Tanganyika Oil Company Ltd.
TSX VENTURE : TYK

Tanganyika Oil Company Ltd.

March 30, 2006 18:53 ET

Tanganyika Announces 2005 Financial Results and Summary of Reserves

CALGARY, ALBERTA--(CCNMatthews - March 30, 2006) - Tanganyika Oil Company Ltd. ("Tanganyika" or the "Company") (TSX VENTURE:TYK)(NYA MARKNADEN:TYKS) announced today its 2005 financial results for the seven months ended December 31, 2005. Effective June 1, 2005, the Company changed its financial year-end from May 31 to December 31. All numbers are expressed in U.S. dollars. A complete statement of Reserves Data and Other Oil and Gas Information can be found on SEDAR at www.sedar.com or on the Company's website at www.tanganyikaoil.com.

2005 Highlights:

- Gross proved reserves increased 39% to 47,732 MSTB (15,615 MSTB company share):

- Gross proved plus probable reserves increased 13% to 118,380 MSTB (40,022 MSTB company share);

- Gross proved plus probable plus possible reserves increased 85% to 333,586 MSTB (180,771 MSTB company share);

- 3P original oil in place in Syria increased to 5.5 billion barrels;

- The Company's revenue was $13 million for the seven months ended December 31, 2005 compared to $12.6 million for the year ended May 31, 2005;

- The Company's profit after tax for the seven month period ended December 31, 2005 was $0.9 million compared to a loss after tax of $1.9 million for the year ended May 31, 2005;

- The Company's profit per share was $0.021 for the seven month period ended December 31, 2005 compared to a loss of $0.049 for the year ended May 31, 2005;

Tanganyika Oil Company Ltd. is a Canadian oil and gas company with production and exploration assets in Egypt and Syria. Its shares are traded on the TSX Venture Exchange and Swedish Depository Receipts trade on the Nya Marknaden of the Stockholm Stock Exchange.

2005 ANNUAL REPORT

Management's Discussion and Analysis

(Amounts in United States Dollars unless otherwise indicated)

Seven months ended December 31, 2005 and the years ending May 31, 2005 and 2004

The following discussion and analysis of the results of operations and financial condition ("MD&A") for Tanganyika Oil Company Ltd. (the "Company" or "Tanganyika") should be read in conjunction with the consolidated financial statements for the seven month period ended December 31, 2005 and the years ended May 31, 2005 and 2004 and related notes therein. The financial information in this MD&A is derived from the Company's in accordance with Canadian generally accepted accounting principles. The effective date of this MD&A is March 22, 2006.

This MD&A may contain forward-looking statements and information. Forward-looking statements are statements that are not historical fact and are generally identified by words such as believes, anticipates, expects, estimates or similar words suggesting future outcomes. By their nature, forward-looking statements and information involve assumptions, inherent risks and uncertainties, many of which are difficult to predict, and are usually beyond the control of management, that could cause actual results to be materially different from those expressed by these forward-looking statements and information. Risks and uncertainties include, but are not limited to, risk with respect to general economic conditions, regulations and taxes, civil unrest, corporate restructuring and related costs, capital and operating expenses, pricing and availability of financing and currency exchange rate fluctuations. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements.

The Company does not undertake to update or re-issue the forward-looking statements and information that may be contained herein, whether as a result of new information, future events or otherwise.

Tanganyika is a Canadian-based company whose common shares are traded on the TSX Venture Exchange under the symbol "TYK". The Company also has Swedish Depository Receipts that trade on the Nya Marknaden of the Stockholm Stock Exchange. Additional information about the Company and its business activities, including the Information Form ("AIF"), is available on SEDAR at www.sedar.com.

OVERVIEW

The Company is an international oil and gas exploration and development company based in Canada with interests in exploration and development properties in Egypt and Syria.

Egypt

The Company acquired its interest in the West Gharib Block, Egypt in 1998 pursuant to a Concession Agreement for Petroleum Exploration and Exploitation. There are five fields within the block: Hana, Hoshia, West Hoshia, Fadl and Rahmi, and one potential discovery at Arta that has been cased to test. Under the agreement, the original exploration term was three years with extensions available if commercial production was not attained. When commercial production is attained at a field, the field is converted to a development lease and the term of the agreement for that field becomes 20 years with a five year extension option. The Hana field was converted to a development lease in 1999 and the Hoshia and Fadl fields were converted to development leases during 2005. The Company submitted applications to the government for development leases for West Hoshia and Rahmi in 2005.

In prior years, the Company farmed out a portion of its interest in the West Gharib block. The Company retained a 70% participating interest in the Hana field and a 45% participating interest in all other fields within the block. Gross production from the block is divided among the Company, its partners and the Egyptian General Petroleum Company ("EGPC") as follows:

- 70% of the crude oil and natural gas production from the block is designated as profit oil and is split among the Company, its partners and EGPC. The percentage available to the Company and its partner is on a declining scale starting at 30% and reducing to 15% as gross average daily production increases to 100,000 barrels per day.

- Up to 30% of the remaining crude oil and natural gas production is available as cost oil to the Company and its partners to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company, its partners and EGPC in the same manner as profit oil.

All royalties and taxes are the responsibility of EGPC from its share of profit and excess cost oil.

Within the Fadl and Hoshia fields, the Company entered into an agreement in 2004 with a third party to provide financing for 53.6% of the drilling costs for two exploratory wells. In return, the third party receives 25% of net revenue generated from these two wells.

Currently, the Hana, Hoshia and Fadl fields have a total of nine wells on production. Gross production is 2,745 bopd and the Company's share is 808 bopd. Commercial production at West Hoshia and Rahmi will commence once EGPC approval is obtained for the development leases. West Hoshia and Rahmi could add approximately 100 bopd to the of production. The Company expects EGPC to approve the development leases before June 2006.

Syria

Oudeh Block

The Company acquired its interest in the Oudeh Block in 2003 pursuant to a Contract for Development and Production of Petroleum with the Government of Syria (the "Government"). The objective of the contract, which has a term of 20 years with a provision for a five year extension, is to increase oil recovery and crude oil production within the block by applying enhanced oil recovery techniques.

The Company has an interest in all incremental production above the base crude oil production ("BCP") level from wells in existence at the time the contract was signed. The BCP level declines at a rate of five percent per annum calculated on a monthly basis. A complete schedule of BCP levels for the Oudeh Block for 2006 and 2007 is included in the Annual Information Form ("AIF").

After deduction of the BCP, a royalty of 12.5% is deducted and submitted to the Government. The remaining production is then shareable among the Company and the Syrian Petroleum Company ("SPC") as follows:

- 30% of the shareable crude oil production from the block is designated as profit oil and is split among the Company and SPC. The profit oil is split 30% to the Company and 70% to SPC.

- Up to 70% of the remaining crude oil production is available as cost oil to the Company to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company and SPC in the same manner as profit oil.

All taxes are the responsibility of SPC from its share of profit and excess cost oil.

The Company expects to begin enhanced oil recovery through the use of thermal (steam) technology by the third quarter of 2006. Currently, the gross production at Oudeh is 2,168 bopd and the Company's share, after deduction of BCP of 943 bopd, is 847 bopd.

Tishrine-Sheikh Mansour Fields

The Company acquired its interest in the Tishrine-Sheikh Mansour fields in November 2004 pursuant to a Contract for Development and Production of Petroleum with the Government. The objective of the contract, which has a term of 20 years with a provision for a five year extension, is to apply enhanced oil recovery techniques to increase crude oil production and recoverability.

The Company has an interest in all incremental production above the BCP level from wells in existence at the time the contract was signed. The BCP level declines at a rate of five percent per annum calculated on a monthly basis. A complete schedule of BCP levels for the Tishrine-Sheikh Mansour fields for 2006 and 2007 is included in the Company's AIF.

After deduction of the BCP, a royalty of 12.5% is deducted and submitted to the Government. The remaining production is then shareable among the Company and SPC as follows:

- 52% of the shareable crude oil production from the block is designated as profit oil and is split among the Company and SPC. The profit oil is split 30% to the Company and 70% to SPC.

- Up to 48% of the remaining crude oil production is available as cost oil to the Company to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company and SPC in the same manner as profit oil.

All taxes are the responsibility of SPC from its share of profit and excess cost oil.

Currently, Tishrine is averaging approximately 6,100 bopd which is slightly below the BCP level. Therefore the Company's share is nil. There is no current production at Sheikh Mansour.

SELECTED ANNUAL INFORMATION



Seven months
ended Year ended Year ended
($000s, except per share data) Dec. 31, May 31, May 31,
2005 2005 2004
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Oil revenue 13,010 12,635 5,168
Earnings (loss) 911 (1,851) (157)
Per share basic 0.021 (0.049) (0.005)
Per share diluted 0.021 (0.049) (0.005)
Total assets 82,915 42,404 33,147
Long term liabilities - - -
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The increases in the Company's oil revenues and assets is consistent with the Company's continued development of its concession interests in both Egypt and Syria and the addition of the Tishrine-Sheikh Mansour concession in November 2004. Total assets at December 31, 2005 almost doubled in comparison to May 31, 2005. This is mainly the result of the private placement in June 2005 which provided additional funds for exploration and development. Approximately $16 million was added to the oil and gas interests for exploration and development activities in Egypt and Syria and the year-end cash position increased approximately $18 million. The increase in oil revenues is a result of both increased production levels and higher oil prices. However, the recent development activities have not yet added significantly to oil revenues. In Egypt, the Company is waiting on approval of two fields to be converted to development leases before commercial production will commence. In Syria, technical problems were encountered with some of the wells drilled at Oudeh, and the Company is continuing with efforts to rectify the issues. The analysis that follows provides additional information on operations and financial condition.

SELECTED QUARTERLY INFORMATION



Three Months Ended (1)
-------------------------------------------------------------
($000s, except per share and production data)
Dec. Sept. May Feb. Nov. Aug. May Feb.
2005 2005 2005 2005 2004 2004 2004 2004
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Total
reven-
ues 5,852 7,558 3,730 2,826 3,988 2,222 1,704 1,321
Earnings
(loss) (2,615) 3,526 (258) 1,429 (1,261) (1,761) 868 404
Per
share
basic (0.059) 0.083 (0.007) 0.038 (0.034) (0.048) 0.027 0.013
Per
share
dilut-
ed (0.059) 0.080 (0.007) 0.037 (0.034) (0.048) 0.026 0.013
Cash
flow (1,071) 5,029 1,540 2,336 16 (456) 342 410
Per
share
basic (0.024) 0.118 0.040 0.062 - (0.012) 0.011 0.013
Per
share
dilut-
ed (0.024) 0.115 0.039 0.061 - (0.012) 0.010 0.013
Average
produc-
tion
(bopd) 1,522 1,382 1,182 1,322 1,220 804 638 567
Total
produc-
tion
(barr-
els) 140,000 169,000 109,000 119,000 111,000 74,000 59,000 51,000
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(1) Except for September 2005 which is for the four months ended


The fourth quarter revenues, on a monthly basis, were unchanged from the prior four month period. The revenue increase as of the quarter ending August 31, 2004 is the result of Syrian production being added. In the previous two quarters, revenue was from the Egypt concession only. Since the quarter ending August 31, 2004, production volumes have been increasing as development activities take place in both Syria and Egypt. The decrease in revenues for the quarter ending February 28, 2005 is a result of a glut of heavy oil in the market resulting in lower prices for both Syrian and Egyptian production during the period.

The fourth quarter's loss compared to the prior period's profit is the result of additional operating cost accruals at year end and a decrease in the exchange gain on translation of the Canadian cash balance at year-end. The significant gain on the translation of the Canadian dollar balance was recognized in the period ended September 30, 2005.

Earnings have fluctuated from quarter to quarter as a result of exchange fluctuations, operating cost fluctuations and increases in total expenses.

RESULTS OF OPERATIONS

The Company had a consolidated net profit for the seven month period ended December 31, 2005 of $911,000 ($0.021 per share) compared to a consolidated net loss of $1,851,000 ($0.049 per share) for the year ended May 31, 2005. The increase is mainly the result of higher oil sales revenue and foreign exchange gain.

For the seven month period ended December 31, 2005, total revenue was $13,410,000 compared to $12,768,000 for the year ended May 31, 2005. Total revenue increased as a result of higher oil sales and higher interest income.



Seven months
ended Year ended Year ended
Dec. 31, May 31, May 31,
2005 2005 2004
--------------------------------------------------------------------
Sales of oil ($)
Egypt 6,081,000 6,182,000 5,168,000
Syria 6,929,000 6,453,000 -
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Total 13,010,000 12,635,000 5,168,000
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Average oil sales price
($ per bbl)
Egypt 40.14 28.44 25.31
Syria 44.67 30.50 -
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Seven months
ended Year ended Year ended
Dec. 31, May 31, May 31,
2005 2005 2004
--------------------------------------------------------------------
Production
Egypt
Gross production (1) 488,000 608,000 572,000
Gross production net of
partners' share (2) 249,000 310,000 292,000
Company share (3) 152,000 217,000 204,000
Company share (bbl/day) 709 595 559
Syria
Gross production 1,785,000 1,821,000 -
Company share (4) 155,000 195,000 -
Company share (bbl/day) 725 534 -
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Total Company share for Egypt
and Syria 307,000 412,000 204,000
Total Company share for Egypt
and Syria (bbl/day) 1,434 1,129 559
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Operating Costs ($)
Egypt (5) 617,000 1,171,000 1,232,000
Egypt per bbl (6) 2.48 3.78 4.22
Syria (7) 6,186,000 6,156,000 -
Syria per bbl (8) 3.47 3.38 -
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(1) Gross production for Egypt includes production from both
development and exploration fields. The production from
exploration fields is not commercial production and therefore
does not contribute towards revenue.
(2) Gross production, net of partners' share includes production from
both development and exploration fields net of the partners'
portion of such production.
(3) Company share of Egypt production represents the Company's share
of revenue generating production (ie. cost and profit oil).
Production from exploration fields is excluded as it is not
commercial production (i.e. it does not generate revenue).
(4) Company share of Syria production represents the Company's share
of cost and profit oil after deduction of royalty and base crude
production.
(5) Egypt operating costs that are included in the Company's results
of operations are total operating costs for the concession net
of the partners' share. The partners are billed by the Company
for their share of costs. The Company recovers the remaining
operating costs through the allocation of cost oil.
(6) Egypt operating costs on a per barrel basis are calculated as
operating costs divided by gross production net of partners'
share.
(7) Syria operating costs represent 100% of operating costs
associated with the Syrian concessions. The Company pays 100% of
operating costs and recovers these costs through the allocation
of cost oil.
(8) Syria operating costs on a per barrel basis are calculated as
operating costs divided by gross production.


Oil Sales

In Egypt, the decrease in oil sales for the seven month period ended December 31, 2005 compared to the year ended May 31, 2005 is due to one period being seven months versus the other being a full year. The average daily oil production in Egypt for the period ended December 31, 2005 has actually increased by approximately 19% over the prior period. Prior to the current period, only the Hana field was on commercial production. The Hoshia and Fadl fields started commercial production during 2005 resulting in increased production volumes.

In Syria, the increase in oil sales for the seven month period ended December 31, 2005 compared to the year ended May 31, 2005 is also due to both higher oil prices and increased production volumes. The average daily oil production in Syria for the period ended December 31, 2005 has increased by approximately 36% over the prior period. The sales of oil are derived entirely from the Oudeh field; drilling activities in the past seven months have resulted in increased production volumes.

The average oil price in Egypt has increased by approximately 41% over the prior period and the average oil price in Syria has increased by approximately 46% over the prior period. World-market oil prices have increased in comparison to the prior period resulting in higher prices received for the Company's oil sales. Both Egypt and Syria produce heavy oil therefore there is a quality differential to quoted Brent crude oil prices. Syria's oil prices are slightly higher than Egypt's because the Oudeh field produces lighter crude than the Hana field.

Operating Costs

In order to determine the operating costs on a per barrel basis for Egypt, the partners' share of costs, must be divided by production volumes net of the partners' share. Operating costs for the seven month period ended December 31, 2005 were $2.48 per barrel, a decrease of approximately 34% compared to the year ended May 31, 2005 cost of $3.78 per barrel. Gross production, net of partners' share, has increased approximately 38% on an annualized basis compared to the prior period indicating that the decrease in Egypt's operating costs on a per barrel basis is mainly the result of total higher production volumes over which to spread total operating costs.

Under the terms of the Syrian concession agreements for Oudeh and Tishrine-Sheikh Mansour, the Company is responsible for paying 100% of operating costs. Accordingly, the Company has reflected total operating costs in its results of operations. Further to the concession agreements, the Company is entitled to claim for reimbursement of the portion of costs attributable to BCP. The Company has estimated that approximately $3 million of operating costs for the seven month period ended December 31, 2005 and $600,000 for the year ended May 31, 2005 are recoverable from SPC in relation to BCP. However, the specific allocation method for the determination of the recoverable amount of operating costs has not been approved by SPC; therefore the Company has not reflected any potential recoveries in its results of operations. Any amounts ultimately recovered will reduce the total operating costs reflected in the Company's results of operations.

In order to determine the operating costs on a per barrel basis for Syria, gross operating costs must be divided by gross production volumes. The operating costs on a per barrel basis have remained relatively constant. The table on the previous page indicates that operating costs on a per barrel basis for Syria for the seven month period ended December 31, 2005 were $3.47 per barrel compared to $3.38 per barrel for the year ended May 31, 2005. An increase in gross production volumes over which to spread operating costs was offset by increases in operating costs resulting in little change to the per barrel cost.

Depletion

Depletion for the seven month period ended December 31, 2005 was $1,750,000 compared to $2,583,000 for the year ended May 31, 2005. Depletion is calculated on a unit-of-production basis using estimated proved oil and gas reserves. The lower depletion expense for the current period is mainly the result of the shorter time period of seven months compared to a full year for the prior period. Depletion, on a per-unit basis, was approximately $2.36 per barrel for Egypt and $2.03 per barrel for Syria. Depletion is calculated based on gross production as the capitalized costs for oil and gas interests relate to the development of gross reserves.

Interest and Service Income

Interest income was $359,000 for the seven month period ended December 31, 2005 compared to $81,000 for the year ended May 31, 2005. The increase is due to bank interest earned on surplus cash from the private placement completed in June 2005.

Service income was $38,000 for the seven month period ended December 31, 2005 compared to $51,000 for the year ended May 31, 2005. Service income represents the overhead provision Egypt is entitled to as operator. The service income is based on monthly expenditures which increased for the period ending December 31, 2005 compared to the prior period.

General and Administrative and Other Expenses

For the seven month period ended December 31, 2005 total expenses, excluding the impact of foreign exchange gains and losses, were $5,432,000 compared to $4,250,000 for the year ended May 31, 2005.

The exchange gain for the seven month period ending December 31, 2005 was $1,485,000 compared to an exchange loss of $458,000 for the year ended May 31, 2005. The exchange gains and losses relate mainly to the translation of the Canadian dollar denominated cash balance to U.S. dollars. The significant gain for the current period is the result of a large Canadian cash balance at year-end and a stronger Canadian dollar.

Salaries and benefits for the seven month period ended December 31, 2005 were $1,897,000 compared to $1,478,000 for the year ended May 31, 2005. The increase in salaries and benefits is the result of hiring additional staff for the Syria operations and adding the Calgary corporate office.

Travel expenses for the seven month period ended December 31, 2005 were $257,000 compared to $153,000 for the year ended May 31, 2005. The increase in travel costs over the prior period is the result of increased travel between Canada and Syria to set up the Oudeh development program, to conduct technical studies at Tishrine and to assist with management of the Syrian operations.

General and administration for the seven month period ended December 31, 2005 was $1,147,000 compared to $508,000 for the year ended May 31, 2005. The increase is primarily the result of the addition of the Calgary corporate office as of June 2005 and costs incurred for consulting services. Office costs increased approximately $221,000 and consultant costs increased approximately $350,000.

In Syria, the Company may be able to recover a portion of its general and administration costs from SPC as part of the costs associated with BCP (see note 15 in the Notes to the Consolidated Financial Statements). The Company has estimated that approximately $1 million of general and administration costs for the seven month period ended December 31, 2005 and $200,000 for the year ended May 31, 2005 may be recoverable from SPC in relation to BCP. However, the recoverability of general and administration costs has not been approved by SPC; therefore the Company has not reflected any potential recoveries in its results of operations. Any amounts ultimately recovered will reduce the total general and administration costs reflected in the Company's results of operations.

Management fees for the seven month period ended December 31, 2005 were $105,000 compared to $158,000 for the year ended May 31, 2005. The monthly management fee actually increased in 2005 however since the current period represents only seven months it is lower than the prior period.

Legal and accounting fees for the seven month period ended December 31, 2005 were $300,000 compared to $326,000 for the year ended May 31, 2005. As the current period is for a shorter time period, legal and accounting fees have actually increased as a result of an increased level of legal and accounting work associated with the additional concession agreement in Syria.

Interest and bank charges for the seven month period ended December 31, 2005 were $56,000 compared to $235,000 for the year ended May 31, 2005. There were shareholder loans outstanding during the year ended May 31, 2005 which gave rise to higher interest charges for that period compared to the current period.

Shareholder information and transfer agent costs were $373,000 for the seven month period ended December 31, 2005 compared to $181,000 for the year ended May 31, 2005. The main reason for the increase is an investor and analyst tour of the concession operations in Syria and Egypt that was conducted in October 2005.

Depreciation for the seven month period ended December 31, 2005 was $251,000 compared to $130,000 for the year ended May 31, 2005. The increase in depreciation is the result of the addition of office furniture and equipment for the setup of the Damascus, Syria office and the Calgary, Canada office.

The Company uses the fair value method of accounting for stock options granted to directors, officers and employees whereby the fair value of all stock options granted is recorded as a charge to operations. Stock-based compensation for the seven month period ended December 31, 2005 was $1,046,000 compared to $1,080,000 for the year ended May 31, 2005. For the seven months ended December 31, 2005, the Company issued 431,500 options at prices ranging from CDN$7.50 to CDN$11.00.

FINANCIAL CONDITION

At December 31, 2005, total assets were $82,915,000 compared to $42,404,000 at May 31, 2005. The increase of approximately $41 million is mainly due to an increase in cash balances and oil and gas interests.

The total cash balance at December 31, 2005 is approximately $18 million higher than the balance as at May 31, 2005. The increase is largely due to the private placement completed in June 2005. The restricted cash in the amount of $16,726,000 at December 31, 2005 represents pledged amounts against the issuance of letters of guarantee and outstanding balances against letters of credit issued to various suppliers in Egypt and Syria. The restricted cash includes a letter of guarantee in the amount of $9 million issued in favour of SPC for the Tishrine-Sheikh Mansour work program, letters of credit issued relating to Syria operations in the amount of $7,503,000 and letters of credit relating to Egypt operations in the amount of $223,000.



Oil and gas interests by country:
As at As at As at
Dec. 31, May 31, May 31,
($) 2005 2005 2004
--------------------------------------------------------------------
Egypt 7,976,000 4,975,000 4,221,000
Syria 27,820,000 13,624,000 7,613,000
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Total 35,796,000 18,599,000 11,834,000
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Since May 31, 2005, Egypt's oil and gas assets have increased $3,001,000 as a result of exploration drilling and seismic acquisition. Syria's oil and gas assets have increased $14,196,000 as a result of development drilling and seismic acquisition. In accordance with the concession agreements, tangible costs will be recovered from cost oil over time periods specified in the individual agreements.

Net property, plant and equipment increased from $497,000 at May 31, 2005 to $1,077,000 at December 31, 2005. The increase is the result of setting up the corporate office in Calgary, Canada and the additional office setup required in Syria.

The advance relating to exploration commitment was for Egypt operations and was released during the year. The balance therefore decreased from $1,372,000 at May 31, 2005 to $nil at December 31, 2005.

The advances to contractors increased from $586,000 at May 31, 2005 to $1,120,000 at December 31, 2005. This represents advances made by the Company to contractors in Syria for services and equipment relating to drilling and work-over programs.

The amounts receivable and other assets increased from $4,919,000 at May 31, 2005 to $7,981,000 at December 31, 2005. The main reason for the increase is that oil sales receivable have increased due to higher oil prices and higher volumes. In accordance with the terms of the agreements in Egypt and Syria, the national oil companies are required to market the Company's share of crude production but the Company retains the right to sell its share of crude production on its own behalf. The Company does not believe that this concentration of credit risk resulting from the national oil companies selling its share of crude production will result in any loss to the Company based on past payment experience.

Inventory increased from $841,000 at May 31, 2005 to $3,281,000 at December 31, 2005. The inventory balance at year-end is predominantly equipment and supplies for the drilling and work-over programs in Syria.

Prepaid expenses increased from $115,000 at May 31, 2005 to $254,000 at December 31, 2005. The prepaid expenses at December 31, 2005 include approximately $200,000 for prepaid accommodation costs in Syria, approximately $30,000 for prepaid rent in Calgary and approximately $20,000 for prepaid geological software maintenance costs.

The Company had total liabilities of $12,423,000 at December 31, 2005 compared to $4,149,000 at May 31, 2005. The increase is the result of increased drilling activities in Syria and Egypt, and the resultant purchase orders for drilling equipment and supplies.

LIQUIDITY AND CAPITAL RESOURCES

The Company completed a private placement in June 2005 whereby it issued five million common shares at a price of CDN$7.60 per share. A finder's fee of five percent was paid with respect to a portion of the private placement. The net proceeds received by the Company were approximately $29.4 million.

At December 31, 2005 the Company held a free cash amount of $16,678,000 compared to $4,220,000 at May 31, 2005. The increase is due to the remaining balance of funds received from the private placement.

The Company's working capital was $33,619,000 at December 31, 2005 compared to $19,158,000 at May 31, 2006. The increase in the working capital is mainly due to the increase in cash resulting from the private placement. Increases in amounts receivable and inventory at December 31, 2005 compared to May 31, 2005 are offset by increases in amounts payable and accrued liabilities.

Net cash flow from operating activities was $2,084,000 for the seven month period ended December 31, 2005 compared to ($2,723,000) for the year ended May 31, 2005. The increase is mainly the result of earnings for the period ended December 31, 2005 compared to a loss for the period ended May 31, 2005.

Net cash used in investing activities was $19,906,000 for the seven month period ended December 31, 2005 compared to $16,346,000 for the year ended May 31, 2005. The investment in oil and gas interests increased $8.6 million but was offset by a $5 million reduction in amounts pledged and guaranteed compared to the prior period.

At December 31, 2005, share capital was $30,604,000 higher compared to May 31, 2005 mainly due to the private placement in June 2005.

The increase in the contributed surplus of $722,000 is due to the net stock-based compensation for the period. Contributed surplus was credited in the amount of $1,046,000, the stock compensation expense for the seven month period ended December 31, 2005. This amount was calculated using the Black-Scholes option value method. When options are exercised, a proportionate amount of the value recorded on the granting of the options is moved from contributed surplus to share capital. For the seven month period ended December 31, 2005, contributed surplus was reduced by an amount of $324,000 for options exercised.

Management considers that the cash generated from the Egypt fields, after providing for related capital expenditures, will continue to significantly contribute towards funding the Company's exploration and development activities in Egypt. However, the Company does not generate sufficient cash flow from all operations to fund its entire exploration and development activities and has therefore relied upon the issuance of securities and the sale of concession interests to provide additional financing. The Company may also consider additional issuances of equity securities as well as debt instruments, to assist with financing its exploration and development activities to the extent that sufficient cash flow from operations is unavailable in the future. Accordingly, the Company's financial statements are presented on a going-concern basis.

FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments comprising cash and short term deposits, restricted cash, amounts receivable and amounts payable approximate their fair value due to the immediate or short-term nature of these financial instruments.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

OUTSTANDING SHARE DATA

As at March 22, 2006, the Company had 44,399,992 common shares outstanding and 1,579,250 stock options outstanding under its stock-based compensation plan.

RELATED PARTY TRANSACTIONS

The Company has entered into transactions with related parties, which were measured at the exchange amounts. During the seven month period ended December 31, 2005, the Company paid $105,000 to Namdo Management Services Ltd. ("Namdo"), a private corporation owned by Lukas H. Lundin, a director of the Company, pursuant to a services agreement. Namdo provides administration and financial services to a number of public companies. The Company also paid $10,000 to Cassels Brock and Blackwell LLP, a legal firm in which a Director is a partner, for various legal and consulting services.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses for the period reported. The significant accounting policies used by the Company are disclosed in the Notes to the Consolidated Financial Statements. Management believes that the most critical accounting policies that may have an impact on the Company's financial results relate to the accounting for its oil and gas interests. Amounts recorded for depletion and the impairment test are based on estimates of proved reserves, production rates, oil prices, future costs and other relevant assumptions. Actual results could differ materially from such estimates.

Proved Oil and Gas Reserves

Under National Instrument 51-101("NI 51-101") detailed rules have been developed to provide uniform reserves recognition criteria within the oil and gas industry in Canada. However, the process of estimating oil and gas reserves is inherently judgmental. Technical reserves estimates are made using available geological and reservoir data as well as production performance data. As new data becomes available, reserves estimates may change. Reserves estimates are also impacted by economic conditions, primarily commodity prices. As economic conditions change, production may be added or may become uneconomical and no longer qualify for reserves recognition.

Depletion

The Company uses the full cost method of accounting for exploration and development activities. In accordance with the full cost accounting guideline, all costs associated with exploration and development are capitalized on a country-by-country basis whether or not such activities were successful. The total capitalized costs and estimated future development costs are amortized using the unit-of-production method based on proved oil and gas reserves. Accordingly, revisions or changes to estimated proved reserves will impact the depletion expenses.

Impairment of Oil and Gas Interests

The Company's capitalized oil and gas interests are subject to impairment tests on a country-by-country basis. Impairment is indicated if the undiscounted estimated future cash flows from proved reserves at oil and gas prices in effect at the balance sheet date plus the cost of unproved properties less any impairment is less than the carrying value of the oil and gas interests. The impairment test requires management to make assumptions regarding cash flows into the distant future and is based on estimates of proved reserves.

CHANGES IN ACCOUNTING POLICIES

Effective June 1, 2005, based on the growth in the Company's U.S. dollar denominated revenues and costs, the Company changed its reporting currency to the U.S. dollar and reclassified its foreign operations from integrated to self-sustaining. Effective June 1, 2005 the Company adopted the current rate method of translation in accordance with Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1651. All prior periods have been restated in accordance with CICA Emerging Issues Committee Abstract 130.

Effective June 1, 2005, the Company changed its financial year-end from May 31 to December 31. The Company made this change in order that its financial year-end would be comparable to its peers in the oil and gas industry. In accordance with Part 4.8 of National Instrument 51-102 Continuous Disclosure Obligations, the financial statements for the seven month period ended December 31, 2005 (the "new financial year") are presented along with the financial statements for the years ended May 31, 2005 (the "transition year") and May 31, 2004 (the "old financial year").

NEW ACCOUNTING PRONOUNCEMENTS

Financial Instruments

On January 27, 2005, the CICA issued Section 3855 of the Handbook titled Financial Instruments - Recognition and Measurement. It expands Handbook Section 3860, Financial Instruments - Disclosure and Presentation, by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented. All financial instruments will be required to be classified in various categories. Held-to-maturity investments, loans and receivables are measured at amortized cost with amortization of premium, or discounts and losses or impairment included in current period interest income or expense. Held-for-trading financial assets and liabilities are measured at fair market value with all gains and losses included in net income in the period in which they arise. All available-for-sale financial assets are measured at fair market value with revaluation gains and losses included in other comprehensive income until the asset is removed from the balance sheet and losses due to impairment included in net income. All other financial liabilities are to be carried at amortized cost. This new Handbook Section will bring Canadian GAAP more in line with U.S. GAAP. The mandatory effective date is for fiscal years beginning on or after October 1, 2006, with optional early recognition for fiscal years beginning on or after December 31, 2004. The Company intends to adopt this standard in its fiscal year ending December 31, 2007.

At present, the Company's most significant financial instruments are cash and short term deposits, accounts receivable and accounts payable. This new section requires little change in accounting for these financial instruments from current standards.

Hedge Accounting

Section 3865 provides alternative treatments to Handbook Section 3855 for entities that choose to designate qualifying transactions as hedges for accounting purposes. The effective date of this section is for fiscal years beginning on or after October 1, 2006, with optional early recognition for fiscal years beginning on or after December 31, 2004. The Company does not currently have any hedging relationships.

Comprehensive Income

New Handbook Section 1530, Comprehensive Income, introduces a requirement to temporarily present certain gains and losses outside of income. Section 1530 defines comprehensive income as a change in value of net assets that is not due to owner activities. Assets that are classified as available-for-sale will have revaluation gains and losses included in other comprehensive income until the asset is removed from the balance sheet.

Consolidation of Variable Interest Entities

The CICA's new accounting guideline, Consolidation of Various Interest Entities (AcG 15), was effective January 1, 2004. The guideline requires the consolidation of certain entities that are subject to control on a basis other than ownership of voting interests. The purpose of the guideline is to provide guidance for determining when an enterprise includes the assets, liabilities and results of activities of such an entity in its consolidated results. It applies to entities with a structure that precludes control through ownership of voting interests but over which control may exist through other arrangements. The guideline applies to annual and interim periods beginning on or after November 1, 2004. The Company has determined that this guideline will not impact its financial position, operating results or cash provided by operating activities.

RISKS AND UNCERTAINTIES

The Company is exposed to a number of risks and uncertainties inherent in exploring for, developing and producing crude oil and natural gas. These risks and uncertainties include, but are not limited to, the following:

- Fluctuations in crude oil or natural gas prices and exchange rates which could have a material effect on the Company's operations and financial condition and the value of its oil and gas reserves;

- Political or economic developments which may adversely affect the Company's operations, including, but not limited to, a change in crude oil or natural gas pricing policies, a change in taxation policies, the imposition of currency controls, the risk of war, terrorism, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, and the imposition of United Nations or United States sanctions;

- Risks and hazards including the possibilities of fire, explosion, blowouts, sour gas releases, pipeline ruptures and oil spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property, the environment or personal injury;

- Uncertainties with respect to estimating the volume of reserves that may be developed and produced in the future which may differ materially from actual results;

- Environmental regulation which imposes, among other things, restrictions, liabilities and obligations in connection with water and air pollution control, waste management, permitting requirements and restrictions on operations in environmentally sensitive areas;

- Competition within the oil and gas industry, which is highly competitive in all aspects of the business, including the acquisition of oil and gas interests, the marketing of oil and natural gas, acquiring or gaining access to necessary drilling and other equipment and supplies;

- Increased competition from alternative forms of energy, fuel and related products that could have a material adverse effect on the Company's business, prospects and results of operations;

- Cost of capital risks associated with securing needed capital at an acceptable rate to carry out the Company's operations and development; and

- The ability to retain current employees or to attract and retain new key employees which could have a materially adverse effect on the Company's growth and profitability.

DISCLOSURE CONTROL AND PROCEDURES

Disclosure controls and procedures are defined under Multilateral Instrument 52-109 - Certification of Disclosure Controls in Issuers' Annual and Interim Filings ("MI 52-109") as "... controls and other procedures of an issuer that are designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under provincial and territorial securities legislation is recorded, processed, summarized and reported within the time periods specified in the provincial and territorial securities legislation and include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its annual filings, interim filings or other reports filed or submitted under provincial and territorial securities legislation is accumulated and communicated to the issuer's management, including its chief executive officers and chief financial officers (or persons who perform similar functions to a chief executive officer or a chief financial officer), as appropriate to allow timely decisions regarding required disclosure". The Company has conducted a review and evaluation of its disclosure controls and procedures, with the conclusion that it has an effective system of disclosure controls, and procedures as defined under MI 52-109. In reaching this conclusion, the Company recognizes that two key factors must be and are present:

(a) the Company is very dependant upon its advisors and consultants (principally its legal counsel) to assist in recognizing, interpreting, understanding and complying with the various securities regulations disclosure requirements; and

(b) an active Board and management with open lines of communication.

The Company has a small staff with varying degrees of knowledge concerning the various regulatory disclosure requirements. The Company is not of a sufficient size to justify a separate department or one or more staff member specialists in this area. Therefore the Company must rely upon its advisors and consultants to assist it and as such they form part of the disclosure controls and procedures.

Proper disclosure necessitates that one not only be aware of the pertinent disclosure requirements, but one is also sufficiently involved in the affairs of the Company and/or receives the communication of information to assess any necessary disclosure requirements. Accordingly, it is essential that there be proper communication among those people who manage and govern the affairs of the Company, this being the Board of Directors and senior management. The Company believes this communications exists.

While the Company believes it has adequate disclosure controls and procedures in place, lapses in the disclosure controls and procedures could occur and/or mistakes could happen. Should such occur, the Company will take whatever steps necessary to minimize the consequences thereof.

OUTLOOK

Tanganyika is well-positioned to build upon the activities completed in 2005. The focus of the Company's strategy is an aggressive, but paced, capital development program of the oil and gas interests in both Syria and Egypt. The Company's main focus continues to be the further development of its oil and gas interests in the West Gharib block in the Egypt concession and the Oudeh block and Tishrine-Sheikh Mansour fields in Syria. In Egypt, the Company has multiple exploration targets which will be drilled prior to the exploration license expiration. In Syria, thermal enhanced oil recovery pilot tests will be conducted in 2006.



Consolidated Balance Sheets

As at December 31, 2005 and
May 31, 2005 and 2004 Dec. 31, May 31, May 31,
(expressed in U.S. dollars) 2005 2005 2004
--------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term
deposits 16,678,492 4,220,427 15,186,375
Restricted cash (note 4) 16,726,382 11,254,266 2,000,000
Advance relating to
exploration commitment
(note 5) - 1,372,163 1,820,000
Advances to contractor 1,120,717 585,871 208,639
Amounts receivable and
other assets (note 6) 7,981,340 4,918,818 743,651
Inventory 3,280,715 841,010 1,011,205
Prepaid expenses 254,280 115,155 158,372
--------------------------------------------------------------------
46,041,926 23,307,710 21,128,242
Oil and gas interests
(note 7) 35,796,451 18,599,429 11,833,974
Property, plant and
equipment (note 8) 1,076,578 496,598 184,392
--------------------------------------------------------------------
82,914,955 42,403,737 33,146,608
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES
Current liabilities
Amounts payable and
accrued liabilities 12,423,390 4,149,289 3,779,186
Amounts due to directors - - 255,425
Loan payable and
advances due to
shareholder (note 9) - - 2,820,116
--------------------------------------------------------------------
12,423,390 4,149,289 6,854,727
--------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 10) 89,905,794 59,302,193 47,638,690
Contributed surplus
(note 11) 5,782,777 5,060,385 4,185,419
Cumulative translation
adjustment (note 2) (175,745) (175,745) (1,450,620)
Deficit (25,021,261) (25,932,385) (24,081,608)
--------------------------------------------------------------------
70,491,565 38,254,448 26,291,881
--------------------------------------------------------------------
82,914,955 42,403,737 33,146,608
--------------------------------------------------------------------
--------------------------------------------------------------------

Contingencies and commitments (note 15)
Subsequent events (note 17)

Approved by the Directors:

signed, Lukas H. Lundin, Chairman and Director

signed, William A. Rand, Director


Consolidated Statements of Operations and Deficit

Seven months ended December 31, 2005 compared to the years ended
May 31, 2005 and 2004
Seven months
ended Year ended Year ended
(expressed in U.S. Dec. 31, May 31, May 31,
dollars) 2005 2005 2004
--------------------------------------------------------------------
Revenue
Sale of oil 13,009,695 12,634,713 5,167,593
Interest income 358,574 81,468 60,987
Service income 38,302 51,498 15,878
Other income 3,171 - -
--------------------------------------------------------------------
13,409,742 12,767,679 5,244,458
--------------------------------------------------------------------

Expenses
Production costs 6,802,305 7,327,088 1,232,269
Depletion 1,750,004 2,583,197 902,070
Salaries and other
benefits 1,896,902 1,478,123 758,826
Travel 256,655 153,444 118,235
General and
administration 1,147,428 507,975 463,344
Management fees 104,868 158,109 137,775
Legal and accounting 300,011 325,353 198,636
Stock-based compensation
(note 13) 1,046,168 1,079,545 694,699
Interest and bank
charges 55,912 235,364 528,067
Amortization of deferred
finance charge - - 399,856
Shareholder information
and transfer agent 373,140 181,830 115,191
Listing in Stockholm - - 480,340
Depreciation 250,637 130,492 114,484
Foreign exchange loss
(gain) (1,485,412) 457,936 (543,972)
--------------------------------------------------------------------
12,498,618 14,618,456 5,599,820

Write-back of oil and
gas concession interests - - (198,461)
--------------------------------------------------------------------

Profit (loss) for the
period 911,124 (1,850,777) (156,901)
Deficit - beginning of
period (25,932,385) (24,081,608) (23,924,707)
--------------------------------------------------------------------

Deficit - end of period (25,021,261) (25,932,385) (24,081,608)
--------------------------------------------------------------------
--------------------------------------------------------------------

Profit (loss) per share
Basic 0.021 (0.049) (0.005)
Diluted 0.021 (0.049) (0.005)

Weighted average number
of shares outstanding
Basic 43,271,237 38,138,151 32,273,394
Diluted 43,624,537 38,393,722 32,475,529


Consolidated Statements of Cash Flows

Seven months ended December 31, 2005 compared
to the years ended May 31, 2005 and 2004
Seven months
ended Year ended Year ended
(expressed in U.S. Dec. 31, May 31, May 31,
dollars) 2005 2005 2004
--------------------------------------------------------------------
Cash flows from
operating activities
Profit (loss) for the
year 911,124 (1,850,777) (156,901)
Items not affecting cash
Stock-based compensation 1,046,168 1,079,545 694,699
Amortization of deferred
finance charge - - 399,856
Interest expense - 204,830 423,084
Depreciation 250,637 130,492 114,484
Depletion 1,750,004 2,583,197 902,070
Unrealized foreign
exchange loss/(gain) - 8,253 (78,823)
Write back of oil and
gas concession interest - - (198,461)
Effect of changes in
exchange rates - 1,281,407 (432,924)
--------------------------------------------------------------------
3,957,933 3,436,947 1,667,084
--------------------------------------------------------------------
Changes in non-cash
working capital
(Increase) decrease in
amounts receivable and
other assets and
advances (3,597,368) (4,537,190) 643,009
Decrease (increase) in
inventory (2,439,705) 257,600 (855,605)
Decrease in amounts due
from/to joint venture
partners - 524 822
Decrease (increase) in
prepaid expenses (139,125) 59,443 (156,230)
Increase (decrease) in
amounts payable and
accrued liabilities 4,302,700 (1,669,564) (423,472)
Decrease in amounts due
to directors - (270,433) (156,149)
--------------------------------------------------------------------
(1,873,498) (6,159,620) (947,625)
--------------------------------------------------------------------
2,084,435 (2,722,673) 719,459
--------------------------------------------------------------------
Cash flows from
investing activities
Investment in oil and
gas interests (14,975,625) (6,782,981) (5,429,743)
Investment in property,
plant and equipment (830,617) (428,802) (270,393)
Pledge for bank
guarantee issued (5,472,116) (11,848,067) 39,726
Advance relating to
exploration commitment - 35,737 (1,820,000)
Deposit in lieu of
guarantee for
exploration license - 2,160,190 -
Partial release of
pledged deposit in lieu
of guarantee issued - (66,038) -
Release of exploration
commitment 1,372,163 584,064 1,764
--------------------------------------------------------------------
(19,906,195) (16,345,897) (7,478,646)
--------------------------------------------------------------------
Cash flows from
financing activities
Investment of common
shares and special
warrants 30,279,825 11,052,125 23,660,010
(Repayment of
loan)/advances from
shareholder - (3,005,103) 17,976
Incidental revenues from
Syria - 55,600 (2,111,904)
--------------------------------------------------------------------
30,279,825 8,102,622 21,566,082
--------------------------------------------------------------------
(Decrease) increase in
cash and short-term
deposits 12,458,065 (10,965,948) 14,806,895
Cash and short-term
deposits - beginning of
period 4,220,427 15,186,375 379,480
--------------------------------------------------------------------
Cash and short-term
deposits - end of period 16,678,492 4,220,427 15,186,375
--------------------------------------------------------------------
--------------------------------------------------------------------


Tanganyika Oil Company Ltd.

Notes to Consolidated Financial Statements

1. Nature of Operations

Tanganyika Oil Company Ltd. (collectively with its subsidiaries, the "Company") was incorporated in 1986 and is engaged in the exploration, development and operation of oil and gas interests in the West Gharib Block in the Arab Republic of Egypt and in the Oudeh, Tishrine and Sheikh Mansour Blocks in the Syrian Arab Republic.

2. Accounting Changes

(a) Foreign Currency Translation:

Effective June 1, 2005, based on the growth in the Company's U.S. dollar denominated revenues and costs, the Company changed its reporting currency to the U.S. dollar and reclassified its foreign operations from integrated to self-sustaining. Effective June 1, 2005 the Company adopted the current rate method of translation in accordance with Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1651. All prior periods have been restated into U.S. dollars in accordance with CICA Emerging Issues Committee Abstract 130.

(b) Change in Financial Year-end:

Effective June 1, 2005, the Company changed its financial year-end from May 31 to December 31. The Company made this change in order that its financial year-end would be comparable to its peers in the oil and gas industry. In accordance with Part 4.8 of National Instrument 51-102 Continuous Disclosure Obligations, the financial statements for the seven month period ended December 31, 2005 (the "new financial year") are presented along with the financial statements for the years ended May 31, 2005 (the "transition year") and May 31, 2004 (the "old financial year").

3. Summary of Significant Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). Significant measurement differences and their impact on these financial statements as a result of differences between Canadian GAAP and International Financial Reporting Standards are set out in note 18.

The significant accounting policies used in these consolidated financial statements are as follows:

a) Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Tanganyika Oil (Bermuda) I Ltd., Dublin International Petroleum (Sinai) Limited, Bermuda (formerly Dublin International Petroleum (Tanzania) Limited, Bermuda), Dublin International Petroleum (Egypt) Limited, Bermuda, Dublin International Petroleum (Syria) Limited, Bermuda, Dublin International Petroleum (Damascus) Limited, Bermuda, and Drucker Petroleum Inc., British Virgin Islands.

b) Use of Estimates

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to measurement uncertainty. Actual results could differ from and affect the results reported in these consolidated financial statements.

In the accounting for oil and gas interests, amounts recorded for depletion and amounts used for impairment test calculations are based on estimates of oil and gas reserves and future cash flows, including development costs. By their nature, the estimates of reserves and the related future cash flows are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods could be material.

c) Foreign Currency Translation

The Company's reporting currency is U.S. dollars.

The Company's Egyptian and Syrian operations are considered self-sustaining and have a functional currency of U.S. dollars. Accordingly, the current rate method of accounting for the translation of non-U.S. dollar denominated transactions is used for these operations. Under the current rate method, assets and liabilities are translated into U.S. dollars at exchange rates prevailing at the balance sheet date and revenue and expenses are translated into U.S. dollars at the average rate of exchange in effect during the period. Exchange gains or losses arising from translation are included in cumulative translation adjustments, a separate component of shareholders' equity.

The Company's Canadian operations have a functional currency of Canadian dollars. Accordingly, the temporal method of accounting for the translation of non-U.S. dollar denominated transactions is used for these operations. Under the temporal method, monetary assets and liabilities are translated into U.S. dollars at exchange rates prevailing at the balance sheet date and non-monetary assets and liabilities are translated at rates in effect on the date of the transaction. Revenues and expenses are translated at the average rate of exchange in effect during the period other than depreciation which is translated at historical rates. Exchange gains or losses arising from translation are included in operations.

d) Joint Interests

The Company's activities in Egypt under the concession agreement with the Egyptian government are conducted jointly with others. The parties share all revenues and costs associated with the concession agreement. These financial statements reflect only the Company's share of these revenues and costs.

e) Oil and Gas Interests

The Company follows the full cost method of accounting for its oil and gas interests. In accordance with Accounting Guideline 16 (AcG 16) issued by the CICA, all costs relating to the exploration for and development of oil and gas reserves are capitalized in country-by-country cost centres and charged against income as set out below. Capitalized costs include expenditures for geological and geophysical surveys, concession acquisition, drilling exploration and development wells, gathering and production facilities and other development expenditures.

Capitalized costs along with estimated future capital costs to develop proved reserves are depleted on a unit-of-production basis using estimated proved oil and gas reserves. Costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion until it is determined whether proved reserves are attributable to the properties or impairment occurs. Unproved properties are evaluated for impairment on at least an annual basis. If an unproved property is considered to be impaired, the amount of the impairment is added to costs subject to depletion.

The Company engages independent reservoir engineers in order to determine its share of reserves.

Proceeds from the sale or farm-out of oil and gas interests are offset against the related capitalized costs and any excess of net proceeds over capitalized costs is included in operations. Gains or losses from the sale or farm-out of oil and gas interests in the producing stage are recognized only when the effect of crediting the proceeds to capitalized costs would result in a change of 20 percent or more in the depletion rate.

Until proved reserves are determined and commercial production has commenced, incidental revenues from the production of oil and gas are offset against the capitalized costs of the related cost centre.

The net amount at which oil and gas interests are carried is subject to a cost recovery test (the "ceiling test"). The ceiling test is a two-stage process which is performed at least annually. The first stage is a recovery test whereby undiscounted estimated future cash flows from proved reserves at oil and gas prices in effect at the balance sheet date ("forecast prices") plus the cost of unproved properties less any impairment is compared to the net book value of the oil and gas interests to determine if the assets are impaired. An impairment loss exists if the net book value of the oil and gas interests exceeds such undiscounted estimated cash flows. The second stage determines the amount of the impairment loss to be recorded. The impairment is measured as the amount by which the net book value of the oil and gas interests exceeds the future estimated discounted cash flows from proved plus probable reserves at the forecast prices. Any impairment is recorded as additional depletion cost.

The Company has no significant asset retirement obligations associated with its oil and gas interests.

f) Revenue Recognition

Once commercial production has been achieved, revenue from the sale of oil and gas is recognized, net of royalties, when: (a) the risks and rewards of ownership pass to the purchaser including delivery of the products, (b) the selling price is fixed or determinable, and (C) collection is reasonably assured.

During the exploration or development stage, prior to commercial production, revenue from the sale of oil and gas is recorded when received as a reduction to the accumulated cost of the related oil and gas interest.

Service income, generated by providing management services to other participants, is recognized as revenue when services are rendered in accordance with the terms of each concession agreement and when collection is reasonably assured.

g) Inventory

Inventory consists of drilling materials, production equipment and supplies. Inventory is recorded at the lower of cost and net realizable value. Cost is determined by the weighted average method.

h) Cash and Short-term Deposits

Cash and short-term deposits comprise cash in banks, (less outstanding cheques) and short-term investments with an original maturity of three months or less.

i) Fair Value of Financial Instruments

The carrying amounts of financial instruments comprising cash and short term deposits, restricted cash, amounts receivable and amounts payable approximate their fair value due to the immediate or short-term nature of these financial instruments.

j) Property, Plant & Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life based on the original cost less any expected residual value. The Company uses periods of three to five years as the estimated useful life for property, plant and equipment.

k) Earnings per Share

Earnings per share is presented for basic and diluted earnings. Basic per share information is computed by dividing the net profit or loss by the weighted average number of common shares outstanding during the year. The weighted average number of shares for fully diluted earnings per share information is calculated using the treasury stock method whereby it is assumed that proceeds obtained upon exercise of options and warrants would be used to purchase common shares at the average market price during the period. Under the treasury stock method, options and warrants have a dilutive effect only when the average market price of the common shares during the period exceeds the exercise price of the options or warrants (they are "in-the-money"). Exercise of in-the-money options and warrants is assumed at the beginning of the year or date of issuance, if later. Should the Company have a net loss for the period, options and warrants would be anti-dilutive and therefore will have no effect on the determination of loss per share.

l) Stock-based Compensation

During the year ended May 31, 2004, the Company elected to apply the fair value method of accounting for stock options granted to directors, officers and employees on a prospective basis in accordance with the recommendations of the CICA. Accordingly, the fair value of stock options are measured and recognized in the statement of operations when granted or in the case of options which vest, over the vesting period. The Company uses the Black-Scholes method for determining the fair value of stock options granted.

m) Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax liabilities and assets are measured using enacted or substantially enacted tax rates. The effect on future tax liabilities and assets of a change in tax rates is recognized in income in the period that the change occurs.

4. Restricted Cash

The Company has provided cash security for certain letters of guarantee and credit issued to third parties. At December 31, 2005, restricted cash represents a pledged amount of $9,000,000 (May 31, 2005 - $9,000,000 and May 31, 2004 - $2,000,000) against the issuance of a letter of guarantee in favour of the Syrian Petroleum Company (SPC) in connection with the concession agreements. Restricted cash also includes outstanding balances relating to letters of credit issued to various suppliers for operations in Egypt and Syria. At December 31, 2005, an amount of $7,726,382 (May 31, 2005 - $2,254,266 and May 31, 2004 - $nil) is restricted as security for letters of credit.

5. Advance Relating to Exploration Commitment

At December 31, 2005 an amount of $nil (May 31, 2005 - $1,372,163 and May 31, 2004 - $1,820,000) was held by the Egyptian General Petroleum Company (EGPC) in respect of an advance associated with the extension of the Egyptian concession exploration license.

6. Amounts Receivable and Other Assets

At December 31, 2005, amounts receivable and other assets include trade receivable balances of $5,466,000 (May 31, 2005 - $3,845,000 and May 31, 2004 - $630,000) from the national oil companies, SPC and EGPC, in respect of the production and delivery of oil. In accordance with the terms of the agreements in Egypt and Syria, the Company sells all oil to EGPC and SPC, respectively. Management does not believe that this concentration of credit risk will result in any loss to the Company based on past payment experience.

Amounts receivable at December 31, 2005 includes $(30,000) (May 31, 2005 - $290,000 and May 31, 2004 - $7,000) due from/(payable to) its partners.



7. Oil and Gas Interests

December 31, 2005
------------------------------------
Accumulated
depletion Net book
Cost & write-downs value
------------------------------------
Arab Republic of Egypt
Producing oil and
gas properties 13,486,681 9,808,727 3,677,954
Exploration and development
properties 4,298,383 - 4,298,383
------------------------------------
17,785,064 9,808,727 7,976,337
------------------------------------

Syrian Arab Republic
------------------------------------
Producing oil and gas
properties 29,929,716 2,109,602 27,820,114
------------------------------------
------------------------------------
Total 47,714,780 11,918,329 35,796,451
------------------------------------

May 31, 2005
------------------------------------
Accumulated
depletion Net book
Cost & write-downs value
------------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 12,544,818 8,935,314 3,609,504
Exploration and development
properties 1,365,241 - 1,365,241
------------------------------------
13,910,059 8,935,314 4,974,745
------------------------------------

Syrian Arab Republic
------------------------------------
Producing oil and gas
properties 14,857,695 1,233,011 13,624,684
------------------------------------
------------------------------------
Total 28,767,754 10,168,325 18,599,429
------------------------------------

May 31, 2004
------------------------------------
Accumulated
depletion Net book
Cost & write-downs value
------------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 10,496,419 7,049,942 3,446,477
Exploration and development
properties 774,084 - 774,084
------------------------------------
11,270,503 7,049,942 4,220,561
------------------------------------

Syrian Arab Republic
------------------------------------
Producing oil and gas
properties - - -
Exploration and development
properties 7,613,413 - 7,613,413
------------------------------------
7,613,413 - 7,613,413
------------------------------------
------------------------------------

Total 18,883,916 7,049,942 11,833,974
------------------------------------


There is no capitalized interest costs included within the costs of oil and gas interests. As at December 31, 2005, an amount of $4,298,383 (May 31, 2005 - $1,365,241, May 31, 2004 - $774,084 ) of exploration costs was excluded from costs subject to depletion as the future recovery of these costs is not determinable at this time.

For purposes of the impairment test, the Company used a benchmark Brent crude price of $50.00. After adjusting for estimated quality differentials, a price of $40.00 was used for Syria and $39.50 was used for Egypt as at December 31, 2005. No impairment provision was required for either country for the period ended December 31, 2005 (May 31, 2005 - $nil; May 31, 2004 - $nil).



8. Property, Plant and Equipment

Accumulated Net book
Cost depreciation value
------------------------------------
December 31, 2005 2,042,398 965,820 1,076,578

May 31, 2005 1,211,781 715,183 496,598

May 31, 2004 726,459 542,067 184,392


9. Loan Payable and Advances due to Shareholder

During the years ended May 31, 2005 and 2004 a loan payable and various unsecured advances were provided by a shareholder of the Company at interest rates ranging from five to 12 per cent per annum. During the year ended May 31, 2005 the Company paid to the shareholder 17,842 common shares (May 31, 2004 - 359,866) as a bonus in relation to the loan payable, the fair value of which was recorded as interest expense. All amounts outstanding were repaid during the year ended May 31, 2005.

10. Share Capital

(a) The authorized and issued chare capital is as follows:

Authorized - Unlimited number of common shares without par value



Issued and outstanding:

--------------------------------------------------------------------
December 31, 2005 May 31, 2005
--------------------------------------------------------------------
Number Amount Number Amount
--------------------------------------------------------------------
Balance, beginning
of year 39,129,641 59,302,193 36,891,166 47,638,690
Private placements,
net 5,000,000 29,447,369 2,000,000 10,910,885
Issue of shares to
shareholder (note 8) - - 7,842 102,194
Exercise of options 217,834 1,156,232 220,633 650,424
Exercise of warrants - - - -
--------------------------------------------------------------------
Balance, end of year 44,347,475 89,905,794 39,129,641 59,302,193
--------------------------------------------------------------------

--------------------------------------------
May 31, 2004
--------------------------------------------
Number Amount
--------------------------------------------
Balance, beginning
of year 25,346,866 24,141,457
Private placements,
net 6,500,000 21,154,119
Issue of shares to
shareholder (note 8) 359,866 396,329
Exercise of options 684,434 359,483
Exercise of warrants 4,000,000 1,587,302
--------------------------------------------
Balance, end of year 36,891,166 47,638,690
--------------------------------------------


(b) During the seven month period ended December 31, 2005, the Company had the following issuances of shares:

(i) the Company completed a private placement consisting of 5,000,000 common shares at CDN $7.60 per share for net proceeds of $29.4 million; and

(ii) options to purchase 217,834 common shares for cash were exercised at prices ranging from CDN $1.95 to $7.25 per share.

(c) During the year ended May 31, 2005, the Company had the following issuances of shares:

(i) the Company completed a private placement consisting of 2,000,000 common shares at CDN $6.75 per share for net proceeds of $10.9 million;

(ii) options to purchase 220,633 common shares for cash were exercised at prices ranging from CDN $0.50 to $6.50 per share; and

(iii) the Company issued 17,842 common shares to a shareholder as settlement for a bonus to the shareholder related to a loan agreement (note 8).

(d) During the year ended May 31, 2004, the Company had the following issuances of shares:

(i) the Company completed a private placement consisting of 3,500,000 common shares at CDN $2.90 per share for net proceeds of $7.4 million;

(ii) the Company completed a private placement consisting of 3,000,000 common shares at CDN $6.30 per share for net proceeds of $13.8 million;

(iii) options to purchase 684,434 common shares for cash were exercised at prices ranging from CDN $0.50 to $3.75 per share;

(iv) warrants to purchase 4,000,000 common shares were exercised for cash at a price of CDN $0.55 per share ; and

(v) the Company issued 359,866 common shares to a shareholder as settlement for a bonus to the shareholder related to a loan agreement (note 8).



11. Contributed Surplus

December 31, 2005 May 31, 2005 May 31, 2004
Tanzania concession 3,498,277 3,498,277 3,498,277
Stock-based
compensation 2,801,536 1,755,368 687,142
Transferred to
share capital (517,036) (193,260) -
---------------------------------------------
5,782,777 5,060,385 4,185,419
---------------------------------------------


For the period ended December 31, 2005, an amount of $517,036 (May 31, 2005 - $193,260 and May 31, 2005 $nil) was transferred from contributed surplus to share capital upon the exercise of stock options. This is the proportionate amount of contributed surplus that was recorded on granting of stock options (note 13).

In 1996, the Company farmed out 25% of its interest in the former Tanzania Concession to Lundin Oil and Gas Limited ("Lundin"), a related party by virtue of common directors. Subsequently in 1998, the Company signed a mutual release agreement with Lundin and assumed Lundin's 25% interest in the Tanzania Concession giving rise to a contributed surplus amount of $3,498,277.

12. Related Party Transactions

The Company has entered into transactions with related parties, which were measured at the exchange amounts. Significant related party transactions were as follows:

a) The Company paid $104,868 (May 31, 2005 - $158,109 and May 31, 2004 - $137,775) to Namdo Management Services Ltd., a private corporation owned by Lukas H. Lundin, a director of the Company, pursuant to a services agreement.

b) A law firm in which a director of the Company is a partner provided various legal and consulting services in the amount of $10,349 (May 31, 2005 - $22,600 and May 31, 2004 - $nil).

c) On August 31, 2001, the Company received an unsecured advance in the amount of $200,000 from a director. Interest on the advance accrued at the rate of 10% per annum. At May 31, 2004 the advance amount including interest amounted to $229,922. The Company repaid the loan plus accrued interest during the year ended May 31, 2005.

d) Other related party transactions are described in notes 9 and 10.

13. Stock Option Information

The Company has a stock option plan (the "plan") for directors, officers and employees of the Company and its subsidiaries. A total of 3,500,000 stock options are authorized to be issued under the plan. The plan is administered by the Board of Directors. In accordance with the policies of the TSX Venture Exchange, the option exercise price, when granted, reflects current trading values of the Company's shares and all of the options are subject to a four-month "hold" period. The exercise period of the options is fixed by the Board of Directors and is not to exceed the maximum period permitted by the TSX Venture Exchange. Vesting rights are determined at the discretion of the Board of Directors.

The continuity of incentive stock options issued and outstanding is as follows:



----------------------------------------------------------
December 31, May 31, May 31,
2005 2005 2004
----------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Out- Price Out- Price Out- Price
standing CDN$ standing CDN$ standing CDN$
----------------------------------------------------------
Out-
standing
at
beginning
of year 1,151,101 5.61 719,234 3.49 645,637 0.52
Granted 431,500 8.88 652,500 6.94 760,000 3.52
Exercised (217,834) 4.56 (220,633) 2.61 (684,434) 0.73
Forfeited - - - - (1,969) 0.51
----------------------------------------------------------
Out-
standing
at end
of year 1,364,767 6.81 1,151,101 5.61 719,234 3.49
----------------------------------------------------------
----------------------------------------------------------


The following table summarizes information about stock options outstanding at December 31, 2005:



Options Outstanding Options Exercisable
--------------------------------- -----------------------
Weighted Weighted
average average
remaining remaining
Exercise contractual contractual
Price- Options life Options life
CDN$ Outstanding in years Exercisable in years
--------------------------------- -----------------------
$ 1.95 21,567 2.5 21,567 2.5
$ 3.75 246,000 0.8 246,000 0.8
$ 3.90 35,000 0.8 35,000 0.8
$ 6.50 6,500 0.3 6,500 0.3
$ 6.90 571,700 1.3 421,700 1.3
$ 7.20 12,500 0.8 12,500 0.8
$ 7.25 40,000 0.6 40,000 0.6
$ 7.50 60,000 1.5 60,000 1.5
$ 7.90 157,500 1.9 157,500 1.9
$ 8.85 100,000 2.0 - -
$11.00 114,000 1.7 114,000 1.7
--------- ---------
1,364,767 1,114,767
--------- ---------


Employee stock options are measured at their fair value on the date of the grant and recognized on a straight line basis as an expense over the vesting period, if any, applicable to the options.

The estimated fair value of options granted during the period ended December 31, 2005 ranged from CDN$ 2.71 to CDN$ 3.77 per option, determined using a modified Black-Scholes option pricing model with the following assumptions:



Dec 31, 2005 May 31, 2005 May 31, 2004
Risk-free rate 2.78% - 3.60% 3.15% - 3.41% 2.83%
Expected life 2 years 2 years 2 years
Estimated volatility
in the market price
of common shares 52% - 63% 52% - 66% 75%
Expected dividend rate 0% 0% 0%


The following table summarizes amounts recognized in income, amounts credited to contributed surplus and amounts credited to share capital, in respect of stock-based employee compensation awards:



----------------------------------------
Dec 31, 2005 May 31, 2005 May 31, 2004
----------------------------------------
Contributed surplus 722,392 886,285 694,699

Share capital 323,776 193,260 -
----------------------------------------
Stock-based compensation 1,046,168 1,079,545 694,699
----------------------------------------


14. Income Taxes

The differences between the income tax provision calculated using enacted combined federal and provincial rates and the reported income tax provision are as follows:



Dec 31, 2005 May 31, 2005
--------------------------------------------------------------------

33.62% 35.62%
--------------------------------------------------------------------

Income tax expense computed at
Canadian statutory rates 306,320 (718,276)
Benefit of tax concessions in
Egypt and Syria (745,135) (563,694)
Permanent differences (110,302) 696,439
Change in valuation allowance 945,663 1,241,831
Share issuance costs incurred
during the year (466,251) (656,300)
Changes in tax rates and other 69,705 -
--------------------------------------------------------------------
- -
--------------------------------------------------------------------
--------------------------------------------------------------------


Future income tax assets and liabilities are recognized for temporary differences between the carrying amount of the balance sheet items and their corresponding tax values as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized.

Significant components of the Company's future tax assets and liabilities, after applying enacted corporate income tax rates, are as follows:



Dec 31, 2005 May 31, 2005
--------------------------------------------------------------------

Future income tax assets
Fixed asset and mineral properties $ 104,080 $ 91,075
Non-capital losses carried forward 2,935,780 2,357,072
Other 698,683 344,735
--------------------------------------------------------------------

3,738,543 2,792,881
Valuation allowance for future
income tax assets (3,738,543) (2,792,881)
--------------------------------------------------------------------

Future income tax assets, net $ - $ -
--------------------------------------------------------------------
--------------------------------------------------------------------


The Company has available losses for Canadian income tax purposes of $8,730,000 which may be carried forward to reduce taxable income of future years. A summary of these losses is provided below:



Non-capital losses expiring in:
($)
------------------------------
2006 296,000
2007 1,089,000
2008 1,224,000
2009 877,000
2012 1,489,000
2013 1,809,000
2014 1,946,000
---------
8,730,000
---------


Egyptian Income Tax

The Company is tax protected by EGPC under the terms of the Egyptian concession agreement. In accordance with the terms of the concession agreement, the Company determines the liability for income tax which would otherwise be payable in connection with its Egyptian operations. Any such tax determined in connection with the Company's Egyptian operations is paid by EGPC from their share of production and the Company retains no liability for payment of income or other taxes.

Syrian Income Tax

The Company is tax protected by SPC under the terms of the Syrian concession agreement. In accordance with the terms of the concession agreement, the Company determines the liability for income tax which would otherwise be payable in connection with its Syrian operations. Any such tax determined in connection with the Company's Syrian operations is paid by SPC from their share of production and the Company retains no liability for payment of income or other taxes.

15. Contingencies and Commitments

a) Under the terms of the Syrian Oudeh concession agreement, the Company has a minimum financial obligation of $5 million for drilling, workovers and other activities. The Company has met these minimum financial obligations. If the Company proceeds to the EOR field implementation phase, as it plans to do, it must undertake to drill a minimum of five wells per calendar year until either (i) a total of 75 wells are drilled, (ii) the total number of wells recommended under the field development plan are drilled, if less than 75, or (iii) the Company and SPC agree that further drilling is not technically or economically justifiable.

b) Under the terms of the Syrian Tishrine-Sheikh Mansour concession agreement, the Company has minimum financial commitments during the technical evaluation phase of $9 million for drilling, workovers and other activities. The Company has issued a letter of guarantee in favour of SPC to cover these minimum financial commitments (note 4). The Company has completed $1.2 million of the minimum work obligations thereby reducing its remaining financial obligations to $7.8 million. Following the technical evaluation phase, the Company may proceed to an EOR field implementation phase. If the Company proceeds with the EOR field implementation phase, it will have minimum financial obligations of $13 million for drilling, workovers and other activities.

c) Under the terms of the West Gharib, Egypt concession agreement, the Company has minimum financial obligations of $13.5 million. The Company has fully met these obligations.

d) Under the terms of the Syrian concession agreements for Oudeh and Tishrine-Sheikh Mansour, the Company is responsible for paying 100% of operating costs up-front and is entitled to claim for reimbursement of the portion of costs attributable to base crude production. SPC has agreed in principle to also reimburse a portion of general and administrative costs associated with base crude production. However, the specific allocation method for the determination of the recoverable amount of operating and general and administrative costs has not been approved by SPC. The Company has estimated that approximately $3 million of production and $1 million of general and administrative costs incurred for the seven month period ended December 31, 2005 may be recoverable and that an amount of approximately $600,000 of production and $200,000 of general and administrative costs may be recoverable for the year ended May 31, 2005. The Company has not included the estimated recoveries in amounts receivable nor has it reduced its production or general and administration costs for the estimated recoveries.

e) The Company is a defendant in a lawsuit filed for non-payment of rent and abandonment of premises in March 1990. This event took place prior to the change in control of the Company and current management believes that the claim is without merit. The amount of the claim is CDN$ 513,000 including costs.



16. Segmented Information

December 31, 2005 Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil (6,928,648) (6,081,047) - (13,009,695)
Interest income (6,896) (6,525) (345,153) (358,574)
Service income - (38,302) - (38,302)
Other income (3,171) - - (3,171)
Production cost
and depletion 7,062,151 1,490,158 - 8,552,309
Depreciation 187,835 28,630 34,172 250,637
Foreign exchange
gain (26,208) (18,838) (1,440,366) (1,485,412)
Other expenses 1,980,122 136,028 3,064,934 5,181,084
Write back of oil
and gas concession - - - -
-----------------------------------------------
Segment (profit)
loss 2,265,185 (4,489,896) 1,313,587 (911,124)
-----------------------------------------------

Other non-cash items -
Interest expense - - - -
-----------------------------------------------

Segment assets 46,155,025 17,492,958 19,266,972 82,914,955
-----------------------------------------------

Segment
expenditures
Oil and gas
interests 8,720,421 6,255,204 - 14,975,625
Property, plant
and equipment 493,355 126,722 210,540 830,617
-----------------------------------------------
9,213,776 6,381,926 210,540 15,806,242
-----------------------------------------------


May 31, 2005 Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil (6,453,149) (6,181,564) - (12,634,713)
Interest income (3,130) - (78,338) (81,468)
Service income - (51,498) - (51,498)
Production cost
and depletion 7,405,841 2,504,444 - 9,910,285
Depreciation 100,522 29,970 - 130,492
Foreign exchange
(gain)/loss (203,801) 215,841 445,896 457,936
Other expenses 1,436,523 199,342 2,483,878 4,119,743
Write back of oil
and gas concession - - - -
-----------------------------------------------
Segment (profit)
loss 2,282,806 (3,283,465) 2,851,436 1,850,777
-----------------------------------------------

Other non-cash items -
Interest expense - - 204,830 204,830
-----------------------------------------------

Segment assets 19,906,029 12,318,005 10,179,703 42,403,737
-----------------------------------------------

Segment
expenditures
Oil and gas
interests 5,302,420 1,480,561 - 6,782,981
Property, plant
and equipment 311,594 117,208 - 428,802
-----------------------------------------------
5,614,014 1,597,769 - 7,211,783
-----------------------------------------------


May 31,
2004 Tanzania Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil - - (5,167,593) - (5,167,593)
Interest
income - (942) - (60,045) (60,987)
Service
income - - (15,878) - (15,878)
Production
cost and
depletion - 2,134,339 - 2,134,339
Depreciation - 57,951 56,533 - 114,484
Foreign
exchange
gain (124,310) (71,282) (27,981) (320,399) (543,972)
Other
expenses 6,015 866,299 210,008 2,812,647 3,894,969
Write back
of oil
and gas
concession (198,461) - - - (198,461)
-------------------------------------------------------
Segment
(profit)
loss (316,756) 852,026 (2,810,572) 2,432,203 156,901
-------------------------------------------------------

Other
non-cash
items -
Interest
expense - - - 423,084 423,084
-------------------------------------------------------

Segment
assets 596 8,955,647 8,941,836 15,248,529 33,146,608
-------------------------------------------------------

Segment
expenditures
Oil and gas
interests - 4,759,419 670,324 - 5,429,743
Property,
plant and
equipment - 246,605 23,788 - 270,393
-------------------------------------------------------
- 5,006,024 694,112 - 5,700,136
-------------------------------------------------------


17. Subsequent Events

On March 8, 2006, the Company entered into an agreement to acquire 50% of the shares of an Egyptian based oil and gas company (the "Vendor") in return for issuing to the Vendor's shareholders common shares of the Company with an aggregate value of $3 million calculated on the basis of the average closing price of the shares of the Company for a period of 30 days prior to the date of the agreement. The Vendor has rights associated with the development of an exploration field (the "Field") located in Egypt. Within 30 days of the date of the agreement, the Vendor and the Company will undertake a work program at the Field, the intent of the work program being to secure a development lease from the Egyptian government. The Company will be responsible for 100% of the Vendor's obligations with respect to the work program, up to a maximum of $2 million. Upon completion of the work program, the Company will have the right to an assignment of 50% of the Vendor's contractual rights in respect of the Field, the right to nominate and appoint 50% of the voting directors appointed to the Vendor's board of directors and an option exercisable for 60 days following the issuance of the development lease for the Field to acquire the remaining 50% of the Vendor's shares in exchange for common shares of the Company with an aggregate value of $6 million calculated on the basis of the average closing price of the shares of the Company for a period of 30 days prior to the date the option is exercised.

18. Summary of Significant Differences Between Canadian GAAP and International Financial Reporting Standards (IFRS)

The Company's consolidated financial statements have been prepared in accordance with Canadian GAAP, which differ in certain material respects from International Financial Reporting Standards ("IFRS"). The principal difference between Canadian GAAP and IFRS from a measurement perspective, as applied to the Company's consolidated financial statements is asset impairment.

The Company's consolidated net result within an IFRS framework was $804,219 (May 31, 2005 $(1,493,053) - and May 31, 2004 - $(220,083)) compared with consolidated net results under Canadian GAAP of $911,124 (May 31, 2005 $(1,850,777) and May 31, 2004 - $(156,901)). A description of the significant differences and their effects on the Company's net result and shareholders' equity is set forth in the following notes.

(a) Asset impairment

Both Canadian GAAP and IFRS require that assets which are impaired be written down to their estimated fair value. Under AcG 16 issued by the CICA, in order to determine whether impairment exists, the book value of an oil and gas asset is compared to the sum of the undiscounted cash flows expected to be generated by such an asset. If the sum of such undiscounted cash flows is less than the carrying value of the asset, impairment exists. In contrast, IFRS under IAS 36 requires an assessment of any impairment using discounted cash flows. Furthermore, under IFRS, reversals of impairment loss are permitted if there has been a change in the estimates used to determine the recoverable amount whereas Canadian GAAP does not permit the reversal of an impairment loss or write-down if the net recoverable amount subsequently increases.

(b) Oil and gas interest

The Company follows the full cost method of accounting for oil and gas interest, as set out in AcG 16 issued by the CICA. Under this method, capitalized costs are accumulated in country-by-country cost centres. Presently there is no specific guidance under IFRS that deal with accounting for the oil and gas production activities. However, in the event where there is no specific IFRS or an Interpretation of the Standing Interpretations Committee, management should use its judgment in developing an accounting policy that provides the most useful information to users of the Company's financial statements which includes considering the pronouncements of other standard setters and industry practices. To date, the Company's management has referred to AcG 16 when developing its accounting policies for its exploration and production activities. This area of accounting is currently under review by the IASB and an extractive industries accounting standard might be developed in future years that may result in a change in the permitted accounting policies for exploration and evaluation. Until further guidance is available under IFRSs that specifically addresses upstream activities, management considers it appropriate to continue to follow Canadian GAAP with clear disclosure of the method adopted in the preparation of the financial statements.

(c) Reconciliations between net result and shareholders' equity determined under Canadian GAAP and IFRS

The following is a summary of the significant adjustments to net result for the seven month period ended December 31, 2005 and the years ended May 31, 2005 and 2004 and to shareholders' equity as of December 31, 2005, May 31, 2005 and May 31, 2004 that would be required if IFRSs had been applied instead of Canadian GAAP in the consolidated financial statements.



Dec 31, May 31, May 31,
2005 2005 2004
--------------------------------------------------------------------
Net result according to the
financial statements prepared
under Canadian GAAP 911,124 (1,850,777) (156,901)

Effect of assets impairment (106,905) 357,724 (63,182)
--------------------------------------------------------------------

Net result in accordance
with IFRS 804,219 (1,493,053) (220,083)
--------------------------------------------------------------------

Shareholders' equity according
to the financial statements
prepared under Canadian GAAP 70,491,565 38,254,448 26,291,881
--------------------------------------------------------------------
Items increasing (decreasing)
reported shareholders' equity:

Effect of adjustment brought
forward 2,008,192 1,650,468 1,713,650

Effect of asset impairment (106,905) 357,724 (63,182)
--------------------------------------------------------------------

Net adjustments 1,901,287 2,008,192 1,650,468
--------------------------------------------------------------------

Shareholders' equity - IFRS 72,392,852 40,262,640 27,942,349
--------------------------------------------------------------------


The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

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