of the
      outstanding shares of Cheal Petroleum Limited (Cheal) , PEP 38757
      Limited and PEP 38758 Limited all located in New Zealand. Cheal owns a
      30.5% interest in PEP 38738-S containing the Cheal Oil Field and a 15.1%
      interest in PEP 38738-D containing the Cardiff deep gas prospect.
      Consideration paid for these three companies was NZ$18,542,857
      (CDN$12,800,000), five million shares of the Company and a 0.775% gross
      over riding royalty on PEP 38738-D. The work commitments expected over the
      2007 fiscal year for PEP 38738-S and PEP 38738-D amount to a total of
      $6,000,000 and relate materially to the Cheal Oil Field Development
      Plan.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b) | Private placement financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On June 12, 2006, the Company completed a private
      placement financing of 40,000,000 common shares at a price of $0.75 per
      share for net proceeds of approximately $28.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | c) | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On April 25, 2006 the Company granted an employee an
      option to acquire up to 100,000 common shares, vesting over eighteen
      months, exercisable at a price of $0.90 per share until expiry on April
      25, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

NOTE 9 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

These financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (Canadian GAAP) which
conform in all material respects with United States generally accepted
accounting principles (U.S. GAAP), except for the following differences:

CONSOLIDATED BALANCE SHEETS

| | a) | Assets
| | -- | ------
| |    |       
| |    | i)    
| |    |       
| |    |       

| |                                           |   | March 31, |  |   | March 31, | 
| | ----------------------------------------- | - | --------- |  | - | --------- | 
| |                                           |   | 2006      |  |   | 2005      | 
| | Marketable securities under Canadian GAAP | $ | -         |  | $ | 3,300     | 
| | Adjustment required under U.S. GAAP       |   | -         |  |   | 10,200    | 
| | Cumulative historical adjustments         |   | -         |  |   | 16,800    | 
| | Marketable securities under U.S. GAAP     | $ | -         |  | $ | 30,300    | 

As a result, total current assets
under U.S. GAAP as at March 31, 2006 and 2005 would be $20,072,798 and
$6,583,579, respectively.

| |  | ii) | Oil and Gas Property
| |  | --- | --------------------

Under U.S. GAAP, the ceiling test
under the full cost method is performed for each cost center by comparing the
net capitalized costs to the present value of the estimated future net revenues
from production of proved reserves discounted by 10%, net of the effects of
future costs to develop and produce the proved reserves, plus the costs of
unproved properties net of impairment, and less the effects of income taxes. Any
excess capitalized costs are written off to expense. The ceiling test under U.S.
GAAP has been limited to those periods in which U.S. GAAP balances have been
provided.

Under U.S. GAAP, the functional
currency for each of the Company's foreign subsidiaries is the local currency of
each subsidiary. Accordingly, the current rate method of foreign currency
translation is required to be used for conversion into Canadian dollars. All
assets and liabilities are translated into Canadian dollars at the rates
prevailing on the balance sheet date. Stockholders equity accounts are
translated into Canadian dollars at the rates prevailing on the transaction
dates, with revenues and expenses translated into Canadian dollars at the
average rate for the year.

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- 56 -

Translation adjustments resulting from
foreign currency translations are recorded as a separate component of the
stockholders equity section on the balance sheet.

| |                                            |   | March 31,  |   |   | March 31, |  
| | ------------------------------------------ | - | ---------- | - | - | --------- | -
| |                                            |   | 2006       |   |   | 2005      |  
| | Oil and gas properties under Canadian GAAP | $ | 9,155,763  |   | $ | 1,933,088 |  
| | Foreign currency translation adjustment    |   | (1,258,323 | ) |   | (7,487    | )
| | Cumulative historical adjustments          |   | 85,529     |   |   | 93,016    |  
| | Oil and gas properties under U.S. GAAP     | $ | 7,982,969  |   | $ | 2,018,617 |  

| |    | As a result of the adjustments, total assets under U.S.
      GAAP as at March 31, 2006 and 2005 would be $28,086,603 and $8,619,030,
      respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                          
| | b) | Stockholders Equity                                                                                                                                     
| |    |                                                                                                                                                          
| |    | i)                                                                                                                                                       
| |    |                                                                                                                                                          
| |    |                                                                                                                                                          
| |    |                                                                                                                                                          
| |    |                                                                                                                                                          

| |                                   |   | March 31,  |  |   | March 31,  | 
| | --------------------------------- | - | ---------- |  | - | ---------- | 
| |                                   |   | 2006       |  |   | 2005       | 
| | Common stock under Canadian GAAP  | $ | 38,424,949 |  | $ | 18,053,464 | 
| | Cumulative historical adjustments |   | 3,042,858  |  |   | 3,042,858  | 
| | Common stock under U.S. GAAP      | $ | 41,467,807 |  | $ | 21,096,322 | 

| |  | ii) | Foreign Currency Translation Adjustment
| |  | --- | ---------------------------------------

The effects of Note 9(a)(ii) on
foreign currency translation adjustment are as follows:

| |                                                         |   | March 31,  |   |   | March 31, |  
| | ------------------------------------------------------- | - | ---------- | - | - | --------- | -
| |                                                         |   | 2006       |   |   | 2005      |  
| | Foreign currency translation                            |   |            |   |   |           |  
| | Adjustment under Canadian GAAP                          | $ | -          |   | $ | -         |  
| | Foreign currency translation adjustment                 |   | (1,258,323 | ) |   | (7,487    | )
| | Cumulative historical adjustments                       |   | 85,529     |   |   | 93,016    |  
| | Foreign currency translation adjustment under U.S. GAAP | $ | (1,172,794 | ) | $ | 85,529    |  

| |  | iii) | Accumulated Other Comprehensive Income
| |  | ---- | --------------------------------------

The effects of Note 9(a) on
accumulated other comprehensive income are as follows:

| |                                                |   | March 31, |   |   | March 31, | 
| | ---------------------------------------------- | - | --------- | - | - | --------- | 
| |                                                |   | 2006      |   |   | 2005      | 
| | Accumulated other comprehensive income         |   |           |   |   |           | 
| | under Canadian GAAP                            | $ | -         |   | $ | -         | 
| | Unrealized gain(loss) on marketable securities |   | (27,000   | ) |   | 10,200    | 
| | Cumulative historical adjustments              |   | 27,000    |   |   | 16,800    | 
| |                                                |   |           |   |   |           | 
| | Accumulated other comprehensive income         |   |           |   |   |           | 
| | under U.S. GAAP                                | $ | -         |   | $ | 27,000    | 

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- 57 -

As a result of these adjustments,
total stockholders equity under U.S. GAAP as at March 31, 2006 and 2005 would
be $25,857,038 and $8,072,609, respectively.

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

| | c) | Net Loss and Comprehensive Income for the Year
| | -- | ----------------------------------------------

The following are the effects of Note
9(a)(i) on net loss for the 2006, 2005, and 2004 fiscal years:

| |                                          |   | 2006       |   |   | 2005       |   |   | 2004     |  
| | ---------------------------------------- | - | ---------- | - | - | ---------- | - | - | -------- | -
| |                                          |   |            |   |   |            |   |   |          |  
| | Net loss for the year under Canadian and |   |            |   |   |            |   |   |          |  
| | U.S. GAAP                                | $ | (1,425,562 | ) | $ | (1,214,377 | ) | $ | (938,001 | )
| |                                          |   |            |   |   |            |   |   |          |  
| | Other comprehensive income:              |   |            |   |   |            |   |   |          |  
| | Realized gain on marketable securities   |   | 39,912     |   |   | -          |   |   | -        |  
| | Portion included previously in           |   |            |   |   |            |   |   |          |  
| | comprehensive income                     |   | (27,000    | ) |   | -          |   |   | -        |  
| | Unrealized gain on marketable            |   |            |   |   |            |   |   |          |  
| | securities                               |   | -          |   |   | 10,200     |   |   | 13,200   |  
| |                                          |   |            |   |   |            |   |   |          |  
| | Comprehensive loss for the year          |   |            |   |   |            |   |   |          |  
| | under U.S. GAAP                          | $ | (1,412,650 | ) | $ | (1,204,177 | ) | $ | (924,801 | )

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- 58 -

ITEM 18. FINANCIAL STATEMENTS

Not applicable.

ITEM 19. EXHIBITS

The following Exhibits are incorporated by reference:

Exhibit Reference
    Exhibit Description1
    Articles of Association and
      Bylaws(1)4.1
    Form of Subscription Agreement for private
      placement dated September 2005 Canadian and Non-U.S. subscribers (2)4.2
    Form of Subscription Agreement for private
      placement dated September 2005 U.S. subscribers (2)4.3
    Underwriting Agreement dated September 1, 2005
      (2)4.4
    Form of 2005 Stock Option Plan (2)4.5  Form of Subscription Agreement
        for private placement dated June 2006 Canadian and Non-U.S. subscribers4.6  Form of Subscription Agreement
        for private placement dated June 2006 U.S. subscribers4.7  Underwriting Agreement
        dated May 12, 20064.8  Form of Share Purchase
        Agreement dated May 9, 2006 between the Company and South Pacific Lease
        Operations Limited.4.9  Sproule report dated April
        30, 2006.4.10  Articles (Post Continuance)
        as approved by shareholders on September 22, 20064.11  Compensation Committee
        Charter4.12  Form of Share Purchase
        Agreement Amendment as dated June 16, 20068.0  List of Wholly-Owned Subsidiaries
        of TAG Oil Ltd.16.1
    Code of Ethics (2)31.1  Section 302(a) Certification
        of CEO31.2  Section 302(a) Certification
        of CFO32  Section 906 Certifications


|(1) | Herein incorporated references previously filed with our
      Form 20-F dated March 31, 2000 filed September 29, 2000.        
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(2) | Herein incorporated by referenced previously filed with
      our Form 20-F dated March 31, 2005 filed on September 28,
  2005.

SIGNATURES

The Registrant certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.

|                         | TAG OIL LTD.
|------------------------ | ------------
|                         |             
|                         |             
|Date: September 28, 2006 | By:         
|                         |             
|                         | Name:       
|                         |             
|                         | Title:      

---