Arctos Petroleum 6-K Current report (foreign)

CAMFLO INTERNATIONAL INC.

REPORT AND FINANCIAL STATEMENTS

December 31, 2003 and 2002

and June 30, 2004 (Unaudited)

AUDITORS' REPORT

To the Directors,

Camflo International Inc.

We have audited the balance sheets of Camflo International Inc. as at December 31, 2003 and 2002 and the statements of loss and deficit and cash flows for each of the years in the three year period ended December 31, 2003.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2003 in accordance with Canadian generally accepted accounting principles.  

Vancouver, Canada	“Amisano Hanson”
April 23, 2004, except as to Note 13, which is as of August 23, 2004	Chartered Accountants

CAMFLO INTERNATIONAL INC.

BALANCE SHEETS

December 31, 2003 and 2002

and June 30, 2004 (Unaudited)

	(Unaudited)
	June 30,	December 31,	December 31,
ASSETS	2004	2003	2002
Current
Cash	$ 36,469	$ 51,868	$ 108,085
Tax credits receivable	8,569	11,058	10,505
Prepaid expenses and deposits	3,332	2,007	-
	48,370	64,933	118,590
Deferred charges – Note 3	-	26,188	38,286
Resource properties – Notes 4 and 13 and Schedules 1  and 2	3,117,436	1,343,504	216,247
Capital assets – Note 5	8,616	9,759	3,578
	$ 3,174,422	$ 1,444,384	$ 376,701
LIABILITIES
Current
Accounts payable – Note 7	$ 1,333,376	$ 604,511	$ 23,562
Due to related parties – Note 7	8,000	-	-
Loan payable – Note 6	111,006	-	-
Promissory notes payable – Notes 7 and 8	249,299	-	-
	1,701,681	604,511	23,562
Due to related parties – Note 7	-	-	123,079
Loan payable – Note 6	-	104,256	90,756
Promissory notes payable – Notes 7 and 8	-	237,896	94,172
Convertible debentures payable – Notes 7 and 9	139,497	483,202	452,296
Asset retirement obligations	125,500	-	-
	1,966,678	1,429,865	783,865
SHAREHOLDERS’ EQUITY (DEFICIENCY)
Share capital – Notes 10 and 13	3,684,234	2,002,491	1,169,016
Share subscriptions – Note 10	-	200,000	-
Contributed surplus – Note 2	87,113	-	-
Deficit	( 2,563,603)	( 2,187,972)	( 1,576,180)
	1,207,744	14,519	(  407,164)
	$ 3,174,422	$ 1,444,384	$ 376,701

Nature and Continuance of Operations – Note 1

Commitments – Notes 4, 9 and 10

Subsequent Events – Note 13

SEE ACCOMPANYING NOTES

CAMFLO INTERNATIONAL INC.

STATEMENTS OF LOSS AND DEFICIT

for the years ended December 31, 2003, 2002 and 2001 and for the six months ended June 30, 2004 and 2003 (Unaudited)

	(Unaudited)
	Six months ended June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Oil and gas sales	$ 111,157	$ -	$ 51,805	$ -	$ -
Cost of sales
Depletion	36,511	-	28,954	-	-
Field expenses	27,695	-	16,880	-	-
Royalties	34,960	-	13,321	-	-
	99,166	-	59,155	-	-
Gross profit (loss)	11,991	-	( 7,350)	-	-
General and administrative expenses
Amortization – capital assets	1,144	479	1,777	1,101	1,466
Amortization – deferred charges	26,188	4,594	12,098	7,657	-
Consulting fees – Note 7	35,620	676	24,696	-	44,750
Filing and transfer agent fees	18,290	15,009	25,431	18,514	10,135
Finance fees	-	-	-	15,000	-
Interest – convertible debentures – Note 7	16,295	30,000	70,906	52,296	-
Interest – loan payable	6,750	6,953	13,500	13,500	2,256
Interest – promissory notes – Note 7	11,403	7,222	13,002	31,418	31,167
Investor relations	21,498	-	-	-	-
Management fees – Note 7	66,000	30,000	102,000	60,000	60,000
Office and miscellaneous – Note 7	5,732	7,468	16,348	18,980	9,736
Office rent – Note 7	14,871	2,400	16,762	4,800	7,500
Professional fees – Note 7	54,874	6,700	17,686	18,292	28,864
Promotion	-	1,400	2,967	8,664	6,336
Telephone	2,699	1,752	7,984	2,775	1,800
Travel and entertainment	19,145	9,129	23,576	16,024	3,174
	300,509	123,782	348,733	269,021	207,184

…/Cont’d.

SEE ACCOMPANYING NOTES

Continued

CAMFLO INTERNATIONAL INC.

STATEMENTS OF LOSS AND DEFICIT

for the years ended December 31, 2003, 2002 and 2001 and for the six months ended June 30, 2004 and 2003 (Unaudited)

	(Unaudited)
	Six months ended June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Loss before other items	( 288,518)	( 123,782)	( 356,083)	( 269,021)	( 207,184)
Other items
Stock-based compensation	( 31,600)	-	-	-	-
Write-down of resource properties – Note 4 and Schedule 2	-	-	( 37,931)	-	-
Write-off of abandoned resource properties – Note 4 and Schedule 2	-	-	( 217,778)	-	( 205,000)
Net loss for the period	( 320,118)	( 123,782)	( 611,792)	( 269,021)	( 412,184)
Deficit, beginning of the period	( 2,187,972)	( 1,576,180)	( 1,576,180)	( 1,307,159)	( 894,975)
Adjustment for stock-based compensation – Note 2	( 55,513)	-	-	-	-
Deficit, end of the period	$ ( 2,563,603)	$ ( 1,699,962)	$ ( 2,187,972)	$ ( 1,576,180)	$ ( 1,307,159)
Basic and diluted loss per share	$ ( 0.03)	$ ( 0.03)	$ ( 0.14)	$ ( 0.12)	$ ( 0.37)
Weighted average number of shares outstanding	12,036,644	3,536,662	4,319,622	2,321,662	1,106,662

SEE ACCOMPANYING NOTES

CAMFLO INTERNATIONAL INC.

STATEMENTS OF CASH FLOWS

for the years ended December 31, 2003, 2002 and 2001 and for the six months ended June 30, 2004 and 2003 (Unaudited)

	(Unaudited)
	Six months ended June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Operating Activities
Net loss for the period	$ ( 320,118)	$ ( 123,782)	$ ( 611,792)	$ ( 269,021)	$ ( 412,184)
Items not involving cash:
Depletion	36,511	-	28,954	-	-
Amortization – capital assets	1,144	479	1,777	1,101	1,466
Amortization – deferred charges	26,188	4,594	12,098	7,657	-
Finance fees	-	-	-	15,000	-
Stock-based compensation	31,600	-	-	-	-
Write-down of resource properties	-	-	37,931	-	-
Write-off of abandoned resource properties	-	-	217,778	-	205,000
	( 224,675)	( 118,709)	( 313,254)	( 245,263)	( 205,718)
Changes in non-cash working capital items
Tax credits receivable	2,489	4,380	( 553)	2,641	5,077
Prepaid expenses and deposits	( 1,326)	-	( 2,007)	-	1,000
Accounts payable	728,865	2,199	580,949	( 7,624)	5,976
Due to related parties	48,000	10,700	7,643	355	( 74,280)
	553,353	( 101,430)	272,778	( 249,891)	( 267,945)
Financing Activities
Shares issued for cash	1,081,743	-	793,475	79,948	-
Share subscriptions	-	327,000	200,000	-	-
Convertible debentures payable	16,295	30,000	70,906	452,296	-
Deferred charges	-	-	-	( 45,943)	-
Loan payable	6,750	6,953	13,500	13,500	77,256
Promissory notes payable (repayment)	11,403	7,222	13,002	( 24,028)	244,200
	1,116,191	371,175	1,090,883	475,773	321,456

SEE ACCOMPANYING NOTES

Continued

CAMFLO INTERNATIONAL INC.

STATEMENTS OF CASH FLOWS

for the years ended December 31, 2003, 2002 and 2001 and for the six months ended June 30, 2004 and 2003 (Unaudited)

	(Unaudited)
	Six months ended June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Investing Activities
Resource properties	( 1,684,943)	( 239,390)	( 1,411,920)	( 193,247)	-
Acquisition of capital assets	-	( 2,500)	( 7,958)	-	-
	( 1,684,943)	( 241,890)	( 1,419,878)	( 193,247)	-
Increase (decrease) in cash during the period	( 15,399)	27,855	( 56,217)	32,635	53,511
Cash, beginning of the period	51,868	108,085	108,085	75,450	21,939
Cash, end of the period	$ 36,469	$ 135,940	$ 51,868	$ 108,085	$ 75,450
Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$ -	$ -	$ -	$ 8,736	$ -
Income taxes	$ -	$ -	$ -	$ -	$ -

Non-cash Transactions – Note 12

SEE ACCOMPANYING NOTES

CAMFLO INTERNATIONAL INC.

Schedule 1

SCHEDULE OF RESOURCE PROPERTIES

for the six months ended June 30, 2004 (Unaudited)

	Alberta, Canada
	Goose	Snipe		Prairie	Black
	River	Lake	Alexander	River	Creek	Total
Balance, December 31, 2003	$ -	$ 289,268	$ 443,764	$ 64,724	$ 545,748	$ 1,343,504
Property Acquisition Costs
Cash	-	156,728	-	-	-	156,728
Deferred Exploration Costs
Asset retirement obligations	-	18,000	37,500	20,000	50,000	125,500
Casing and accessories	49,632	-	41,672	-	1,056	92,360
Drilling	354,159	-	168,267	27,127	160,848	710,401
Engineering and site supervision	18,677	-	27,267	2,163	39,409	87,516
Equipment rental	18,476	-	14,305	-	29,624	62,405
Field costs and supplies	13,104	-	86,596	4,115	199,646	303,461
Land lease	8,000	-	39,109	58,928	2,422	108,459
Testing and analysis	-	-	30,117	-	42,405	72,522
Transportation and trucking	24,912	-	17,172	-	49,007	91,091
	486,960	18,000	462,005	112,333	574,417	1,653,715
Less:
Depletion of producing resource properties	-	-	-	( 36,511)	-	( 36,511)
Balance, June 30, 2004	$ 486,960	$ 463,996	$ 905,769	$ 140,546	$ 1,120,165	$ 3,117,436

SEE ACCOMPANYING NOTES

CAMFLO INTERNATIONAL INC.

Schedule 2

SCHEDULE OF RESOURCE PROPERTIES

for the years ended December 31, 2003 and 2002

	Alberta, Canada
	Snipe		Prairie	Black	Wimberly,
	Lake	Alexander	River	Creek	Texas, USA	2003	2002
Balance, beginning of the year	$ -	$ -	$ -	$ -	$ 216,247	$ 216,247	$ -
Property Acquisition Costs
Cash	7,993	42,000	-	-	-	49,993	178,890
Common shares	-	-	-	-	-	-	23,000
	7,993	42,000	-	-	-	49,993	201,890
Deferred Exploration Costs
Casing and accessories	14,910	46,450	-	132,171	-	193,531	-
Drilling	28,450	78,292	2,567	175,451	-	284,760	-
Engineering and site supervision	5,320	33,738	20,035	57,696	-	116,789	-
Equipment rental	3,100	55,410	21,536	36,163	-	116,209	14,357
Field costs and supplies	14,711	33,804	15,559	35,695	1,531	101,300	-
Land lease	80,640	14,593	1,488	28,850	-	125,571	-
Road construction	120,894	12,346	14,626	-	-	147,866	-
Testing and analysis	850	8,253	22,390	142	-	31,635	-
Transportation and trucking	12,400	118,878	33,408	79,580	-	244,266	-
	281,275	401,764	131,609	545,748	1,531	1,361,927	14,357
	289,268	443,764	131,609	545,748	217,778	1,628,167	216,247
Less:
Depletion of producing resource properties	-	-	( 28,954)	-	-	( 28,954)	-
Write-down of resource properties	-	-	( 37,931)	-	-	( 37,931)	-
Write-off of abandoned resource properties	-	-	-	-	( 217,778)	( 217,778)	-
Balance, end of the year	$ 289,268	$ 443,764	$ 64,724	$ 545,748	$ -	$ 1,343,504	$ 216,247

SEE ACCOMPANYING NOTES

CAMFLO INTERNATIONAL INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2003 and 2002

and June 30, 2004 (Unaudited)

Note 1

Nature and Continuance of Operations – Note 4

The Company is in the process of exploring and developing its oil and gas properties in Alberta, Canada.  During the year ended December 31, 2003, the Company abandoned its interest in an oil and gas property in Texas, USA.

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern which presume the realization of assets and discharge of obligations in the normal course of business for the foreseeable future.

The ultimate recoverability of amounts shown for resource properties is dependent upon the existence and discovery of economically recoverable oil and gas reserves, the ability of the Company to obtain the necessary financing to develop the reserves and upon the ability of the Company to attain future profitable production or proceeds from the sale the resource properties.

The Company’s ability to continue as a going concern is uncertain.  The Company has accumulated losses of $2,563,603 (Unaudited) since incorporation and has a working capital deficiency of $1,653,311 (Unaudited) at June 30, 2004.  These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company was incorporated under the Business Corporations Act of Alberta on March 21, 1997.  On July 4, 2001, the Company moved jurisdiction to the Yukon Territory.  The Company changed its name to Camflo International Inc. on September 27, 2001.  The Company’s shares are publicly traded on the TSX Venture Exchange.

Note 2

Significant Accounting Policies

These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in Canadian dollars.  Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgement.  Actual results may differ from these estimates.

The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 2

Note 2

Significant Accounting Policies – (cont’d)

Principles of Consolidation

The financial statements for the years ended December 31, 2002 and 2001 include the accounts of the Company and the accounts of its inactive wholly-owned subsidiary, eteeoff.com Inc. (“eteeoff”).  Upon consolidation, all inter-company balances and transactions have been eliminated.  During the year ended December 31, 2003, the Company disposed of its 100% interest in eteeoff.  As a result of this disposal, the financial statements for the year ended December 31, 2003 are prepared on a non-consolidated basis.

Oil and Gas Properties and Depletion

The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.

Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined by independent petroleum engineers. Petroleum products and reserves are converted to a common unit of measure, using 6 MCF of natural gas to one barrel of oil.

Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.

Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion by more than 20%.  Royalties paid net of any tax credits received are included in oil and gas sales cost of sales.

In applying the full cost method, the Company calculates a ceiling test whereby the carrying value of petroleum and natural gas properties is compared to the sum of the undiscounted cash flows expected to result from the proved reserves and the lower of cost or market of unproved properties. Cash flows used in the ceiling test are based on independent third party quoted forward prices, adjusted for contracted prices and quality differentials. Should the ceiling test result in an excess of carrying value, the Company would then measure the amount of impairment by comparing the carrying amounts of petroleum and natural gas properties to an amount equal to the estimated net present value of unproved properties. A risk-free interest rate is used to arrive at the net present value of future cash flows. Carrying values in excess of the estimated discounted future cash flows would be recorded as a p ermanent impairment.

Note 2

Significant Accounting Policies – (cont’d)

Oil and Gas Properties and Depletion – (cont’d)

Effective January 1, 2004, the Company adopted the new Canadian guidelines for full-cost accounting.

Previously, future net revenues for ceiling test purposes were based on proved reserves and were not discounted. Estimated future general and administrative costs and financing charges associated with the future net revenues were deducted in arriving at the ceiling.

If the Company had not early adopted the new guidelines, a ceiling test write down of $1,873,436 (Unaudited) would have been required at June 30, 2004 as the previous policy recognizes only proven reserves and a significant portion of the reserves at June 30, 2004 are classified as probable.

Asset Retirement Obligations

Effective January 1, 2004, the Company recognizes the fair value of asset retirement obligations in the period in which they are incurred, discounted to their present value using the Company’s risk-free interest rate with the corresponding amount increasing the carrying amount of resource properties. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Actual costs incurred upon the settlement of the obligation are charged against the liability.

Mineral Properties

Acquisitions of mineral properties are initially recorded at cost.  Direct exploration and developments costs are deferred.  When production is attained, these costs will be amortized using the unit-of-production method based on estimated reserves.  Costs relating to properties abandoned are written-off when the decision to abandon a site is made, or earlier if a determination is made that the property does not have economically recoverable reserves.  On a quarterly basis, senior management reviews the carrying values of mineral properties and deferred exploration costs with a view to assess whether there has been any impairment in value.  In the event that reserves are determined to be insufficient to recover the carrying value of any property, the carrying value will be written-down or written off as appropriate.

Environmental Costs

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate.  Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed.  Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated.  Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company’s commitments to plan of action based on the then known facts.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 3

Note 2

Significant Accounting Policies – (cont’d)

Capital Assets and Amortization

Capital assets are recorded at historical cost.  Amortization is calculated at the following annual rates:

Computer equipment

- 30% declining balance

Office equipment

- 20% declining balance

Amortization is calculated at one-half rates in the year of acquisition.

Deferred Charges

Deferred charges are recorded at cost and represent costs incurred with respect to issuing the convertible debentures.  These costs are amortized over the term of the debentures.

Foreign Currency Translation

Transactions denominated in foreign currencies are translated into Canadian dollar equivalents based at the exchange rate in effect at the time of the transaction.  Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollar equivalents based on the year-end exchange rate.  Exchange gains and losses are included in operations.

Basic and Diluted Loss Per Share

Basic loss per share is computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year.  Diluted loss per share reflects the potential dilution that could occur if potentially dilutive securities were exercised or converted to common shares.  The dilutive effect of options, warrants and their equivalent is computed by application of the treasury stock method and the dilutive effect of convertible securities by the “if converted” method.  Fully diluted amounts are not presented when the effect of the computations are anti-dilutive due to the losses incurred.  Accordingly, there is no difference in the amounts presented for basic and diluted loss per share.

Financial Instruments

The carrying values of cash and accounts payable approximate their fair values because of the short maturity of those instruments.  The fair values of due to related parties, loan payable, promissory notes payable and convertible debentures payable are also approximate their carrying amounts. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 4

Note 2

Significant Accounting Policies – (cont’d)

Stock-based Compensation

The Company has a stock-based compensation plan as disclosed in Note 10.  Stock options are granted in accordance with the policies of regulatory authorities at an exercise price equal to the market price of the Company’s stock on the date of the grant.  No compensation expense was recognized for options when issued to employees and directors.  Any consideration paid by employees and directors upon exercise of stock options was credited to share capital.

Effective January 1, 2002, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants (“CICA”) regarding accounting for stock-based compensation.  These new requirements required that all stock based payments to non-employees and direct awards of stock to employees be accounted for using a fair value based method of accounting. Fair value is determined using the Black-Scholes option pricing model.  However, the new standard permitted the Company to continue its existing policy of not recording compensation expense on stock options granted to employees and directors, as long as the Company disclosed the pro forma effect of accounting for these awards as if the fair value method had been used.  

Effective January 1, 2004, the Company adopted the amended CICA standard regarding accounting for stock-based compensation.  Under this amended standard, the Company must account for compensation expense based on the fair value of options granted. Compensation costs attributable to options granted to employees or directors are measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus.  Upon exercise of stock options, consideration paid, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.

This change in accounting policy has been applied retroactively with no restatement of prior periods presented.  As a result, at December 31, 2003 accumulated deficit increased by $55,513 and contributed surplus increased by $55,513.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes.  Under this method, current income taxes are recognized for the estimated income taxes payable for the current year.  Future income tax assets and liabilities are recognized in the current year for temporary differences between the tax and accounting basis of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes only if it is more likely than not that they will be realized.  Future income tax assets and liabilities are measured using tax rates and laws expected to apply in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on future income tax assets and liabilities is recognized in operations in the year of the change.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 5

Note 3

Deferred Charges

	(Unaudited)
	June 30,	December 31,
	2003	2003	2002
Finders fees	$ 27,600	$ 27,600	$ 27,600
Legal fees	18,343	18,343	18,343
	45,943	45,943	45,943
Less:  accumulated amortization	( 45,943)	( 19,755)	( 7,657)
	$ -	$ 26,188	$ 38,286

Note 4

Resource Properties

Snipe Lake

By a Farmout and a Transfer Agreement dated March 18, 2003, the Company acquired a 10% working interest in four sections of land located in Alberta, Canada.  The Company agreed to pay 10% of the costs of drilling and completing test wells.  The interest is subject to a convertible overriding royalty of 15%, which after payout, will convert to a 5% working interest on one of the four sections of land.  By drilling this well, the Company earns an option to participate in the remaining three sections on the same terms and conditions as the March 18, 2003 agreement.  As a result of grouping an adjacent license (the “Taurus Lands”) with this well, the Company earned a 3.75% interest in seven additional sections of land.

On July 23, 2003, the Company acquired a 5% working interest in two sections of land in the Snipe Lake area from Crown land sales for $5,278 and on August 6, 2003 the Company acquired a 3.75% working interest in an additional section adjacent to the Taurus Lands for $2,715.

During the six months ended June 30, 2004, the Company acquired a 20% working interest in an additional seven sections of land in the Snipe Lake area for $156,728.

Alexander

By a Farmout Agreement dated March 15, 2003, the Company acquired a 35% working interest in four sections of land in Alberta, Canada for $42,000.  The Company has agreed to pay 70% of the costs of drilling and completing four test wells on the property.  The agreement is subject to a convertible overriding royalty of 15% which after pay out will convert to a 35% working interest and the Company retaining a 35% net working interest.  The Company was granted the option to participate in additional wells on the property by paying 35% of well costs.  In addition, the Company was granted the option to participate in an additional three contiguous sections by paying 35% of well costs.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 6

Note 4

Resource Properties – (cont’d)

Alexander – (cont’d)

By a Farmout and Option Agreement dated December 1, 2003, the Company acquired a 27.5% working interest in one section of land in Alberta, Canada.  The Company has agreed to pay 50% of the costs of drilling and completing a test well.

Prairie River

By a Farmout Agreement dated March 1, 2003, the Company acquired a 21.5% working interest in one section of land located in Alberta, Canada. The company is required to pay 35% of the costs of drilling and completing a test well to earn its 21.5% working interest.  The Company was granted an option on three sections of adjoining lands by paying 40% of a seismic program and drilling an additional well at 100% working interest before payout and 49.5 % working interest after payout.  The Company renegotiated this option agreement and has agreed to participate as to a 51.25% working interest before payout reverting to a 31% working interest after payout.

At December 31, 2003, the Company performed a ceiling test on its Prairie River property and determined that a write-down of $37,931 was necessary to reflect the net realizable value of the property.

Black Creek

By a Participation Agreement dated October 28, 2003, the Company acquired a 68% working interest in three sections of land located in Alberta, Canada.  The Company has agreed to pay 68% of the costs of drilling and completing a test well.  The Company’s share of the estimated costs is $790,024.  To December 31, 2003, the Company had incurred costs totalling $545,748 in respect to the Black Creek prospect.  The Company’s interest reverts to a 34% working interest after payout.  The Company has the option to participate in three additional sections of adjoining lands.

Goose River

By a Farmout and Option Agreement dated March 10, 2004, the Company acquired a 30% working interest in four sections of land in the Goose River area of Alberta, Canada.  The Company has agreed to pay 30% of the costs of drilling and completing a test well.  The Company’s interest reverts to an 18% working interest after payout.  The Company has the option to participate in eight additional sections of adjoining lands on the same terms as the March 10, 2004 agreement.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 7

Note 4

Resource Properties – (cont’d)

Goose River – (cont’d)

The Company acquired an additional 8% working interest in the Goose River test well as a result of a partner not participating in this well.  The additional interest has a 500% penalty payment associated against the non-participating party.  Once 500% of the total costs of this operation have been recovered, the non-participating party will reacquire the 8% working interest from the Company.

Wimberly

By an agreement effective February 14, 2002, the Company acquired a 20% working interest and a 16% net revenue interest in the Wimberly prospect located in Jack County, Texas for consideration of $162,566 (US$100,000) and 150,000 common shares valued at of $0.10 per share.  The Company issued an additional 80,000 common shares valued at $0.10 per share as a finders fee for the Wimberly prospect.  During the year ended December 31, 2003, the Company abandoned its interest in the Wimberly prospect resulting in a write-off totalling $217,778.

Val d’ Or

The Company had the option to earn a 51% interest in 130 mining claims located in the Val d’Or region of Quebec.  During the year ended December 31, 2001, the Company abandoned the property and wrote-off acquisition costs totalling $205,000.

Note 5

Capital Assets

		(Unaudited)		December 31,
	June 30, 2004			2003	2002
		Accumulated
	Cost	Amortization	Net	Net	Net
Computer  equipment	$ 5,776	$ 2,923	$ 2,853	$ 3,356	$ 1,158
Office equipment	10,214	4,451	5,763	6,403	2,420
	$ 15,990	$ 7,374	$ 8,616	$ 9,759	$ 3,578

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 8

Note 6

Loan Payable

The loan payable is unsecured, bears interest at 18% per annum and is due on May 1, 2005.  

Note 7

Related Party Transactions

The Company incurred the following charges by directors or officers or companies with directors or officers in common:

	(Unaudited)
	Six months ended
	June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Consulting fees	$ 26,640	$ -	$ 23,020	$ -	$ 30,000
Interest – convertible debentures	3,425	7,169	14,338	10,459	-
Interest – promissory notes	10,165	5,262	10,525	23,616	28,751
Management fees	66,000	30,000	102,000	60,000	60,000
Office and miscellaneous	-	1,050	1,050	3,900	2,100
Office rent	-	1,200	1,200	4,800	7,500
Professional fees	4,250	500	3,500	-	-
	$  110,480	$ 45,181	$  155,633	$ 102,775	$ 128,351

These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.

Included in accounts payable is $11,075 (Unaudited) (December 31, 2003: $7,702) (December 31, 2002:  $Nil) owing to directors of the Company relating to unpaid fees and expense reimbursements.

Due to related parties of $8,000 (Unaudited) (December 31, 2003: $Nil) (December 31, 2002:  $123,079) consists of amounts owing to directors of the Company or companies with common directors.  These amounts are unsecured, non-interest bearing and have no specific terms of repayment.

Included in promissory notes payable is $224,175 (Unaudited) (December 31, 2003: $214,011) (December 31, 2002:  $72,764) owing to directors of the Company or to companies with common directors.

Included in convertible debentures payable is $28,223 (Unaudited) (December 31, 2003: $104,798) (December 31, 2002:  $90,459) owing to directors of the Company.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 9

Note 8

Promissory Notes Payable – Note 7

The promissory notes payable are unsecured, bear interest at rates from 7.5% per annum to 15% per annum and are due on May 1, 2005.

Note 9

Convertible Debentures Payable – Note 7

The convertible debentures bear interest at 15% per annum and mature February 28, 2007.  The debentures and accrued interest are convertible into units consisting of one common share and one share purchase warrant at $0.10 per unit in years one and two, at $0.15 per unit in year three, at $0.20 per unit in year four or at $0.25 per unit in year five.  The share purchase warrants entitle the holders the right to purchase one common share for each warrant held at $0.10 per share for two years from the conversion date for conversions in the first two years, at $0.15 per share for one year for conversions in the third year, at $0.20 per share for one year for conversions in the fourth year or at $0.25 per share for one year for conversions in the fifth year.  A finders fee of $27,600 was paid with respect to this private placement.  Included in convertible debentures payable i s $139,497 (Unaudited) (December 31, 2003: $123,202) (December 31, 2002:  $52,296) of accrued interest.

The Company may force conversion of these debentures up to and including the close of business on February 28, 2005, by redeeming the debentures if the Company’s shares trade in excess of $0.50 per share for a minimum of 90 days, at a redemption price equal to the principal amount being redeemed together with accrued and unpaid interest on the principal amount to the date fixed for redemption and all other moneys owing under this debenture and a penalty of six months interest payments.

On November 10, 2003, a $40,000 debenture was converted into 400,000 units at $0.10 per unit.  Each unit consists of one common share and one share purchase warrant entitling the holder thereof the right to purchase an additional common share at $0.10 until November 10, 2005.  

On February 12, 2004, debentures totalling $360,000 were converted into 3,600,000 units at $0.10 per unit.  Each unit consists of one common share and one share purchase warrant entitling the holder thereof the right to purchase an additional common share at $0.10 until February 12, 2006.  

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 10

Note 10

Share Capital – Notes 9 and 13

i)

Authorized:

Unlimited number of common shares without par value

Unlimited number of preferred shares without par value

ii) Issued:	Number	Amount
Balance, December 31, 2001	1,106,662	$ 925,068
Issue of shares for cash pursuant to a private placement  – at $0.10	1,000,000	100,000
Less:  share issue costs	-	( 20,052)
Issue of shares for acquisition of resource property – at $0.10	150,000	15,000
Issue of shares for finders fee with respect to acquisition  of resource property – at $0.10	80,000	8,000
Issue of shares for loan bonus  – at $0.10	150,000	15,000
Issue of shares for settlement of debts – at $0.12	1,050,000	126,000
Balance, December 31, 2002	3,536,662	1,169,016
Issue of shares for cash pursuant to private placements  – at $0.30	2,666,667	800,000
Less:  share issue costs	-	( 10,000)
Issue of shares for cash pursuant to the exercise of share  purchase options – at $0.13	26,733	3,475
Issue of shares on conversion of debentures  – at $0.10	400,000	40,000
Balance, December 31, 2003	6,630,062	2,002,491
Issue of shares for cash pursuant to private placements – at $0.45	2,200,000	990,000
Less:  share issue costs	-	( 68,857)
–  at $0.50	400,000	200,000
Issue of shares for finders fee	6,000	-
Issue of shares for services pursuant to the exercise of share purchase warrants – at $0.14	285,714	40,000
Issue of shares for cash pursuant to the exercise of share  purchase warrants – at $0.14	714,286	100,000
– at $0.30	100,000	30,000
– at $0.45	68,000	30,600
Issue of shares on conversion of debentures  – at $0.10	3,600,000	360,000
Balance, June 30, 2004 (Unaudited)	14,004,062	$ 3,684,234

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 11

Note 10

Share Capital – Notes 9 and 13 – (cont’d)

iii)

Commitments:

Stock-based Compensation Plan

A summary of the Company’s stock option plan as of June 30, 2004, December 31, 2003 and 2002 and the changes during the periods then ended is presented below:

		Weighted
		Average
	Number of	Exercise
	Shares	Price
Options outstanding and exercisable, December 31, 2001	-	-
Granted	133,666	$0.13
Options outstanding and exercisable, December 31, 2002	133,666	$0.13
Granted	230,000	$0.30
Exercised	(26,733)	$0.13
Options outstanding and exercisable, December 31, 2003	336,933	$0.25
Granted	400,000	$0.50
Options outstanding and exercisable, June 30, 2004 (Unaudited)	736,933	$0.38

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 12

Note 10

Share Capital – Notes 9 and 13 – (cont’d)

iii)

Commitments: – (cont’d)

Stock-based Compensation Plan – (cont’d)

At June 30, 2004, there were 736,933 share purchase options outstanding entitling the holders thereof the right to purchase one common share for each option held as follows:

Number	Exercise Price	Expiry Date
106,933	$0.13	February 18, 2007
230,000	$0.30	September 3, 2008
400,000	$0.50	February 23, 2009
736,933

As disclosed in Note 2, the Company did not record compensation expense on the granting of share purchase options to directors and employees prior to December 31, 2003. Disclosure of pro forma loss and loss per share figures had the Company elected to follow the fair value method using the Black-Scholes option pricing model are as follows:  

	Years ended December 31,
	2003	2002	2001
Net loss for the year as reported	$ ( 611,792)	$ ( 269,021)	$ ( 412,184)
Stock-based compensation	( 36,800)	( 18,713)	-
Pro forma loss for the year	$ ( 648,592)	$ ( 287,734)	$ ( 412,184)
Pro forma basic and diluted loss per  share	$ ( 0.15)	$ ( 0.12)	$ ( 0.37)

The following assumptions were used for the Black-Scholes model:

	(Unaudited)
	Six months ended
	June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Risk free rate	3.5%	-	3.0%	3.0%	-
Dividend yield	0%	-	0%	0%	-
Expected volatility	7%	-	56%	196%	-
Weighted average expected  option life	5 yrs	-	5 yrs	5 yrs	-

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 13

Note 10

Share Capital – Notes 9 and 13 – (cont’d)

iii)

Commitments: – (cont’d)

Stock-based Compensation Plan – (cont’d)

The weighted average fair value at the date of grant of the director stock options granted were as follows:

	(Unaudited)
	Six months ended
	June 30,		Years ended December 31,
	2004	2003	2003	2002	2001
Weighted average  fair value	$ 0.08	$ -	$ 0.30	$ 0.14	$ -
Total options  granted	400,000	-	230,000	133,666	-
Total fair value of  options granted	$ 31,600	$ -	$ 36,800	$ 18,713	$ -

Share Purchase Warrants

At June 30, 2004, there were 8,898,667 (Unaudited) share purchase warrants outstanding entitling the holders thereof the right to purchase one common share for each warrant held as follows:

Number	Exercise Price	Expiry Date
1,566,667	$0.30	October 7, 2004
1,000,000	$0.30	August 22, 2005
400,000	$0.10	November 10, 2005
200,000	$0.60	January 30, 2005
3,600,000	$0.10	February 12, 2006
2,132,000	$0.45	January 30, 2006
8,898,667

Share Subscriptions

At December 31, 2003, the Company had received share subscriptions totalling $200,000 in respect to a flow through private placement of 400,000 units at $0.50 per unit.  Each unit consists of one flow-through common share and a one share purchase warrant entitling the holders thereof the right to purchase one non-flow-through common share for each two warrants held at $0.60 per share to January 30, 2005.  The units were issued on January 30, 2004.  The Company issued an additional 6,000 common shares as a finders fee with respect to the private placement.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 14

Note 10

Share Capital – Notes 9 and 13 – (cont’d)

iii)

Commitments: – (cont’d)

Convertible Debentures – Note 9

Note 11

Income Taxes

At December 31, 2003, the Company has accumulated non-capital losses totalling $1,223,695 which may be deducted from future years’ taxable income. These losses expire as follows:

December 31, 2004	$ 1,287
2005	53,765
2006	186,097
2007	185,705
2008	202,551
2009	269,130
2010	325,160
	$ 1,223,695

At December 31, 2003, the Company has accumulated capital losses of $225,357 which may be deducted from future years’ taxable capital gains.  

At December 31, 2003, the Company has accumulated Canadian exploration and development expenses of $417,227, Canadian oil and gas expenses of $1,210,389 and foreign exploration and development expenses of $225,993 which may be deducted from future years’ taxable income.

Amounts received on the issue of flow through shares will be renounced in favour of the investors and will not be available for future deduction from taxable income by the Company.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 15

Note 11

Income Taxes – (cont’d)

The significant components of the Company’s future income tax assets are as follows:

	(Unaudited)
	June 30,	December 31,
	2004	2003	2002
Non-capital losses	$ 544,877	$ 460,354	$ 422,808
Capital losses	42,390	42,390	42,390
Canadian and foreign exploration and  development and oil and gas expenses	1,331,204	697,328	241,403
	1,918,471	1,200,072	706,601
Less:  valuation allowance	( 1,918,471)	( 1,200,072)	( 706,601)
	$ -	$ -	$ -

The Company has recorded a valuation allowance against its future income tax assets based on the extent to which it is unlikely that sufficient taxable income will be realized during the carry-forward periods to utilize all the future tax assets.

Note 12

Non-cash Transactions

Investing and financing activities that do not have a direct impact on current cash flows are excluded from the statement of cash flows.  The following transactions were excluded from the statements of cash flows:

Six months ended June 30, 2004:

–

the Company issued 6,000 common shares as finders fees in respect to a private placement.

–

the Company issued 400,000 common shares at $0.50 per share in respect to a private placement, the proceeds of $200,000 were received prior to December 31, 2003.

–

the Company issued 3,600,000 common shares at $0.10 per share pursuant to the conversion of debentures totalling $360,000.

–

the Company issued 1,000,000 common shares at $0.14 per share pursuant to the exercise of share purchase warrants.  The Company received $100,000 with the balance of $40,000 applied to unpaid management and consulting fees.

–

the Company provided $125,500 for asset retirement obligations on resource properties.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 16

Note 12

Non-cash Transactions – (cont’d)

Year ended December 31, 2003:

–

the Company issued 400,000 common shares at $0.10 per share in respect to the conversion of a $40,000 debenture.

–

the Company reclassified $130,722 from amounts owing to related parties to promissory notes payable.

Year ended December 31, 2002:

–

the Company issued 150,000 common shares at $0.10 per share in respect to the acquisition of a resource property.

–

the Company issued 80,000 common shares at $0.10 per share in respect to finders fee on the acquisition of a resource property.

–

the Company issued 150,000 common shares at $0.10 per share in respect to bonus shares relating to a loan payable.

–

the Company issued 1,050,000 common shares at $0.12 per share in respect to debt settlement agreements.

Note 13

Subsequent Events

Subsequent to June 30, 2004, the Company:

i)

entered into a Petroleum and Natural Gas Rights Conveyance Agreement with Spearhead Resources Inc. (“Spearhead") dated July 7, 2004, whereby the Company purchased Spearhead's 32% working interest in the Joffre oil and gas property in central Alberta (the "Joffre Property "). Under the terms of the agreement, the Company was required to pay a purchase price of $3,500,000 (paid) and provide a further $1,500,000 (paid) to Spearhead for outstanding joint venture obligations.  

ii)

completed a brokered private placement which consisted of the issuance 9,000,000 common shares of the Company at $0.50 per share and the issuance of a further 3,185,273 flow through common shares at $0.55 per share for total gross proceeds of $6,251,900. The broker received a cash commission of $437,633 and brokers warrants to acquire 1,218,527 common shares at $0.50 per share for a term of 18 months.  In addition, legal fees totalling $56,888 were paid to the brokers lawyer.  In connection with the private placement, certain principals of the Company sold 2,000,000 common shares at $0.50 per share to an investor in a prearranged trade in order to facilitate the investor's desire to acquire free trading shares. The proceeds from the sale, by such principals, have been invested in the private placement by way of a subscription for 2,000,000 common shares at $0.50 per share.

Closing of the acquisition of the Joffre Property occurred concurrently with the closing of the private placement.

Camflo International Inc.

Notes to the Financial Statements

December 31, 2003 and 2002 and June 30, 2004 (Unaudited) – Page 17

Note 13

Subsequent Events – Notes 4 and 10 – (cont’d)

iii)

entered into an Amalgamation Agreement with Spearhead dated July 7, 2004, whereby the Company and Spearhead would amalgamate on the basis that the Company’s shareholders would receive three shares of the newly formed company (“Amalco") for every four shares held, while the Spearhead shareholders would receive one share of Amalco for every share of Spearhead held.  The amalgamation will be accounted for as a business combination using the purchase method with the Company identified as the acquiror.  This agreement is subject to regulatory and shareholder approvals.

iv)

issued 200,000 common shares at $0.30 per share pursuant to the exercise of share purchase warrants for proceeds of $60,000.

v)

issued 5,000 common shares at $0.45 per share pursuant to the exercise of share purchase warrants for proceeds of $2,250.

Note 14

Comparative Figures

Certain comparative figures as at December 31, 2003 and 2002 and for the periods ended June 30, 2003, December 31, 2003, 2002 and 2001 have been reclassified in order to comply with the financial statement presentation adopted for the six months ended June 30, 2004.