heartland10qsb051304

10QSB 1 heartland10qsb051304.htm HEARTLAND10QSB051304 heartland10qsb051304

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period

Commission file number 000-32669

HEARTLAND OIL AND GAS CORP.
(Exact name of small business issuer as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or organization)

91-1918326
(I.R.S. Employer Identification No.)

Suite 1925, 200 Burrard Street
Vancouver, British Columbia, Canada
V6C 3L6
(Address of principal executive offices)

604.693.0177

(Issuer's telephone number)

Suite 1500, 885 West Georgia Street
Vancouver, British Columbia, Canada V6C 3E8
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

24,391,321 common shares and 995,305 preferred stock issued and outstanding as of April 28, 2004

Transitional Small Business Disclosure Format (Check one): Yes [X] No [ ]

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

Our unaudited financial statements as of March 31, 2004 and for the three month periods ended March 31, 2004 and 2003 form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with accounting principles generally accepted in the United States of America.

HEARTLAND OIL & GAS CORP.
(An Exploration Stage Company)

March 31, 2004


Balance Sheets	F-1

Statements of Operations	F-2

Statements of Cash Flows	F-3

Notes to the Financial Statements	F-4




Table of Contents

HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

BALANCE SHEETS

	March 31, 2004	December 31, 2003

	(Unaudited)	(Audited)
ASSETS

CURRENT ASSETS

Cash and cash equivalents	$10,114,459	$8,279,474
Prepaid expenses	15,850	27,011


Total current assets	10,130,309	8,306,485

OIL AND GAS PROPERTIES, unproven (Note 2)	4,870,668	4,267,171

EQUIPMENT, net of accumulated amortization of $5,303 and $3,030, respectively	18,233	16,075


TOTAL ASSETS	$15,019,210	$12,589,731


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Accounts payable and accrued liabilities	$176,569	$493,336
Due to related parties (Note 4)	2,662	7,027

Total current liabilities	179,231	500,363

LONG-TERM LIABILITIES

Asset retirement obligations (Note 5)	34,000	-


TOTAL LIABILITIES	213,231	500,363


STOCKHOLDERS’ EQUITY (Note 3)

Preferred stock - $0.001 per value, 5,000,000 shares authorized,
995,305 and 0 shares issued and outstanding, respectively	995	-

Common stock - $0.001 per value, 100,000,000 shares authorized,
24,391,320 and 24,301,320 shares issued and outstanding, respectively	24,391	24,301

Additional paid-in capital	16,841,404	13,766,605

Deficit accumulated during the exploration stage	(2,060,811)	(1,701,538)


TOTAL STOCKHOLDERS’ EQUITY	14,805,979	12,089,368


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$15,019,210	$12,589,731

The accompanying notes are an integral part of these statements.


	F-1

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

STATEMENTS OF OPERATIONS

	Three Months Ended March 31, 2004	Three Months Ended March 31, 2003	Period from Inception (August 11,2000) Through March 31, 2004

	(Unaudited)	(Unaudited)	(Unaudited)

REVENUE	$-	$-	$-

EXPENSES

Professional fees	79,872	42,039	362,217
Management fees (Note 4)	47,617	11,000	141,617
Interest expense	-	3,839	67,206
Stock – based compensation (Note 1)	107,513	-	782,488
Travel and promotion	43,931	24,615	291,465
Office rent	11,760	6,707	43,928
Consulting (Note 4)	6,000	8,253	91,171
General and administrative	84,014	33,979	331,410


Total operating expenses	380,707	130,432	2,111,502


LOSS FROM OPERATIONS	(380,707)	(130,432)	(2,111,502)

OTHER INCOME
Interest income	21,434	-	50,691


NET LOSS	$ (359,273)	$(130,432)	$(2,060,811)


BASIC AND DILUTED NET LOSS PER COMMON SHARE	$(0.01)	$(0.01)


BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING	24,351,430	19,685,873

The accompanying notes are an integral part of these statements


	F-2

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31, 2004	Three Months Ended March 31, 2003	Period from Inception (August 11, 2000) Through March 31, 2004

	(Unaudited)	(Unaudited)	(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss	$(359,273)	$(130,432)	$(2,060,811)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accrued interest on convertible debentures	-	11,348	49,061
Stock – based compensation	107,513	-	782,488
Depreciation, depletion and amortization	1,674	364	5,304
Decrease (increase) in prepaid expenses	11,161	(10,864)	(15,825)
Increase (decrease) in accounts payable and accrued expenses	(316,767)	(17,435)	406,015


Net cash used in operating activities	(555,692)	(147,019)	(833,768)


CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of computer equipment	(3,832)	(2,952)	(23,537)
Acquisition and exploration of oil and gas properties	(569,497)	(36,936)	(4,836,668)


Net cash used in investing activities	(573,329)	(39,888)	(4,860,205)


CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in due to related parties	(4,365)	6,873	224,142
Cash received on recapitalization	-	-	15,896
Proceeds from issuance of common stock, net of offering costs	40,500	476,400	12,054,321
Proceeds from issuance of preferred stock, net of offering costs	2,927,871	-	2,927,871
Proceeds from share subscriptions	-	490,000	-
Proceeds from long-term debt	-	-	586,202


Net cash provided by financing activities	2,964,006	973,273	15,808,432


NET INCREASE IN CASH AND CASH EQUIVALENTS	1,834,985	786,366	10,114,459

CASH AND CASH EQUIVALENTS, beginning of period	8,279,474	86,475	-


CASH AND CASH EQUIVALENTS, end of period	$10,114,459	$872,841	$10,114,459


SUPPLEMENTAL NON-CASH INFORMATION

Increase in oil and gas properties from asset retirement obligations	$34,000	$-	$34,000

The accompanying notes are an integral part of these statements


	F-3

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organization, Business and Going Concern

On April 10, 2002, Adriatic Holdings Limited ("Adriatic") entered into a letter of intent to acquire all of the shares of Heartland Oil and Gas Inc., a Nevada corporation ("Heartland"). Heartland was incorporated in the State of Nevada on August 11, 2000 and its principal business activity consists of exploration and development of oil and gas properties in the United States to determine whether they contain economically recoverable resources. The Company is currently in the exploration stage and has not generated significant revenues from its operations. Effective September 17, 2002, the acquisition of Heartland by Adriatic was completed through the issuance of one share of Adriatic common stock for each share of Heartland outstanding. At the time of the acquisition, Adriatic had 7,090,000 shares of common stock outstanding. Adriatic issued 12,212,429 shares of common stock to the shareholders of Heartland, and as a result, the Company had 19,302,429 shares of common stock outstanding immediately after the acquisition. As part of the exchange agreement, Adriatic changed its name to Heartland Oil & Gas Corp. The acquisition of Heartland by Adriatic is considered a reverse acquisition and accounted for under the purchase method of accounting. Under reverse acquisition accounting, Heartland is considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of Adriatic. Assets acquired and liabilities assumed are reported at their historical amounts.

The consolidated financial statements include the accounts of Adriatic since the date of the reverse acquisition (September 17, 2002) and the historical accounts of its wholly owned subsidiary, Heartland Oil and Gas Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has suffered recurring losses from operations and has accumulated a deficit of $2,060,811 since inception on August 11, 2000. At March 31, 2004, the Company has working capital of $9,951,078, which is sufficient to fund the Company’s operations for the next twelve months. Since inception, the Company has funded operations through the issuance of capital stock and debt. Management’s plan is to continue raising additional funds through future equity or debt financings until it achieves profitable operations from its oil and gas drilling activities.

Basis of Presentation

The accompanying consolidated financial statements of the Company are unaudited and include, in the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of March 31, 2004, and the related statements of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financials statements should be read in conjunction with the Company’s audited financial statements and the related notes thereto included in the Company’s Form 10-KSB filed with the Securities and Exchange Commission.

Oil and Gas Properties

The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. As of March 31, 2004, the Company has no properties with proven reserves. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects including capitalized interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future exploration of unproved properties are determined uneconomical the amount of such properties are added to the capitalized cost to be amortized. As of March 31, 2004, all of the Company's oil and gas properties were unproved and were excluded from amortization. At March 31, 2004, none of the Company’s unproved oil and gas properties were considered impaired.

The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions. No impairment existed as of March 31, 2004.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.


	F-4

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Loss Per Share of Common Stock

Net loss per share of common stock is based on the weighted average number of shares of common stock outstanding, giving effect to the outstanding shares of Adriatic as if they were issued on the date of the reverse acquisition as discussed above. Common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured at intrinsic value, which is the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock.

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".

Had the Company measured compensation cost based on the fair value of the options at the grant date for the three-month period ended March 31, 2004 consistent with the method prescribed by SFAS 123, the Company’s net loss and loss per common share would have been increased to the pro forma amounts indicated below:

	Three Months Ended March 31, 2004


Net loss, as reported	$ (359,273)

Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects	107,513

Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects	(104,857)


Pro forma net loss	$ (356,617)

	Three Months Ended March 31, 2004


Earnings per share:
Basic and diluted earnings (loss) per common share
As reported	$ (0.01)
Pro forma	(0.01)

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.


	F-5

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Management believes that the estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ from these estimates.

Fair Value of Financial Instruments

Substantially all of the Company's assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Estimates of fair value are made at a specific point in time, based on relative market information and information about the financial instrument, specifically, the value of the underlying financial instrument. Assets that are recorded at fair value consist largely of cash and other assets, which are carried at contracted amounts that approximate fair value. Oil and gas properties are valued as discussed above. The Company's liabilities consist of short term liabilities and notes payable recorded at contracted amounts that approximate fair value.

Recent Accounting Pronouncements

A reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, Heartland has included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, Heartland would be required to reclassify approximately $2,664,261 at March 31, 2004 and $2,372,337at December 31, 2003 out of oil and gas properties and into a separate intangible assets line item. Heartland’s cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full-cost accounting rules.

In May, 2003, SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, was issued. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Generally, a financial instrument, whether in the form of shares or otherwise, that is mandatorily redeemable, i.e. that embodies an unconditional obligation requiring the issuer to redeem it by transferring its shares or assets at a specified or determinable date (or dates) or upon an event that is certain to occur, must be classified as a liability (or asset in some circumstances). In some cases, a financial instrument that is conditionally redeemable may also be subject to the same treatment. This Statement does not apply to features that are embedded in a financial instrument that is not a derivative (as defined) in its entirety. For public entities, this Statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not effect the Company’s financial position or results of operations.

NOTE 2- OIL AND GAS PROPERTIES, UNPROVEN

The total costs incurred and excluded from amortization are summarized as follows:

	Acquisition Costs	Exploration Costs	Total


Costs incurred during periods ended:

March 31, 2004	$ 291,924	$ 311,573	$ 603,497
December 31, 2003	839,081	1,278,006	2,117,087
December 31, 2002	917,003	-	917,003
December 31, 2001	506,253	591,875	1,098,128
December 31, 2000	110,000	24,953	134,953


Totals	$ 2,664,261	$ 2,206,407	$ 4,870,668

At March 31, 2004, all of the Company’s oil and gas properties are considered unproven. Based on the status of the Company’s exploration activities, including the drilling of test wells, management has determined that no impairment has occurred.


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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 3- STOCKHOLDERS' EQUITY

During the three-month period ended March 31, 2003 the Company completed the sale of 690,000 units at $1.40 per unit for proceeds of $966,000.

During the three-month period ended March 31, 2004 the Company issued 60,000 shares of common stock at $0.50 per share for proceeds of $30,000 and 30,000 shares of common stock at $0.35 per share for proceeds of $10,500 from the exercise of stock options.

During the three-month period ended March 31, 2004 the Company completed the sale of 995,305 units at $3.20 per unit for proceeds of $3,184,976, before issue costs. Each unit is comprised of one share of Series A Preferred convertible shares and one stock purchase warrant to purchase one-half of one share of common stock for the additional consideration of $3.84 per share. Each preferred share is convertible into one common share for no additional consideration.

NOTE 4- RELATED PARTY TRANSACTIONS

Amounts due to related parties on the accompanying balance sheet as of March 31, 2004, are $2,662. This amount due from related parties represents non-interest bearing advances to directors and shareholders, with no fixed terms of repayment.

During the three-month period ended March 31, 2004, the Company paid or accrued $47,617 in management fees and $6,000 in consulting fees to directors of the Company.


	F-7

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HEARTLAND OIL & GAS CORP.

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 5 – ASSET RETIREMENT OBLIGATIONS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized costs is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized The following table summarizes the Company’s asset retirement obligation transactions during the three month period ended March 31, 2004.

	Three Months Ended March 31, 2004


Beginning asset retirement obligations	$ -
Additions related to new properties	-
Liabilities incurred	34,000
Deletions related to property disposals	-
Accretion	-


Total asset retirement obligations	$ 34,000

NOTE 6 – COMMITMENTS AND CONTINGENCIES

The Company leases a facility in Vancouver, British Columbia under a non-cancelable operating lease. The lease commenced on February 1, 2004 and will expire on February 29, 2008. Future minimum lease payments are as follows:

	Amount


2004	$ 41,486
2005	45,258
2006	45,258
2007	45,258
2008	7,543


	$ 184,803

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash in excess of the federally insured amount of $100,000. To date, the Company has not incurred a loss relating to this concentration of credit risk.


	F-8

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Item 2. Management's Discussion and Analysis or Plan of Operation.

FORWARD-LOOKING STATEMENTS

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

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

As used in this quarterly report, the terms "we", "us", "our" and "Heartland" mean Heartland Oil and Gas Corp., unless otherwise indicated. All dollar amounts refer to US dollars unless otherwise indicated. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

General

General Overview

We are an exploration stage oil and gas company engaged in the exploration for and development of Coal Bed Methane in the “Soldier Creek Prospect” located in the Forest City Basin of northeast Kansas. Our “Soldier Creek” project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. Our subsidiary, Heartland Oil and Gas Inc., holds the interests in the leases and operates the project.

Corporate History

Our company, Heartland Oil and Gas Corp., was incorporated in the State of Nevada on July 9, 1998, under the name Adriatic Holdings Ltd.

On September 17, 2002 we acquired all of the issued and outstanding stock of Heartland Oil and Gas Inc., a private Nevada Corporation, from its stockholders in exchange for 12,212,429 shares of our common stock. As a result, the former stockholders of Heartland Oil and Gas Inc. own a majority of our outstanding stock. Therefore, for accounting purposes, Heartland Oil and Gas Inc. was deemed to have acquired Adriatic Holdings Ltd. Heartland Oil and Gas Inc. survives as our wholly-owned subsidiary. Heartland Oil and Gas Inc. is an oil and gas exploration company that has interests in leases covering approximately 240,000 acres in central Kansas.

As part of the share exchange we changed our name, effective November 4, 2002, to “Heartland Oil and Gas Corp.”, and increased the authorized common stock of our company from 25,000,000 to 100,000,000 with a par value of $0.001 per share.

We have not been involved in any bankruptcy, receivership or similar proceeding.




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Our Current Business

On April 10, 2002 we entered into a letter of intent to acquire all of the shares of Heartland Oil and Gas Inc., a private Nevada corporation. On July 31, 2002 we entered into a formal Share Exchange Agreement with Heartland Oil and Gas Inc. and its shareholders. On September 17, 2002 we acquired all of the issued and outstanding stock of Heartland Oil and Gas Inc. from its stockholders in exchange for 12,212,429 shares of our common stock. As a result, the former stockholders of Heartland Oil and Gas Inc. own a majority of our outstanding stock. Therefore, for accounting purposes, Heartland Oil and Gas Inc. was deemed to have acquired Adriatic Holdings Ltd. Heartland Oil and Gas Inc. survives as our wholly-owned subsidiary.

We are an exploration stage oil and gas company engaged in the exploration for and development of Coal Bed Methane in the “Soldier Creek Prospect” located in the Forest City Basin of northeast Kansas. Pursuant to several Oil and Gas Leases entered into with various parties, our “Soldier Creek” project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. We have a 100% working interest in all of these leases. Our net revenue interest in these leases is 84.5%, so as a result our net acreage is approximately 202,800 acres. Our “working interest” consists of our share of gross production, revenues, burdens, field operating costs and gathering and processing fees before deduction of royalties. Our “net revenue interest” means our working interest less the royalties that are payable. Heartland Oil and Gas Inc. holds the interests in the leases for the lands and operates the project. The expiration dates for the leases range from dates in 2004 through 2009. Certain of the leases may be extended upon the exercise of options on the leases. For the year ending December 31, 2004 we will be required to pay approximately $258,000 on the current leases. There are no lease option payments due in 2005 and for the year ending December 31, 2006 we will be required to pay approximately $355,076 on the current leases. In addition, we are obligated to pay delay rentals on certain leases of approximately $16,000 in 2004, 2005 and 2006.

Heartland Oil and Gas Inc. signed a letter agreement dated August 25, 2000 with Topeka-Atchinson Gas & Illuminating LLC, whereby Heartland Oil and Gas Inc. engaged Topeka-Atchinson Gas & Illuminating LLC to identify three exploration areas within the Forest City Basin and to provide a detailed budget for the anticipated cost of a one-well exploration program for each exploration area and a four-well pilot program. In consideration Heartland Oil and Gas Inc. advanced a non-refundable deposit of $20,000 to Topeka-Atchinson Gas & Illuminating LLC. The letter agreement provided for:

- within 60 days of receipt of the deposit, Heartland Oil and Gas Inc. was to advise of its intention to proceed with the exploration program;

- if Heartland Oil and Gas Inc. elected to proceed with the exploration program, then within 60 days from the date of the start of the last desorption test from coal, Heartland Oil and Gas Inc. could elect to proceed further with an initial 3-well exploration program; and

- within 60 days from the completion of drilling in the three exploration areas, Heartland Oil and Gas Inc. has the election to proceed with a pilot program or to drill a further test well in an additional exploration area.

Topeka-Atchinson Gas & Illuminating LLC is entitled to receive a 3% gross over-riding royalty, on an 8/8th basis, on all oil and gas leases acquired by Heartland Oil and Gas Inc. within certain areas in the Forest City Basin.

The Soldier Creek area was chosen when a privately funded, proprietary analysis of historical drilling logs from previous drilling of deeper hydrocarbon targets revealed the existence of significant coal beds to the North and West of where coal bed methane production was currently being successfully developed. This analysis also indicated that the coal bed thickness at Soldier Creek was more than four times greater than the coal beds being exploited nearby. The logs used to map the thickness of these coal beds are not capable of indicating the productivity from the coal beds. Further adding to the area’s potential, was its proximity to a ready market and gas pipelines.




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We commenced our exploration program consisting of three wells including our Engelke 16-18 well. The Engelke well was drilled by Heartland Oil and Gas Inc. in the fall of 2001 and encountered 57 feet of coal. Two of the three wells were logged and tested for permeability and all three were cased as potential coal bed producers. To test for permeability, we hired Production Enhancement & Reservoir Management, LLC to conduct injection falloff tests on selected coal seam intervals in the two wells. At the Engelke 16-18 well two separate injection falloff tests were conducted. The first test consisted of three seams near the bottom of the well; a 3 foot thick seam at 2,378 feet, a 2 foot seam at 2,406 feet, and a 3 foot seam at 2,429 feet. The second test targeted a single coal seam 4 feet thick at 1,832 feet. In each test the coal seam was perforated and fresh water was injected at high pressure and the pressure was then allowed to falloff. A pressure modeling program was then used to estimate the coal seam permeability to water. This resulted in an estimated permeability of 12.68 millidarcies (md) for the lower coals and 22.5 md for the upper coal.

At the Trout 10-2 well, two falloff tests were conducted. In the first test, 3 coal seams near the bottom of the well were tested; a 3 foot seam at 1,491 feet, a 2 foot seam at 1,500 feet and a 3 foot seam at 1,510 feet. The coal seam permeability to water was estimated at 40.14 md. It was noted that the permeability in this well could be as high as 105.3 md. In the second test, a single coal seam 3 foot thick at 1,039 feet was tested and permeability was found to be 0.187 md.

No flow tests were conducted as part of the injection falloff testing. The report provided by the contractor concluded that the coal seams in these wells will require hydraulic fracturing for commercial coalbed methane development.

During September and October 2001 Heartland Oil and Gas Inc. drilled the three test wells to test the relative coal thickness, permeability, porosity and gas content. Coal thickness and porosity are estimated from well logs and permeability is estimated through injection fall off tests. Gas content is estimated through desorption and adsorption tests on coal cores. In order to conduct a desorption test, coal core samples are saved in airtight canisters at the well site, are opened in the lab and the amount of gas that may be recovered from the coal at various pressures is measured. These tests are done using a constant temperature as close to reservoir temperature as possible. An estimate must also be made for the amount of gas lost before the coal samples were put into the canisters prior to testing.

Adsorption tests measure the ultimate amount of gas the coal can hold. These tests measure the amount of gas that the coal can hold by injecting gas into the coal at increasing pressures. These tests are also run at reservoir temperature. The adsorption test typically shows a higher gas content than that measured in the desorption test, suggesting that the coals are somewhat under saturated with gas compared to the maximum amount of gas they could hold. If so, the pressure must be lowered to that corresponding to the gas content from the desorption test, which is typically done by producing water from the coal. Most coal bed methane wells need some dewatering in order to produce as gas.

The coal thickness, permeability, porosity and gas content data from the various wells drilled was sent to an independent laboratory for input into a coalgas simulator program, designed to estimate the amount of coal bed methane and water that may be recoverable from the wells.

With the results from our economic modeling, we decided to begin aggressively acquiring acreage, concentrating on the North Engelke area, which mapping shows to be the thickest part of the basin. Coal thicknesses here are up to 4 times thicker than in the Cherokee basin to the south, where there are active coal bed methane operations. Many of the coals in the Cherokee basin are present at Engelke, but Engelke also has many more coal seams. As of March 26, 2004 we have leases totalling 240,000 acres. Of the 240,000 acres under lease, approximately 215,000 are in the Engelke area. We have a 100% working interest in all of these leases. The net revenue interest of these leases if 84.5%, so our net acreage is approximately 181,675 acres in the Engelke area.

In July, 2003 we undertook the drilling of a four well pilot program surrounding the Engelke 16-18 well, the westernmost of our three initial test wells. In October, 2003 we purchased an existing wellbore in the Engelke area and converted it to a water disposal well by removing the existing tubing in the well and then perforating a deeper formation.




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In November, 2003 we completed the five wells in the Engelke pilot program. We selected various coal seams in the Lower Cherokee section, in the lower part of the coal sequence, for the first completions. Eight seams, totalling approximately 16 feet of coal, were perforated, acidized and hydraulically fractured. Down-hole pumps were installed in each well and initial dewatering of the wells began in late November, 2003. As of March 26, 2004 all 5 wells were continuing to pump water with no gas production.

As of March 31, 2004, two wells have been drilled, cased and logged and the rig is currently moving to the next location in the first 5-well pilot. The wells show an excellent section of thick lower Cherokee coals, which is the main producing formation in the coalbed methane wells in other parts of the Forest City/Cherokee Basin. We anticipate it will take approximately 30 days to drill each 5-well pilot program. Completion operations are being planned for each of the pilots and should start within 30 days of the completion of drilling in each pilot program.

In deciding to expand our Soldier Creek Prospect, we considered the following factors:

•Major gas lines exist (El Paso owned ANR Pipeline Co. runs directly through our gas leases) and many have available capacity translating to access to markets.

•The Forest City area’s flat, sparsely populated marginal ranch or farmland makes transportation and access less expensive, minimizing surface access costs.

•Known gas coals that are already established from conventional drilling, thereby reducing exploration and development risk. Our mapping of the existing wells in this area shows the presence of a number of coals in the shallow part of the basin. Drilling records, when available, often show gas as these coals are penetrated.

•The abundance of depleted wells often simplifies and reduces cost of water disposal from dewatering coals, as wastewater is re-injected into depleted wells.

•As full-scale development is implemented, drilling, completing, and operating costs are anticipated to drop, further enhancing the project’s economics.

•The area also contains a number of black shales, which are not included in the reserve and economic calculations but which may add to the amount of recoverable gas.

The Coal Bed Methane Industry

During the past decade coal bed methane has emerged as a viable source of natural gas compared to the late 1980s when there was no significant production outside of the still dominant San Juan Basin, in northwestern New Mexico, and the Black Warrior Basin in Alabama and Mississippi. As noted in USGS Fact Sheet FS-123-00 of October 2000, coal bed methane production accounted for 7% of US natural gas production or approximately 3.6 billion cubic feet (Bcf) of gas per day or an annual 1.35 trillion cubic feet (Tcf) of gas from over 14,000 producing wells.

We believe the success of coal bed methane developments has been largely the result of improved drilling and completion techniques, better hydraulic fracture designs and significant cost reductions as a result of highly dependable gas content and coal bed methane reservoir performance analysis. Also aiding this sector’s growth is the apparent shortage of quality domestic conventional exploration and development projects. In comparison, according to USGS Fact Sheet FS-123-00 of October 2000, total “unconventional” coal bed methane resource across America’s 25 basins (lower US) is estimated to be roughly 700 trillion cubic feet (Tcf) of which 14% or 100 Tcf is considered technically recoverable with existing technology. Technically recoverable gas volumes do not necessarily qualify as proved reserves and we do not have any proved coal bed methane reserves at this time. We also believe that propelling the coal bed methane production growth is its relatively low finding and development costs. Coal bed methane fields are often found where deeper conventional oil and gas reservoirs have already been developed, therefore, considerable exploration-cost-reducing geologic information is often readily available. This available geological information, combined with coal bed methane reservoirs’ comparatively shallow locations, reduces finding and developing costs.




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Coal Bed Methane

Natural gas normally consists of 80% or more methane with the balance comprising such hydrocarbons as butane, ethane and propane. In some cases it may contain minute quantities of highly poisonous hydrogen sulfide, referred to as “sour gas”. Coal bed methane is, generally, a sweet gas consisting of 95% methane and thus is normally of pipeline quality. Coal bed methane is considered an unconventional natural gas resource because it does not rely on ‘conventional’ trapping mechanisms, such as a fault or anticline, or stratigraphic traps. Instead coal bed methane is “adsorbed” or attached to the molecular structure of the coals - an efficient storage mechanism as coal bed methane coals can contain as much as seven times the amount of gas typically stored in a conventional natural gas reservoir such as sandstone or shale. The adsorbed coal bed methane is kept in place as a result of a pressure equilibrium often from the presence of water. Thus the production of coal bed methane in many cases requires the dewatering of the coals to be exploited. This process usually requires the drilling of adjacent wells and from 6 to 36 months to complete. Coal bed methane production typically has a low rate of production decline and an economic life typically from 10 to 20 years.

The principal sources of coal bed methane are either biogenic, producing a dry gas which is generated from bacteria in organic matter, typically at depths less than 1000 feet, or thermogenic, which is a deeper wet gas, formed when organic matter is broken down by temperature and pressure.

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

The following discussion of our plan of operations for the three months ended March 31, 2004 and 2003 should be read in conjunction with our most recent audited annual financial statements, which form part of our annual report on Form 10-KSB filed on March 29, 2004, the unaudited interim financial statements forming part of this quarterly report, and, in each case, the notes thereto.

Plan of Operations

Cash Requirements

For the next 12 months we plan to continue drilling a series of pilot programs in our Soldier Creek acreage area, consisting of drilling up to 18 further new wells. Fifteen of the wells will be completed for potential coal bed methane and 3 of the wells will be completed as salt water disposal wells. As we will be in a test period initially, gathering systems and pipeline tie-ins will be undertaken at the completion of the drilling program.

We also intend to undertake additional completion operations in the Engelke area, including additional hydraulic fracturing of existing coals and perforating and fracturing new coals in the wells.

Pursuant to several oil and gas leases entered into with various parties, our Soldier Creek project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. Heartland Oil and Gas Inc. holds the interests in the leases for the lands and operates the project. The expiration dates for the leases range from dates in 2004 through 2009. Certain of the leases may be extended upon the exercise of options on the leases. For the year ending December 31, 2004 we will be required to pay approximately $258,532 on the leases. There are no lease option payments due in 2005 and for the year ending December 31, 2006 we will be required to pay approximately $355,076 on the leases. In addition, we are obligated to pay delay rentals on certain leases of approximately $16,000 in each of the years 2004, 2005 and 2006.




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We may require additional funds to implement our growth strategy in our gas exploration operations. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable.

In order to proceed with our plans we raised funds by way of a private placement of equity securities in our company pursuant to exemptions from registration provided by Regulation S under the Securities Act of 1933. The offering consisted of units at a price of $1.40 per unit. Each unit consisted of one common share $0.001 par value and one warrant exercisable at $1.75 expiring August 30, 2004. In May, 2003 we closed the private placement having issued 1,000,000 units for gross proceeds of $1,400,000. The net proceeds received will be used as working capital to allow us to continue our ongoing lease acquisition program and to expand on the exploration and development of our Soldier Creek Prospect.

In June, 2003, we sold an aggregate of 602,836 of our shares of our common stock and share purchase warrants to acquire an additional 301,418 shares of our common stock in a private placement for gross proceeds of approximately $1,700,000. The share purchase warrants have an exercise price of $3.38 and expire three years from the date of issuance.

On August 19, 2003, we sold an aggregate of $8,815,024 of our shares of our common stock and share purchase warrants to acquire additional shares of our common stock in a private placement. The private placement involved the issuance of 2,754,695 shares of our common stock and share purchase warrants to acquire an additional 1,377,348 shares of our common stock. The share purchase warrants have an exercise price of $3.84 and expire on August 19, 2006.

On January 13, 2004 we closed a private placement for the issuance and sale of 995,305 units at a purchase price of $3.20 per unit for total aggregate proceeds of $3,184,979. Each unit is comprised of one share of Series A Preferred Convertible Stock and one stock purchase warrant to purchase one-half of one share of common stock for the additional consideration of $3.84 per share for a period of three years. Each preferred share is to be convertible into one common share for no additional consideration. The preferred shares will not bear interest.

Our net cash provided by financing activities during the three month period ended March 31, 2004 was $2,964,006.

Over the next twelve months we intend to use all available funds to continue our ongoing lease acquisition program and to expand on the exploration and development of our Soldier Creek Prospect, as follows:

Estimated Funding Required During the Next Twelve Months

General and Administrative			$750,000
Acreage
	Rentals and Option Payments	280,000

Operations
	Drill and complete 15 new wells	4,500,000
	Drill and equip 3 new disposal wells	510,000
	Additional completion operations at Engelke	500,000
	Gathering and Pipelines	1,775,000
	Lease Operating Expense	950,000
	Corporate and Severance Taxes	888,000

Working Capital		347,000
Total		$10,500,000




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As at March 31, 2004, we had $179,231 in current liabilities. Our financial statements report a net loss of $359,273 for the three month period ended March 31, 2004 compared to a net loss of $130,432 for the three month period ended March 31, 2003. As a result, our accumulated loss increased to $2,060,811 during the period from inception to March 31, 2004. Our losses increased primarily as a result of stock-based compensation expenses and increased expenses associated with professional fees and administration activities. Stock-based compensation for the three month period ended March 31, 2004 was $107,513, as compared to $0l for the three month period ended March 31, 2003.

Our total liabilities as of March 31, 2004 were $213,231, as compared to total liabilities of $500,363 as of December 31, 2003. The decrease was due to a decrease in accounts payable and accrued liabilities, from $493,336 as at December 31, 2003 to $176,569 as at March 31, 2004.

During the three month period ended March 31, 2004 we spent $569,497 on exploration and acquisition of our oil and gas properties. Of this amount, $291,924 was attributable to acquisitions costs and $277,573 was attributable to explorations costs. We have capitalized these amounts on our balance sheet, in addition to $34,000 related to asset retirement obligations.

We have suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital. In this regard we have raised additional capital through the equity offerings noted above.

The continuation of our business is dependent upon obtaining further financing, a successful program of acquisition and exploration, and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

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

Product Research and Development

Our business plan is focused on a strategy for maximizing the long-term exploration and development of our Soldier Creek Prospects, Kansas USA. To date, execution of our business plan has largely focused on acquiring prospective Coal Bed Methane (CBM) leases and drilling three initial test wells on this acreage from which to establish a going forward exploration and development plan.

Purchase of Significant Equipment

We do not intend to purchase any significant equipment (excluding oil and gas activities) over the twelve months ending March 31, 2005.

Employees

Currently there are no full time employees and two part-time employees who are also officers of our company. We do not expect any material changes in the number of employees over the next 12 month period. We do and will continue to outsource contract employment as needed. However, if we are successful in our initial and any subsequent drilling programs we may retain additional employees.




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New Accounting Pronouncements

A reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, Heartland has included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, Heartland would be required to reclassify approximately $2,664,261 at March 31, 2004 and $2,372,337 at December 31, 2003 from oil and gas properties and into a separate intangible assets line item. Heartland’s cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full-cost accounting rules.

Application of Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

Our consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. The financial statements have been prepared assuming we will continue as a going concern. However, certain conditions exist which raise doubt about our ability to continue as a going concern. We have suffered recurring losses from operations and have accumulated a deficit of $2,060,811 since inception of Heartland Oil and Gas Inc. through March 31, 2004.

Since our inception, we have funded operations through the issuance of capital stock and debt. Our ability to continue as a going concern is dependent upon achieving profitable operations and the raising of additional capital. Our plans in this regard are to secure additional funds through future equity and debt financing which will enable us to develop our oil and gas properties.

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to account for stock-based compensation Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB25") and have adopted the disclosure only provisions of SFAS123. Accordingly, compensation for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee is required to pay for the stock.




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We account for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services".

We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. As of March 31, 2004, we have no properties with proven reserves. When we obtain proven oil and gas reserves capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined. If the future development of unproved properties are determined uneconomical the amount of such properties is added to the capitalized cost to be amortized. As of March 31, 2004, all of our oil and gas properties were unproved and were excluded from amortization. At March 31, 2004, none of our unproved oil and gas properties were considered impaired.

Revenue from sales or services will be recognized at the time the product is delivered or at the time the service is performed.

Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Non-monetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in the statement of operations. Revenue and expenses are translated at the dates such items are recognized in the statement of operations.

Our financial instruments consist of cash, prepaid expenses and other liabilities. The carrying amounts of financial instruments approximate fair value due to their short maturities.

Financial instruments that potentially subject us to concentrations of credit risk consists primarily of cash in excess of the federally insured amount of $100,000. To date, we have not incurred a loss relating to this concentration of credit risk.

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Earnings per share requires presentation of both basic earnings per common share and diluted earnings per common share. Common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.




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RISK FACTORS

Much of the information included in this registration statement includes or is based upon estimates, projections or other "forward looking statements". Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Those forward-looking statements also involve certain risks and uncertainties. Factors, risks and uncertainties that could cause or contribute to such differences include those specific risks and uncertainties discussed below and those discussed in our Form 10-KSB Annual Report for the year ended December 31, 2003. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document.

Our common shares are considered speculative during the development of our new business operations. Prospective investors should consider carefully the risk factors set out below.

We have had negative cash flows from operations.

To date we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred losses totalling approximately $2,060,811 as of March 31, 2004. As of March 31, 2004 we had working capital of $9,951,078 as a result of recent financing activities. We do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:

- drilling and completion costs for further wells increase beyond our expectations; or

- we encounter greater costs associated with general and administrative expenses or offering costs.

The occurrence of any of the aforementioned events could adversely affect our ability to meet our business plans.

We will depend almost exclusively on outside capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing development costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.




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If we issue additional shares in the future this may result in dilution to our existing stockholders.

Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Our board of directors have the authority to issue additional shares up to the authorized capital stated in the certificate of incorporation. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares from the selling shareholders, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance may result in a change of control of our corporation.

We have a history of losses and fluctuating operating results.

Since inception through March 31, 2004, we have incurred aggregate losses of approximately $2,060,811. Our loss from operations for the three month period ended March 31, 2004 was $380,707. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the unpredictability of when customers will purchase our services, the size of customers’ purchases, the demand for our services, and the level of competition and general economic conditions. If we cannot generate positive cash flows in the future, or raise sufficient financing to continue our normal operations, then we may be forced to scale down or even close our operations. Until such time as we generate revenues, we expect an increase in development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flow until our properties enter commercial production.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.




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NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

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

Trading on the OTC Bulletin Board may be sporadic because it is not a stock exchange, and stockholders may have difficulty reselling their shares.

Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the company’s operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like Nasdaq or a stock exchange like Amex.

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

We have no history of revenues from operations and have no significant tangible assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. The success of the company is significantly dependent on a successful acquisition, drilling, completion and production program. Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

A majority of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.

We do not currently maintain a permanent place of business within the United States. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. The foregoing risks also apply to those experts identified in this prospectus that are not residents of the United States.

Because of the early stage of development and the nature of our business, our securities are considered highly speculative.

Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of its development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas. Accordingly, we have not generated any revenues nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.




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As our properties are in the exploration and development stage there can be no assurance that we will establish commercial discoveries on our properties.

Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil and/or gas wells. Our properties are in the exploration and development stage only and are without proven reserves of oil and gas. We may not establish commercial discoveries on any of our properties.

The potential profitability of oil and gas ventures depends upon factors beyond the control of our company

The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.

Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital.

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

The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed. Our budget anticipates our acquisition of additional acreage in the Forest City basin. This acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases. There are other competitors that have operations in the Forest City basin and the presence of these competitors could adversely affect our ability to acquire additional leases.

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

The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.




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

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which it may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.

Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.

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

We believe that our operations comply, in all material respects, with all applicable environmental regulations.

Our operating partners maintain insurance coverage customary to the industry; however, we are not fully insured against all possible environmental risks.

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

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

Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business.

The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.




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Item 2. Description of Property.

Our executive and head offices are located at Suite 1925, 200 Burrard Street, Vancouver, British Columbia, V6C 3L6. The offices are approximately 2,935 square feet in size and are leased on an annual basis, expiring February 29, 2008, at an annual rent of approximately CDN$58,700. Our current premises are adequate for our current operations and we do not anticipate that we will require any additional premises in the foreseeable future.

Our Soldier Creek project currently encompasses approximately 240,000 acres of prospective frontier coal bed methane lands located in the Forest City Basin of northeast Kansas. As at the date hereof we had a total of 240,000 acres of undeveloped land under lease, of which 215,000 acres were concentrated in Nemaha County, Brown County and the northern part of Jackson County, Kansas. We have a 100% working interest in all of these leases. Our net revenue interest in these leases is 84.5%, so as a result our net acreage is approximately 202,800 acres.

We had no productive wells as at the date hereof and no developed acreage. In September and October of 2001, Heartland Oil and Gas Inc. drilled three coal bed methane stratigraphic/exploration wells on its property. All three wells have been cased pending completion. In July 2003 we drilled four more coal bed methane stratigraphic/exploration wells on our property. These four additional wells have been cased and are awaiting results from testing. “Cased” means that metal casing has been cemented in place in the well to protect the well from fluids, pressures and/or wellbore stability problems in the wells, in anticipation of testing and/or production. In November 2003, five of the wells located in the Engelke area were fracture stimulated and pumps were installed to begin dewatering the coals. At March 31, 2004 all of these wells were continuing to produce water.

We commenced the drilling of the first wells in our next three 5-well pilot programs on March 19, 2004. The drilling program consists of 15 new CBM wells and three new wells to be used for salt water disposal. The new 15 pilot wells are spaced across our acreage block in the Forest City and are intended to further define the productivity of our acreage for coalbed methane production. As of March 31, 2004, two wells have been drilled, cased and logged. We anticipate it will take approximately 30 days to drill each 5-well pilot program. Completion operations are being planned for each of the pilots and should start within 30 days of the completion of drilling in each pilot program.

Item 3. Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out in evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer. Based upon that evaluation, the Company's President and Chief Executive Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer as appropriate, to allow timely decisions regarding required disclosure.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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




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Item 2. Changes in Securities.

On January 13, 2004 we issued 995,305 units to six accredited investors, at a purchase price of $3.20 per unit for total aggregate proceeds of $3,184,979. Each unit is comprised of one share of Series A Preferred Convertible Stock and one stock purchase warrant to purchase one-half of one share of common stock for the additional consideration of $3.84 per share for a period of three years. Each preferred share is to be convertible into one common share for no additional consideration. The preferred shares will not bear interest. We relied on the provisions of Regulation S promulgated under the Securities Act of 1933, as amended, for issuance of the units.

On January 13, 2004, we issued to C.K. Cooper and Company, Inc., a broker dealer registered pursuant to section 15 of the Securities Exchange Act of 1934, a warrant to purchase up to 41,471 shares of our common stock, exercisable at any time during the three year period ending on January 13, 2007 at an exercise price of $3.84 per share. We issued these warrants pursuant to Rule 506 of Regulation D under the Securities Act of 1933, in partial payment of placement fees in connection with the sale of our Series A Preferred Convertible Stock and share purchase warrants to the accredited investors.

On January 26, 2004, we issued an aggregate of 90,000 shares of common stock (30,000 shares of common stock each to three individuals) upon exercise of stock options previously granted under the terms of a stock option plan. The shares had been registered on a Registration Statement on Form S-8.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

Reports of Form 8-K

On March 16, 2004 we filed a Form 8-K with the Securities and Exchange Commission announcing the change of auditor from Spicer Jeffries LLP to Staley, Okada & Partners.

Consolidated Financial Statements Filed as a Part of the Quarterly Report

Our consolidated financial statements include:

Balance Sheets

Statements of Operations

Statements of Cash Flows

Notes to the Financial Statements

Exhibits Required by Item 601 of Regulation S-B

Exhibit Number/Description




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Exhibit Number	Description

3.1	Articles of Incorporation (1)
3.2	Bylaws of Adriatic Holdings Ltd. (1)
3.3	Certificate of Amendment to Articles of Incorporation effective November 4, 2002 (2)
3.4	Certificate of Designation for shares of Series A Convertible Preferred Stock, effective December 18, 2003 (9)
10.1	Share Exchange Agreement between Adriatic Holdings Ltd., Heartland Oil and Gas Inc. and the shareholders of Heartland Oil and Gas Inc., dated July 31, 2002 (3)
10.2	Form of Oil and Gas Lease (4)
10.3	Managing Dealers Agreement, dated June 19, 2003, between Heartland Oil and Gas Corp. and C.K. Cooper and Company, Inc. (5)
10.4	Managing Dealers Agreement, dated July 29, 2003 between Heartland Oil and Gas Corp. and C.K. Cooper and Company, Inc. (8)
10.5	Form of Subscription Agreement in connection with the private placements on June 24 and June 30, 2003(5)
10.6	Form of Subscription Agreement in connection with the private placement on August 19, 2003(6)
10.7	Consulting Agreement dated July 1, 2003, between Heartland Oil and Gas Corp. and Donald Sharpe (8)
10.8	Consulting Agreement dated July 1, 2003, between Heartland Oil and Gas Corp. and Richard Coglon (8)
10.9	Letter Agreement between Topeka-Atchison Gas & Illuminating LLC with Heartland Oil and Gas Inc., dated August 25, 2000 (8)
10.10	Form of Oil and Gas Lease with Option (7)
10.11	Form of Subscription Agreement in connection with the private placement of preferred stock (10)
14.1	Code of Business Conduct and Ethics (10)
21.1	Heartland Oil and Gas Inc., a company incorporated pursuant to the laws of the State of Nevada
31.1*	Section 302 Certifications under Sarbanes-Oxley Act of 2002
32.1*	Section 906 Certifications under Sarbanes-Oxley Act of 2002

* Filed herewith

(1) Incorporated by reference to the company's Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 23, 2001.

(2) Incorporated by reference to the company's Form 10-QSB filed with the Securities and Exchange Commission on November 14, 2002.

(3) Incorporated by reference to the company's Form 8-K filed with the Securities and Exchange Commission on October 2, 2002.

(4) Incorporated by reference to the company's Form 10-KSB filed with the Securities and Exchange Commission on April 1, 2003.

(5) Incorporated by reference to the company's Form 10-QSB filed with the Securities and Exchange Commission on July 28, 2003.

(6) Incorporated by reference to the company's Form 8-K filed with the Securities and Exchange Commission on August 21, 2003.

(7) Incorporated by reference to the company's Form 10-KSB/A filed with the Securities and Exchange Commission on October 22, 2003.

(8) Incorporated by reference to the company's Form SB-2 filed with the Securities and Exchange Commission on August 29, 2003.

(9) Incorporated by reference to the Company's Form SB-2 Registration Statement filed with the Securities and Exchange Commission on February 17, 2004.

(10) Incorporated by reference to the Company's Form 10-KSB filed with the Securities and Exchange Commission on March 29, 2004.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HEARTLAND OIL AND GAS CORP.

By: /s/Richard Coglan
Richard Coglon, President, Chief Executive Officer and Director
(Principal Executive Officer)
May 14, 2004

By: /s/Robert Knight
Robert Knight, Chief Financial Officer and Director
(Principal Financial Officer)
May 14, 2004