20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

[  ]	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
	OR
[ X ]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005
	OR
[ X ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from   August 31, 2005 to December 31, 2005
	OR
[  ]	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report:
	For the transition period from _____________________ to ______________________

Commission file number 000-50339

CAPITAL RESERVE CANADA LIMITED

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant's name into English)

Alberta, Canada

(Jurisdiction of incorporation or organization)

Canadian Western Bank Place

Suite 2440, 10303 Jasper Avenue

Edmonton, Alberta T5J 3N6

(Address of principal executive offices)

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

Title of each class
Class A Common Stock Name of each exchange on which registered
OTC

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

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer's capital or common stock as of the close of the period covered by the annual report:

34,810,814 Class A common shares as at December 31, 2005.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.                                                                                                               

[  ]Yes  [  X] No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

                                                                                                                                                         [  ]Yes  [  X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

[ X]Yes  [  ] No

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

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

Indicate by check mark which financial statement item the registrant has elected to follow.

[  ] Item 17  [X ] Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                          [  ]Yes  [ X ] No

________________________________

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

[  ]Yes  [  ] No

TABLE OF CONTENTS

PART I

2

Item 1.

Identity of Directors, Senior Management and Advisors

2

Item 2.

Offer Statistics and Expected Timetable

2

Item 3.

Key Information

2

Item 4.

Information on the company

7

Item 5.

Operating and Financial Review and Prospects

13

Item 6.

Directors, Senior Management and Employees

15

Item 7.

Major Shareholders and Related Party Transactions

18

Item 8.

Financial Information

20

Item 9.

The Offering and Listing

20

Item 10.

Additional Information

21

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 12.

Description of Securities Other than Equity Securities

24

PART II

25

Item 13.

Defaults, Dividend Arrearages and Delinquencies

25

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds.

25

Item 15.

Controls and Procedures

25

Item 16A. Audit Committee Financial Expert

25

Item 16B. Code of Ethics

25

Item 16C.  Principal Accountant Fees and Services

26

Item 16D. Exemptions from the Listing Standards for Audit Committees

26

PART III

26

Item 17.

Financial Statements

26

Item 18.

Financial Statements

26

Item 19.

Exhibits

26

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

ITEM 3.

KEY INFORMATION

SELECTED FINANCIAL DATA

Exchange Rates

Our financial statements are presented in Canadian dollars and all dollar amounts in this document are in Canadian  Dollars unless otherwise indicated.

The host country is the United States of America and therefore we provide disclosure of the exchange rate between our financial reporting currency which is in Canadian dollars and  United States dollars ("US$")of the host country based upon the exchange rate in effect at the end of the  month or of the calendar year to which the amount relates, or the exchange rate on the date specified. For such purposes, the exchange rate means the noon buying rate for United States dollars from the Bank of Canada (the "Noon Buying Rate"). These translations should not be construed as representations that the Canadian dollar amounts actually represent such U.S. dollar amounts or that Canadian dollars could be converted into U.S. dollars at the rate indicated or at any other rate. The Noon Buying Rate at the end of each of the five years ended December 31, the average of the Noon Buying Rates on the last day of each month during e ach of such fiscal years and the high and low Noon Buying Rate for each of such fiscal year's were as follows:

	2001 $	2002 $	2003 $	2004 $	2005 $
At end of period	0.63	0.63	0.77	0.83	0.858
Average for period	0.65	0.64	0.72	0.77	0.825
High for period	0.67	0.66	0.77	0.85	0.869
Low for period	0.62	0.62	0.64	0.72	0.787

Following is a table of the Noon Buying Rates on the last day of each month for the last six months ended June 30, 2006:

	January	February	March	April	May	June
At end of period	0.874	0.879	0.857	0.898	0.907	.897
Average for period	0.874	0.879	0.883	0.898	0.910	.910
High for period	0.863	0.870	0.864	0.875	0.901	.902
Low for period	0.853	0.863	0.853	0.853	0.890	.890

The Noon Buying Rate as of   July 12, 2006 was 0.0887.

Change of Control

On August 8, 2005, the Company acquired 78.2% of KCP Innovative Services Inc. for the issuance of 17,335,814 Class A common shares of the Company bringing the total number of Class A shares to 19,335,814.  This effected a change in control of the Company.  Based on the acquisition of the controlling interest in KCP Innovative Services Inc. as of August 8, 2005, and reverse merger accounting applied to the transaction, the following financial information reflects the financial information of KCP Innovative Services Inc. for the fiscal years ended August 31, 2001 to August 31, 2005.  KCP Innovative Services changed its year end to the year end of the Company which is December 31.  

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Year End	Aug 31	Aug 31	Aug 31	Aug 31	Aug 31	Dec 31
	2001	2002	2003	2004	2005	2005(4 mos)
	CAD	CAD	CAD	CAD	CAD	CAD
Operating Revenues	94,582	129,377	420,314	380,606	933,441	355,017
Income (loss) from Operations	4,321	15,787	47,304	(197,917)	(862,266)	(399,830)
Net Income (loss)	4,321	15,787	38,789	(178,084)	(822,851)	(330,069)
Net Income (loss) from operations per share	.0002	.001	.002	(.008)	(.037)	(.015)
Total Assets	13,936	81,637	151,820	2,484,614	2,003,032	1,698,171
Net Assets	8,681	24,279	63,068	2,048,488	291,726	883,308
Capital Stock	2,320,783	2,320,783	2,320,783	2,320,783	2,320,783	3,242,434
Number of Shares	17,335,814	17,335,814	17,335,814	17,335,814	19,335,814	34,810,814

CAPITALIZATION AND INDEBTEDNESS

Not Applicable

REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable

RISK FACTORS

The business of the company will be subject to numerous risk factors, as more particularly described below.

Our business operations are speculative.  The failure of our plans could ultimately force us to reduce or suspend operations and even liquidate our assets and wind-up and dissolve our company.

The Company’s shares should be considered highly speculative due to the proposed nature of the Company’s business and the current stage of the Company’s development.  Certain information set out in this annual report includes or is based upon expectations, estimates, projections or other "forward looking information".  Such forward-looking information includes projections or estimates made by the Company and its management as to the Company’s future business operations.  While statements concerning forward looking information, and any assumptions upon which they are based, are made in good faith and reflect the Company’s current judgment regarding the direction of its business, actual results will almost certainly vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.  see "cautionary statement concerning forward - looking information".

A significant or prolonged Decrease in Oil and Natural gas prices will seriously and negatively impact our Business Plans and Operations.

We are dependent on expenditures of oil and gas companies. The demand for the Company’s tools and services will be primarily influenced by current and anticipated commodity prices, particularly oil and natural gas prices.  Weakness in commodity prices may cause the Company’s customers to reduce their capital and operating expenditures as weaker commodity prices result in fewer wells being drilled. Other factors that may affect demand for the Company’s tools and services include:

•

the level of development, exploration and production activity of, and corresponding spending by energy and resource companies, which in turn is affected by conditions such as weather conditions and seasonality government regulation of energy and resource companies; and

•

conditions in the worldwide energy and resources industry.

Periods of diminished or weakened demand for the Company’s tools and services may occur in the future.  In light of these factors, historical operating results may not be indicative of the Company’s future performance.  In addition, reductions in

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commodity prices can result in a reduction in the trading prices and value of the Company’s securities, even if the reduction in commodity prices does not affect its business generally.

Seasonality may affect the Performance of the Company

In general, the level of activity in the oilfield service industry is influenced by seasonal weather patterns.  Wet weather and the spring thaw may make the ground unstable.  Consequently, municipalities and provincial transportation departments enforce road bans that restrict the movement of rigs and other heavy equipment, thereby reducing activity levels.  Additionally, certain oil and gas producing areas are located in areas that are inaccessible other than during the winter months, because the ground surrounding the drilling sites in these areas consists of swampy terrain.  Seasonal factors and unexpected weather patterns may lead to declines in the activity levels of exploration and production companies and corresponding declines in the demand for our tools and services.

We may be unable to continue as a Going Concern if we are unable to raise additional Capital.

Because the costs associated with further development of our business and our ability to generate revenue will depend on a variety of factors, including our ability to meet our development schedule and customer needs, changes in technology, and the availability of additional funds that may be required to advance and expand our business.  Additional funds, whether through additional equity financing, debt financing or other sources may not be available on terms acceptable to us or at all or may result in significant dilution to our shareholders and a change of control of the Company. The inability to obtain additional funds may have a material adverse affect on our business, results of operations, and financial condition.

There is No Guarantee of Profit. The Company has incurred losses and anticipates losses will continue. This could have an impact on investors’ investment in our common stock.

The business is capital intensive and the Company has a limited history of operations.  Accordingly, we have no history of profit and there can be no assurance that our future business activities will be profitable.  We have incurred costs to develop and enhance our tools and services, to establish strategic relationships and to build an administrative organization.  Our ability to operate profitably and generate positive cash-flow in the future will be affected by a variety of factors, including its ability to further develop and test its technology on schedule and on budget, the pace of its entry into its target markets, consumer acceptance of its products, the intensity of the competition experienced by us, the availability of additional capital to pursue our business plans, including development of new products.  An inability to generate sufficient funds from operations will have a materially adver se affect on our business, results of operations and financial condition.

The Company relies on Suppliers.

We will have to rely on suppliers for additional gauges, trucks and equipment in order to expand, or to replace existing equipment.  The availability of suppliers could affect our ability to expand or to meet our commitments to existing customers.

The Company is in an early Stage of Development

Prospects for the Company are subject to all of the risks inherent to a new business. There can be no assurance that the Company will obtain market acceptance as contemplated in its business objectives and any failure to sell its products or services may have a material adverse effect on its business, results of operations, and financial condition.

The Industry has Rapid Technological Change

The industry is subject to rapid change, and any inability on our part to adapt to such change may have an adverse affect on our business, results of operations and financial condition.  The effect of new developments and technological changes on the business sector in which we will compete cannot be predicted.  Our failure to adapt to any of the above could have a material adverse effect on our business, results of operations, and financial condition.

The Company competes directly with independent, Technology-Driven Service Companies

We expect to face significant competition from other organizations and there can be no assurance that we will be able to compete effectively in our target markets.  In addition, new technologies may emerge that are competitive with our tools and services.  Advances in measurement tools as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring and any such change could have a material adverse impact on us.  We expect that competition will intensify in the future, as our tools and services, and the opportunities presented thereby, become better known.

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There is a continual need for Innovative Solutions

To achieve our business objectives and obtain market share and profitability, the Company will need to continually research, develop and refine its tools and services.  Many factors may limit our ability to develop and refine existing tools and services.  We may also be exposed to marketplace resistance to new tools and services.  Any failure to develop or refine our existing tools and services, or create new tools or offer new services could have a material adverse effect on our business, results of operations, and financial condition.

The Company needs to protect its Intellectual Property

Our success will be largely dependent upon our ability to protect our proprietary technology.  We rely upon copyright law and trade secrets to protect our intellectual property.  We have not to date applied for or obtained any patents or trademarks to protect our intellectual property. Where appropriate, we also enter into non-disclosure agreements with persons to whom we reveal proprietary information.  Any failure to protect our intellectual property could have a material adverse effect on our business, results of operations, and financial condition.

We may have to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity and we may incur substantial costs as a result.  Any claims or litigation initiated by us to protect our proprietary technology could result in significant expense to us and diversion of the efforts of our technical and management resources, whether or not the claims or litigation are determined in favor of us.

Significant Shareholders

Two directors, Messrs. Ken Pearson and James Baker, own a significant number of shares in the Company.

These shareholders will have the power to significantly influence our affairs and may be able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of directors and the amendment of its articles of incorporation and bylaws.  Assurances cannot be given that such persons will not exercise their influence over the Company in a manner detrimental to the interests of the Company’s security holders.

The Business may attract Uninsured Liabilities

Our products are used in processes of production of oil and gas.  Though it is unlikely that the products could cause damage, we may be subject to liability for property damage, personal injury or other hazards.  We expect to be insured in accordance with industry standards to address certain of these risks, however, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities.  In addition, such risks may not in all circumstances be insurable.  The payment of such uninsured liabilities would have an adverse effect on our business, results of operations and financial conditions.

There may be environmental liability from our services. In the event that losses or damages result from the operation of the assets that are not covered by the operator's insurance these losses or damages would become a liability for the company.  It is possible that uncovered losses and damages could be incurred which could cause us to have to file for bankruptcy protection from the courts.

The Company may be unable to effectively manage its Planned Growth

Responding to consumer demands, expanding into other geographical markets and targeting growth in our business is likely to place significant strains on our administrative and operational resources and increased demands on our internal systems, procedures and controls.  If we experience rapid acceptance of our technology, the need to manage such growth will add to the demands on our management, resources, systems, procedures and controls.  There can be no assurance that our administrative infrastructure, systems, procedures and controls will be adequate to support our operations or that our officers and personnel will be able to manage any significant expansion of operations.  If we are unable to manage growth effectively, our business, operating results, and financial condition will be materially adversely affected.

The Company may not be able to hire enough Qualified Personnel.

We will be reliant upon company management personnel to anticipate and address consumer demands and hire technical employees and contractors to provide the Company's services.  There can be no assurance that qualified management or technical personnel will be available to us in the future.  The success of our operations and activities will depend to a significant extent on the efforts and abilities of our management and technical personnel.  The loss of services of any of our management or technical personnel could have a material adverse effect on our business, results of operations, and financial condition.

5

The Company’s  day-to-day management and operations are dependent on the expertise  of Ken Pearson, their President. If Mr. Pearson were no longer  able to provide services, the operations of the Company could be threatened.

Currently, the Company is dependent on the expertise of Ken Pearson, who has an in-depth knowledge of our technology and its operations. He is also responsible for the day-to-day management of our wholly-owned subsidiary KCP. Our ability to operate would be severely curtailed if Mr. Pearson were to be unavailable due to a situation of ill-health or demise.

There will be Potential Fluctuations in Operating Results

We expect to be exposed to significant fluctuations in  operating results caused by many factors, including changes in the demand for our technology, the introduction of competing technologies, market acceptance of such enhancements or products, delays in the introduction of such enhancements or products, changes in our pricing policies or those of its competitors, the mix of services sold, foreign currency exchange rates and general economic conditions.

Our future operating results may fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and natural gas, rate of drilling success, rates of production from completed wells and the timing of capital expenditures.  This variability makes it very difficult to predict when we might reach profitability and hence would have a serious impact on the value of investor's investment in our company.  In addition, any failure or delay in the realization of expected cash flows from initial operating activities could limit our future ability to continue exploration and to participate in economically attractive projects.

The Price of oil and natural gas is determined based on world demand and supply.  It is impossible to predict future oil and natural gas price movements with any certainty, as they have historically been subject to wide fluctuations in response to a variety of market conditions, including relatively minor changes in the supply and demand for oil and natural gas, economic, political and regulatory developments, and competition from other sources of energy.

Any extended or substantial decline in oil and natural gas prices would have a material adverse effect on our ability to negotiate favorable joint ventures with viable industry participants, our cash flow and our access to capital.

Kyoto Protocol and changing Government Regulations

Canada is a signatory to the United Nations Framework Convention on Climate Change and has ratified the Kyoto Protocol established hereunder.  Canada, as an Annex B party to the Kyoto Protocol, is required to set legally binding targets to reduce nation-wide emissions of carbon dioxide, methane, nitrous oxide and other so-called "greenhouse gases".

The direct or indirect costs of complying with emissions regulations may adversely affect the oil and gas business in Canada, which in turn may adversely affect the oil and gas services industry in which we will participate.

Other government regulations are subject to change at any time and are beyond the control of the Company.

U.S. Investors face the risk that their investment may be subject to special U.S. federal income tax rules.  

For any taxable year of the Company, if at least 75% of the Company’s gross income is “Passive income” (as defined in the Internal Revenue Code of 1986, as amended (the “Code”)), or if at least 50% of the Company’s assets, by average fair market value, are assets that produce or are held for the production of passive income, the Company will be a Passive Foreign Investment Corporation (“PFIC”).

If the Company is a PFIC for any taxable year during which an individual who is a citizen or resident of the Untied States or a domestic corporation (a “U.S. Taxpayer”) owns any common stock, the U.S. Taxpayer will be subject to special U.S. federal income tax rules, set forth in Sections 1291 to 1297 of the Code, with respect to all of such U.S. Taxpayer's common stock. For example, gifts, exchanges pursuant to corporate reorganizations and use of the common stock as security for a loan may be treated as taxable disposition, and a stepped-up basis upon the death of such a U.S. Taxpayer may not be available. Furthermore, in the absence of an election by such U.S. Taxpayer to treat the Company as a “qualified electing fund” (the “QEF election”), as discussed below, the U.S. Taxpayer would be required to (i) report any gain on disposition of any common stock as ordinary income rather than capital gain, (ii) to comput e the tax liability on such gain and on certain distributions as if the shares had been earned pro rata over the U.S. Taxpayer's holding period (or a certain portion thereof) for the common stock, and (iii) would be subject to the highest ordinary income tax rate for each taxable year of the U.S. Taxpayer in which the shares were treated as having been earned. Such U.S. Taxpayer would also be liable for interest (which may be non-deductible by certain U.S. Taxpayers) on the foregoing tax liability as if such liability had been due with respect to each such prior year.

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U.S. Taxpayers are strongly urged to consult his or her own tax advisor in that regard.

The foregoing discussion of United States taxation is of a general and summary nature only and is not intended to be, nor should it be considered to be, legal or tax advice to any particular shareholder. Accordingly, prospective investors should consult their own tax advisors as to the tax consequences of receiving dividends from the Company or disposing of their common stock and thus any investment in our common stock could be illiquid for an indefinite period of time.

You should not expect to receive dividends on your investment.

We have never paid any cash dividends on shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion of our business.  Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time.

There are Reporting Issuer Requirements and Costs

We are subject to all of the obligations of a reporting issuer under applicable securities laws and all of the obligations applicable to a listed company under stock exchange rules.  Direct and indirect costs associated with public company status have escalated dramatically in recent years and regulatory initiatives under consideration may further increase the costs of being a reporting issuer in the United States and could have a material adverse effect on our business, results of operations and financial condition.  If we are unable to generate significant revenues from business operations, the cost of complying with applicable regulatory requirements will represent a financial burden to us and may have a material adverse effect on our business, results of operations, and financial condition.

ITEM 4.

INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

Capital Reserve Canada Limited (“Capital Canada” or the “Company”) was incorporated on December 8, 1999 as a private corporation under the Business Corporations Act (Alberta, Canada).  On January 15, 2003, we amended our articles of incorporation to enable us to be a public company under the laws of the Province of Alberta.  On May 28, 2003, we amended our Articles of Incorporation to forward split our issued and outstanding shares of Class A common stock on the basis of 2000 shares for every 1 share held.  From the date of incorporation to November 1, 2004,  Capital Canada was a wholly owned subsidiary of FACT Corporation.  On November 1, 2004 FACT Corporation distributed the shares of the company to the FACT shareholders and to a creditor and the Company was no longer a subsidiary of FACT.

Our principal place of business is located at Canadian Western Bank Place, Suite 2440, 10303 Jasper Avenue, Edmonton, Alberta, Canada T5J 3N6.  Our telephone number is 780-428-6026.

Our registered agent is Davis & Company, 3000 Shell Centre, 400-4^th Avenue S.W., Calgary, Alberta, Canada T2P OJ4.

On July 1, 2005, the Company entered in two convertible loan agreements with FACT Corporation in the principal amount of $533,527 USD and $152,997 CDN (approx. $126,222.USD). The loan agreements were to mature on June 30, 2007 and interest was calculated at US prime plus 1%.  The loans  were convertible into Class A common shares of the Company at $0.05USD per share.  On November 22, 2005, FACT Corp. advised the Company that it had assigned all of its rights and interest in the convertible loan agreements.  On November 23, 2005, the Company received notice of election to convert a total of $772,550USD owing for interest and principal and issued a total of 15,451,000 Class A common shares pursuant to the conversion.  On February 15, 2006, the Company received notification of the conversion of the remaining balance of the convertible loans in the amount of $226,065US and issued a total of 4,521,307 Class A common shares.  This was full and final settlement of all of the outstanding debt under the convertible notes.

On  August 2^nd, 2005, the Company incorporated a wholly owned subsidiary, Capital Reserve Canada Projects Ltd. to effect the acquisition of an operating business in the oil and gas services industry, KCP Innovative Services Inc.  On August 8, 2005, the Company issued a total of 17,335,814 Class A common shares of the Company and Capital Reserve Canada Projects Ltd. acquired a 78.2% interest in KCP Innovative Services Inc.    This effected a change in control of the Company.   

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On February 3^rd, 2006, the Company issued a further 4,834,300 shares of Class A common stock for the remaining 21.8% of the shares of KCP Innovative Services Inc. and Capital Reserve Canada Projects Ltd. effected an amalgamation with KCP Innovative Services Inc.(“KCP”) with KCP the surviving entity.  KCP is now a wholly owned subsidiary of the Company.   All of the operations of the Company are carried on by KCP.  As all of the operations of the Company are undertaken by KCP, management has applied reverse merger accounting for the reporting of financial information.  Unless otherwise stated, all of the financial information included in this annual report is the financial information of KCP, the Company’s wholly owned subsidiary, except for the shareholder’s equity which includes information for both KCP and the Company.

Principal Capital Expenditures and Divestitures:

The financial statements presented in this annual report relate to the operations of KCP, which is presently a wholly owned subsidiary of the Company, however, we have included the information as to capital expenditures and divestitures for both the Company and KCP in this section.  

 The Company was previously in the oil and gas industry by way of the ownership of certain producing and non-producing oil and gas properties.  On May 15, 2003, the Company sold certain of its oil and gas producing properties to Hornet Energy Ltd. for CDN$150,000.00 or approximately US$113,920.  The funds received paid off certain loans with Alberta Treasury Branches in full, funded the drilling of an exploration well in Montana and paid down a total of $57,526 USD of debt with FACT Corporation.

On June 10, 2003 the Company executed an agreement with FACT Corporation and Terra Nostra Technology Ltd. whereby the Company acquired an interest in certain oil and gas leases held in Rosebud and Garfield Counties, Montana for $10,000 USD. As part of the agreement with FACT Corporation and Terra Nostra Technology Ltd., we also took ownership of a small producing oil and gas well in Colorado, known as the Kejr leases.   The Company expended a total of $6,181 for the drilling of an exploration well on the Montana leases during July, 2003.  The well was a dry hole.  Management of the Company determined to divest itself of the Kejr leases and the Montana leases.  On December 23, 2004, effective as of December 1, 2004, the Company entered into an agreement with Stone Canyon Resources Inc. (“Stone Canyon”) whereby the company transferred all rights and interest in and to the Kejr and Montana leases in exchange for Stone Canyon assuming all current liabilities and any future liabilities for the Kejr and Montana leases.

Effective January 1, 2004, KCP acquired from a group of individuals, a computer modeling system to analyze the underground formations that contain natural gas and oil by way of the issuance of a total of 14,966,270 common shares of KCP.

On June 11, 2004, KCP acquired 100% of the issued and outstanding shares of Zone Technologies Ltd. from an existing shareholder and an unrelated party.  Consideration for the acquisition was $782,500 which was paid by the way of 1,294,444 shares of KCP and $200,000 cash.  

Vendor	Percent Ownership	Cash Consideration	Share Consideration
Darren Klassen	50%	$200,000(1)	425,000 KCP Shares
Ken Pearson	50%	$	869,444 KCP Shares
Total	100%	$200,000	1,294,444 KCP Shares

Note:

(1) KCP paid $200,000 to Mr. Klassen as part of the Zone Acquisition.  As Zone had a cash balance of $44,000 on June 14, 2004, the net cost to KCP was $156,000.

On September 26, 2005, Zone Technologies Ltd. was dissolved and the assets were transferred directly to KCP.

During February and March, 2005, KCP purchased two Slick Line Units  at a cost of approximately $650,000 for use in operations.

Principal Capital Expenditures and Divestitures In Progress:

On June 13, 2006, the Company incorporated Two Hills Environmental Inc. in the Province of Alberta, Canada as a wholly owned subsidiary to acquire the assets of Southbend Power Ltd.  On June 16, 2006, as amended July, 5 2006, Two Hills Environmental Inc. and Southbend Power Ltd. entered into an asset purchase agreement for the purchase of acquiring awater diversion permit, 147 acres of surface rights with a water pumping station, and certain mineral rights from Southbend, in exchange for 13,200,000 Class A common shares of the Company.  Share certificates have been issued for the 13,200,000 shares, but these are held in trust pending completion of due diligence and closing.  We have not included these shares in any

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of the issued and outstanding share numbers disclosed in this report.  Should we complete the asset purchase then there will be a total of 57,366,421 Class A common shares of the Company issued an outstanding.   The Company is undertaking due diligence on this acquisition at the time of this report and the estimated closing date is on or before July 28, 2006.

BUSINESS OVERVIEW

The Company is an Alberta, Canada Corporation formed in December 1999 to locate and acquire producing oil and gas assets in Canada.  The company disposed of its Canadian oil and gas production on May 15, 2003, which consisted of a 5% interest in a field located in Alberta.  The company divested of its interests in oil and gas exploration and development leases in Montana and a producing oil and gas property located in Colorado effective as of December 1, 2004.  On August 12, 2005, the Company acquired a controlling interest in an oil and gas services company, KCP Innovative Services Inc. and the Company acquired a further interest on February 3, 2006, making KCP a wholly owned subsidiary of the Company.   All of the operations of the Company are presently undertaken by KCP.

Operations and Principal Activities:

The Company no longer has any oil and gas leases. The Company is presently operating in the oil and gas services industry.  All of the Company’s present business is conducted in Alberta, Canada by its wholly owner subsidiary, KCP Innovative Services Inc. (“KCP”) located in Edmonton Alberta, Canada. KCP is a corporation that develops tools for, and provides services using such tools to, businesses engaged in the exploration for energy.  Specifically, KCP's tools are used for measuring the flow and quantity of production of oil and gas wells.  KCP's measurement tools are used by oil and gas companies to measure pressure and temperature of a well, which enables improved production information on development life to assist the Alberta Energy and Utilities Board to determine royalty payments and gas reserves.

For the three fiscal years ending 2003, 2004 and 2005, more than 95% of its business was from the applicable of KCP’s perforation inflow diagnostics  (“PID”) technology.

KCP commenced operations in 2001.  KCP was formed by Mr. Ken Pearson to develop measurement tools, with Mr. Pearson himself researching, developing and deploying services using such tools.   On January 1^st, 2004, KCP changed its direction from a single operator to a larger operation, to take advantage of the opportunities Mr. Pearson identified in the market.  KCP grew its management team adding Mr. Baker and sought an experienced Board of Directors adding Messrs. Getty, Baker and Hawkes.  KCP refined its business plan and moved ahead with private placements to raise capital for operations.

Tools and Services

Services

KCP also provides services to oilfield operators.  KCP's primary service uses a number of proprietary processes as well as proprietary equipment.  The various measurement services offered by KCP are provided directly at client well sites by a crew of one or two KCP employees or contractors.  Crews are primarily made up of KCP employees, but KCP may also contract out certain services to wire line companies in the area of a particular client well site.  Provision of KCP's services to clients requires specialized staff with knowledge of the oilfield services industry and KCP's technology.  Basic wire line knowledge and basic computer knowledge are required, with further training on KCP's services provided by KCP.  The generally healthy state of the oil and gas industry dictates the availability of potential employees with the knowledge required by the KCP.  As of this date, KCP has been abl e to find skilled employees with oilfield experience.

KCP requires a number of components and equipment in order to provide its products and services to clients.  These components and equipment are available from a wide range of suppliers who are able to provide services and products to KCP on a timely basis.  There are no unusual payment terms under any agreements or other arrangements with KCP's principal suppliers.  All of KCP's suppliers are at arm's length from KCP.  Suppliers are able to provide service and product to KCP on a timely basis.

KCP's primary customers are oil and gas production companies that are looking to maximize reservoir output.  KCP has completed work for most of the major oil and gas companies in Alberta.  KCP plans to continue to market its business to existing customers and attract new clients.  All of KCP's existing and proposed customers are at an Arm’s Length from KCP, except for BJ Services Company Ltd., of which Robert Hawkes, a Director of KCP, is an employee.  There are no unusual payment terms under any agreements or other arrangements with KCP's customers.  

KCP's primary tools are as follows:

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Perforation Inflow Diagnostics (“PID”)

PID testing is a set of tools and processes that determine the permeability, skin, reservoir pressure, and gas and liquid inflow during a perforating operation at the well site.  Memory gauges are dropped from the surface on a perforating drop bar using an electric line to convey the data.  The electric line conveys the data to a surface recorder at the well head so that information of the well inflow may be evaluated by the user at the time of the perforation.  This information comes from an analysis of the data from the memory gauges using KCP’s proprietary software.  The results are available in graphic form, helping the user determine if the well is viable, and, if viable, which drilling methodology should be used.  In essence, PID helps the user optimize the well.

Management of KCP believes that PID gives more accurate measurements of pressure and temperature, and therefore better production of the well, than traditional analysis.  The PID process, as well as the tools and gauges used in the process, neither is nor currently offered by KCP’s competitors.  This product is targeted at all producers of natural gas.  No material regulatory approvals or documentation are required for KCP to achieve its business objectives with respect to this product.

PID testing is achieved with two in-house PID slickline units, one drop spool unit and by renting slickline trucks as required.  Since the two PID slickline units were not available until March 29^th, 2005, most of the revenue for the first held of fiscal 2005 was generated by KCP’s drop spool unit and by renting Slickline trucks as required.  PID testing has created most of the revenue.

More than 95% of sales in 2005 were in the PID Market.

Injection Technology

Coal Bed Methane (“CBM”) is found in coal seams and is produced and sold as natural gas.  Coal beds, however, offer different challenges since coal beds tend to be saturated with water and the pressure tends to be much lower than in natural gas wells.  However, the water pressure is sufficient enough to hold the CBM in solution and, once the pressure is reduced CBM separates from the water and is able to be piped away.

The challenge is to depressurize the well without dewatering below the coal seam and running the risk of damaging the formation and preventing the recovery of more CBM.  A great deal of care is therefore needed to help determine the profitability and achieve the production without damaging the well.

KCP’s injection technology is used to determine the profitability of coal bed methane deposits and is composed of both hardware and software technologies.  The unit injects fresh water into the underground formation to help open the coal beds.  Once flow can be achieved, gauges then measure the flow rate for the methane gas.  Since water has to be removed from the well first, this process helps determine whether the well will be profitable before the customer makes a significant investment on the well.  The process uses proprietary equipment and methodologies developed by KCP and there is no known competitor at present.  This product is targeted at all producers of methane gas, such as EnCana Corp. and Methane Gas Ventures.  This product is currently in the commercial production stage.  No material regulator approvals or documentation are required for KCP to achieve its business obj ectives with respect to this product.

KCP has two injection trailer units which may be pulled with a pickup truck.  One was purchased from Zone and the other was constructed in September 2004. There were no sales in injection technology in 2005.  

Vent Gas Analyzer

The Vent Gas Analyzer is intended to assist with well abandonment by significantly reducing the time required to determine emissions to the atmosphere. It uses a turbine and deadweight to accurately calculate flow rates of gas to the atmosphere. This helps ensure that there are no emissions above the regulatory guidelines.  Management of KCP believes that the process is more accurate and not as labor intensive as previous methods. The technology is proprietary to KCP and, to the knowledge of KCP, is not used by any competitor.  This product will be targeted at all oil and gas exploration companies. This product is currently at the test stage of development and no sales have occurred to date. This will be completed by end of 2006 at an additional cost of about $15,000.  No material regulatory approvals or documentation are required for KCP to achieve its business objectives with respect to this product.

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Electronic Shut-In Tool

This programmable tool is intended to measure pressure, volume and temperature for the purposes of determining the productivity of an existing well.  Management of KCP believes that is the only tool that is programmable and has multi functions. It can be programmed to open and close at certain intervals as compared to conventional tools that are open or closed based on a fixed time. The programmable feature also allows the tool to automatically shut in based on pressure. This allows the pressure to build up in the well thus enhancing its life and production. This product is targeted at oil and gas companies.  There are no sales to date and his service will not go into production until September 2007.  No material regulatory approvals or documentation are required for KCP to achieve its business objectives with respect to this tool.

Principal Markets

All of the operations of KCP are in the Province of Alberta, Canada at present.  More than 95% of the total revenues of KCP are derived from the application of its PID technology.  The other 5% of the total revenues are derived from its injection technology.

Seasonality

The oil and gas industry as a whole is affected by seasonal variation.  Wet weather can significantly impede the operations of players in all sectors of the industry.  If exploration and development operations are impeded by wet weather or other seasonal weather conditions, it may be expected that sales of KCP’S products and services will be negatively affected.  

Marketing    

KCP conducts its own marketing as follows:

KCP's sales strategy to date has been driven primarily by personal contacts with senior management.  These contacts are derived from previous work projects.  A number of supplemental marketing methods have been contemplated.  These include referral fees, company brochures, exhibits at trade shows in Calgary, advertisements in industry magazines, and a company website.  KCP may also employ a commissioned sales person or contact engineering officers at targeted companies by telephone.  In addition to pursuing and securing new accounts,  KCP will focus on widening existing accounts.

There have been no major costs associated with KCP's sales strategy to date and KCP has traditionally operated at full capacity.  The following table provides an estimated annual cost for selected contemplated supplemental marketing strategies, if pursued.

Breakdown of Costs

Strategy	Cost ($)
Referral Fees	$1,000
Company Brochures	$1,000
Trade Show Exhibits                                  * Calgary	$3,000
Magazine Advertisements	$5,000
Website Maintenance	$2,000
Commissioned Sales person	$20,000

Market Competition

KCP's current market is the oil and gas industry in Alberta.  This will also be the immediate target market for KCP’S tools and services.  On completion of its product development, it is anticipated that KCP will expand to the regional Western Canada market and eventually, if successful, the worldwide market.

KCP's prices are negotiated for the job, depending on location, complexity, nature of the service and availability. Some jobs may require some design and investigation before proceeding. Rental of gauges over time is based on accepted rental rates in the industry.  After sales service, maintenance and warranties are not a significant competitive factor in this market segment.

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The oil and gas market continues to be strong. According to their website, the Canadian Association of Petroleum Producers (“CAPP”) estimated on its website that 23,920 new wells were drilled in Canada in 2004.  CAPP also believes that Canada has a significant potential in emerging resources such as natural gas from CBM. KCP estimates that while approximately 50% of wells are suitable for measurement with KCP's products, only a small portion are customers.  As production declines in Western Canada, management of KCP believes that KCP will maintain its growth, as customers will seek KCP's tools to enhance current production wells, and to reactivate abandoned wells. In addition, exploration and development companies require new data from all wells on an annual basis and will have a use for KCP’s tools.

A number of businesses operate or have operated in the oil and gas measurement sector.  Many of these no longer operate in the sector or have reorganized such that the measurement niche is no longer their core business.  KCP's primary competitor in the field of oil and gas measurement is Lonkar Well Testing Ltd. ("Lonkar"). Management of KCP estimates that Lonkar is currently the larger service provider in the market for this type of service.  Lonkar has, in addition to a dominant market share, a strong capital position. Management of KCP feels, however, that KCP has more advanced proprietary technology, and that this should prove a competitive advantage that will allow it to penetrate the market. It should be noted that since some of the market is currently untapped, it is possible that new competitors may enter the market.  Management of KCP feels, however, that its products and services ar e more advanced than those of its competition or any other potential competitor.  Management of KCP intends to keep KCP at the technological forefront of the sector by continuous research and development and continuous improvements of existing products and services.  Management of KCP believes that the dedication of KCP to continuous technological advancement will give it a competitive advantage.

Management of KCP feels that KCP’s market acceptance for its tools and services is growing as its products become more frequently utilized.  However, no market testing or surveys have been carried out with respect to market acceptance of KCP's tools and services.

KCP's tools and services are not affected by any market controls or regulations directly.  However, since KCP's clients and target clients, as exploration and drilling companies, are subject to regulatory control, it may be anticipated that any future significant changes to the oil and gas regulatory scheme may have an indirect effect on KCP’S ability to market its products and services.

REGULATORY MATTERS AFFECTING OUR BUSINESS

Environment and Safety

The Company's operations will be subject to numerous federal, provincial and local laws and regulations relating to environmental protection. These laws and regulations govern, among other things, the amounts and types of substances and materials that may be released into the environment, the issuance of permits in connection with exploration, drilling and production activities, the release of emissions into the atmosphere, the discharge and disposition of generated waste materials, offshore oil and gas operations, the reclamation and abandonment of wells and facility sites and the remediation of contaminated sites. In addition, these laws and regulations may impose substantial liabilities for the failure to comply with them or for any contamination resulting from the operations associated with the company's assets.  Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Such laws and regulations may expose the company to liability for the conduct of or conditions caused by others, or for acts of the company which were in compliance with all applicable laws at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on the company's financial position and results of operations.

The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant thereto impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by the OPA, and such liability could be substantial. A failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action.

The Company takes the issue of environmental stewardship very seriously and works diligently with its operators to insure that compliance with applicable environmental and safety rules and regulations. Compliance with such laws and regulations has not had a material effect on the company's operations or financial condition in the past. However, because environmental laws and regulations are becoming increasingly more stringent, there can be no assurances that such laws and regulations or any environmental law or regulation enacted in the future will not have a material effect on the Company's operations or financial condition.

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ORGANIZATIONAL STRUCTURE

The Company’s only subsidiary as at the year ended December 31, 2005 was Capital Reserve Canada Projects Ltd. which held a 78.2% interest in KCP.  Subsequent to the fiscal year ended December 31, 2005, Capital Reserve Canada Projects Ltd. completed the acquisition of KCP Innovative Services Inc. and effected a merger with KCP Innovative Services Inc., making KCP the surviving company.

As of the date of the filing of this report, the Company has two wholly owned subsidiaries, KCP Innovative Services Inc. and Two Hills Environmental Inc.  Both of these companies are incorporated pursuant to the laws of the Province of Alberta, Canada.

PROPERTY, PLANTS AND EQUIPMENT

Our principal corporate and administrative offices are located at Suite 2440, 10303 Jasper Avenue, Edmonton, Alberta, Canada.  Up to June 1, 2006 the space was provided free of charge by LFC Corporation, a shareholder of the Company.  On June 1, 2006 the Company agreed to pay LFC Corporation a monthly rent of $2000 per month which includes telephone, computers, photocopier, fax and reception. There is no formal rental agreement and the rental is a verbal agreement  on a month to month basis and cancelable at any time.   

KCP leases 6,500 square feet of office space in Edmonton, Alberta Canada  at 4304-74 Ave, Edmonton, Alberta. The lease is a three (3) year term commencing on October 15, 2004 and expiring on October 14, 2007.  The base rent is $3,500 per month net of taxes.  Under the lease agreement KCP is responsible for the additional costs of all utilities, property taxes and business taxes.  

KCP has a financing agreement with Canadian Western Bank for $423,500 dated March 22^nd, 2005 for the financing of 2 PID trucks.  The loan is a 60 month term bearing interest at 6.375%. The monthly payment is $8313.29. The balance of the loan on June 18^th, 2006 is $325,363.19.

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not Applicable

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

The financial information as presented herein relates to the financial statements for the Company’s wholly owned subsidiary, KCP Innovative Services Inc. (“KCP”) Pursuant to a share exchange agreement dated August 12, 2005, the Company indirectly, through its wholly owned subsidiary, Capital Reserve Projects Ltd., acquired a 78.2% interest in KCP.  Because the shareholders of KCP became the controlling shareholders of the Company, this transaction was accounted for as a reverse merger whereby KCP is deemed to be the parent company and CRC is deemed to be the subsidiary company for accounting purposes.  The financial statements of the combined entity are issued under the name of the Company, but are considered a continuation of the financial statements of KCP.  

Prior to the fiscal year ended August 31, 2005, KCP changed its fiscal year end from August 31 to December 31.  We have provided financial information for the transitional four month period ended December 31, 2005 and for the fiscal years ended August 31, 2005, 2004 and 2003.

Comparison of 2005, 2004 and 2003

August 31, 2005 operations include a substantial increase in revenues from $420,314 (2003) $380,606 (2004) to $933,441 (2005).  Revenues for  2004 decreased by $39,708 as compared to  revenues for 2003 due to an unusually wet season which reduced access to wells for operations resulting in a loss in revenues.  The increase in revenues for 2005 can be predominantly attributed to the availability of additional equipment for operations and increased marketing efforts of management.    For the years ended August 31, 2005, 2004 and 2003 KCP incurred operating losses of $862,266 (2005)   $197,917 (2004) as compared to a gain of $43,304 during 2003.  Cost of sales for August 31, 2005 increased from $259,372 (2003) and $186,501 (2004) to $605,370 (2005).  This was mainly due to a corresponding increase in sales.    Expenses for

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August 31, 2005 increased to $1,190,337 from $392,022 (2004) and $113,639 (2003). Salaries and benefits increased to $173,460 (2005) from $53,971 (2004) and $48,984 (2003) due to the hiring of additional staff.  General and Administrative expenses increased to $430,431 (2005) from $263,703 (2004)  and $52,824 (2003) due to additional management and consulting services to go public.  Amortization increased to $553,924 (2005) from $68,113 (2004) and $9,204 (2003) due to the acquisition of additional equipment, furniture and service vehicles.   

During the fiscal period ended August 31 2005, KCP raised a total of $142,179 by way of a private placement of common shares and repaid a total of $70,000 to two investors pursuant to the cancellation of a private placement.  During the fiscal period ended August 31, 2004 KCP raised a total of $1,619,505 by way of private placements of common shares.

During the fiscal year ended August 31, 2004 KCP issued a total of 14,966,270 common shares for the acquisition of technology.  As the transaction did not resulting a change in ownership, the transaction is recorded at the nominal carrying value of $1.00.  Also, during the fiscal year ended August 31, 2004 KCP issued a  total of 1,294,444 common shares for the purchase of Zone Technology Ltd.  and paid cash consideration of $200,000.  The transaction is valued at $782,500.  

Net losses for the two fiscal years ending August 31 were $643,469 (2005) and $178,084 (2004)  respectively,  For fiscal year 2003 KCP reported a gain of $47,304.  

As at the four month period reflected on the financial statements for the fiscal year ended December 31, 2005, the Company had revenues of $355,017. Costs of sales were $184,165.  Expenses for the four month period were $570,682 and were comprised of $54,358 for salaries and benefits, $279,027 for general and administrative, $229,154 for amortization and interest costs of $8,143.   There are no comparable periods for 2004 as the Company effected a change in its fiscal year end.

LIQUIDITY AND CAPITAL RESOURCES

Summary of Working Capital and Stockholders Equity

As of December 31, 2005, KCP had positive working capital of $1,176,312 and Stockholders' Equity of $883,308 as  compared with positive working capital of $1,465,967 (August 31, 2005) $2,260,128 (August 31, 2004) and $110,740 (August 31, 2003)  and Stockholders' Equity of $291,726 (August 31, 2005) $2,048,488 (August 31, 2004) and $63,608 (August 31, 2003). KCP’s working capital increased from 2003 to 2004 due to the raising of funds by way of private placements and has decreased during 2005 due to the acquisition of additional equipment and increased expenses as KCP increased operations and and undertook to become a public company.

Liquidity

KCP expects to be able to generate sufficient amounts of cash and cash equivalents, both in the short and long term, to maintain its capacity, meet its planned growth and development activities.  Cash and cash equivalents are expected to come from offerings of CRC securities to the public and sales of KCP’s tools and services to its target customers.

Sources of Working Capital

During 2005 the Company's primary sources of working capital have come from revenues generated from our operations and a net amount of $72,179 by way of a private placement funding   As at December 31, 2005, KCP has cash on hand of $24,768, term deposits of $436,445 and accounts receivable of $247,604.  

Borrowings

KCP has an operating line of credit in the maximum amount of $95,000.  Interest is charged monthly on the outstanding balance at the rate of Bank of Canada prime plus 1%.  As at December 31, 2005 the interest rate was 6% and the amount outstanding was $48,000.

KCP has a demand bank loan repayable over 60 months maturing February 2010.  The loan has monthly blended payments of principal and interest of $8,313.  The interest rate on the loan is 6.375%.  The loan is secured by two Sterling Slick Line units. The balance as at December 31, 2005 was $364,040.  

KCP is not in arrears on the payment of interest or principal payments on borrowing.  KCP is not, nor has it been during the fiscal year ended 2005, in default on any debt covenants.  

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Material Capital Commitments

KCP has taken delivery of the two PID trucks.  One was delivered on February 18^th, 2005, the other on March 29^th, 2005.

KCP has arranged capital lease financing for the trucks totaling $494,614, of which $325,363 is still outstanding at June, 2006..  The future commitments for these leases which commenced February 18^th, 2005, are included in the Contractual Obligations outlined above.

KCP leases space in Edmonton at 4304-74 Ave. The lease is for a period of three years commencing on October 14, 2004 $3500 per month.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

KCP invests in research and development, not only to refine its existing products but to develop new products.  KCP anticipates that 1-5% of the funds available to the company will be used for research and development.  KCP conducts its own research and development and it is anticipated that KCP will also conduct in-house research and development.

The company has no patents and licenses.  

TREND INFORMATION

The Company is not aware as of the filing of this annual report of any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on its financial condition.

OFF-BALANCE SHEET ARRANGEMENTS

The company has no off-balance sheet arrangements.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS

CAPITAL RESERVE CANADA AS AT DECEMBER 31, 2005
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
	Payments due by period
CONTRACTUAL OBLIGATIONS	Total	Less than one year	1-3 years	3-5 years	More than 5 years
KCP Lease Obligations (Office Space)(1)	73,500	40,250	33,250	0	0
Purchase Obligations(2)	364,040	99,756	199,512	116,382	0
Long Term Debt(3)	44,161	12,324	24,648	7,189	0
Total	481,701	152,300	257,410	123,571	0

(1)  Based on rent of $3,500 per month net of any taxes or operating costs.

(2)  Bank loan for the purchase of two Sterling Slick line units blended monthly payments of $8,313

(3) Vehicle loan with blended payments of $1027

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person and the date such person became a director or executive officer.   Our executive officers are elected annually by our Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers, and no persons have been elected as a director or officer at the request of any shareholders, customers, suppliers, or others.    

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Name	Age	Title
James W. Baker	57	CEO, President and Director
Donald Getty	72	Chairman of the Board and Director
Ken Pearson	55	Director
Robert Hawkes	50	Director of KCP Innovative Services

Ken Pearson, Director of Capital Reserve Canada Ltd., President and Director of KCP Innovative Services Inc.

Mr. Pearson has 35 years experience in the oil and gas industry.  He has spent 11 years directly in the Research and Development of high performance methodology to enhance measurement devices and the resulting information from those devices.  He is trained on full-bore tools, drill stem testing and telemetry tools for case holes and has developed many measurement devices.   Mr. Pearson has been a director and the President of KCP Innovative Services Inc. since inception. He became a director of Capital Reserve Canada Ltd. on August 12, 2005.

James Baker, CEO, President and Director of Capital Reserve Canada Ltd., CEO and director of KCP Innovative Services Inc.

Mr. Baker was awarded a Masters in Business Administration from Queen's University in 1974 and a Bachelor of Engineering Degree from the Nova Scotia Tech (Dalhousie) University in 1970.  He is an investment consultant and prior thereto between 1997 and October 2002, he was an investment advisor with a national investment dealer which is a member of the Investment Dealers' Association of Canada. Mr. Baker has been acting CEO and a director ofKCP since January 1, 2004 and became a director, CEO and President of Capital Reserve Canada Ltd. on August 12, 2005.  Mr. Baker spends 50% of his time working with the Company and KCP and the remainder of his time is devoted to his own consulting business.

Donald Getty, Chairman of the Board and Director of Capital Reserve Canada Ltd.  and Director of KCP Innovative Services Inc.

Mr. Getty earned his Business Administration Degree from the University of Western Ontario with honors in 1954. His positions with the Alberta Government included two terms as Premier of Alberta, the position of Energy Minister and the position of Minister of Federal and Intergovernmental Affairs.  In his business career, Mr. Getty has served on the Boards of distinguished companies such as the Royal Bank of Canada, Nova Company, Genstar Company and Interprovincial Pipe and Steel Corp.  Mr. Getty joined the Company as a director and was appointed Chairman of the Board of Directors on August 13, 2005. Mr. Getty currently sits on the Board as a Director of Guyanor Resources (TSE), Nationwide Resources (TSE) Mera Petroleums (TSX)

Robert Hawkes, Director of KCP Innovative Services Inc..

Robert Hawkes graduated from the Southern Alberta Institute of Technology in 1979 with a diploma in Petroleum Engineering.  He began his career with Esso Resources as a Reservoir Technologist in their testing department.  Since that time, he went on to establish himself as a specialist in Well Test Analysis.  Robert currently works for BJ Services in Calgary as a Team Leader, Reservoir Services.  He is well published in CIM and SPE and is a recognized expert in the field of pressure transient analysis, reservoir characterization and short-term pre-frac buildup and analysis.  Robert was awarded the 2005 Presidents Award for technical and presentation excellence in formation evaluation by the Canadian Well Logging Society..

None of our directors has been involved in any bankruptcy or criminal (excluding traffic violations and other minor offenses) proceedings. None of our directors is subject to any order, judgment or decree related to his involvement in any type of business, securities or banking activities or has been found to have violated a federal or state securities or commodities law.

COMPENSATION

The following table sets forth the compensation paid to our directors and members of our management group for the last fiscal year.

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	Annualized Compensation			Long Term Compensation
Name and Principal Position	Year	Salary (CDN$)	Bonus (CDN$)	Securities Under Options to be Granted (#)	Long Term Incentive Plan Payouts (CDN$)	All other Compensation (CDN$)
James Baker President & Director	2005	63,880-	-		-	-
Donald  Getty Chairman of the Board & Director	2005	0	-	-	-	-
Ken Pearson Director	2005	108,000	-	-	-	-
Robert Hawkes	2005	0	-	-	-	-

The company has not paid any other compensation to any other members of its management, administrative or supervisory bodies.  Faye Pearson earns $3000.00 per month as Office Manager.

MANAGEMENT CONTRACTS

KCP has a management contract with Projex Corporation Ltd., a company of which James Baker is the sole officer and director for the provision of Mr. Baker’s services as CEO for $5,000 per month on a part-time basis, commencing Feb 1^st, 2005.  The contract has a 90 day termination provision and there are no company benefits.  Mr. Baker presently devotes approximately 50% of his time to the Company and KCP.  The other 50% of his time is devoted to his consulting business.

KCP has an employment agreement with Ken Pearson as President of KCP for $8,000 per month commencing on February 1^st, 2005. The contract has no specific term of employment and no specific termination clause.  Any termination would be subject to the employment laws of the Province of Alberta, Canada. Employment includes a company health plan, covering healthcare supplemental coverage, dental care, vision care, life insurance and disability.  The cost of the plan for Ken Pearson is $98.09 per month.

KCP has an employment agreement with Faye Pearson for Office Management services for $3,000 per month.  The contract has no specific term of employment and no specific termination clause.  Any termination would be subject to the employment laws of the Province of Alberta, Canada. Employment includes a company health plan covering healthcare supplemental coverage, dental care, vision care, life insurance and disability. The cost of the plan for Faye Pearson is $162.80 per month.

Compensation of Directors

No directors receive any form of compensation in their capacity as directors of the Company.

BOARD PRACTICES

Members of our Board of Directors are elected annually at the Annual Shareholders' Meeting and hold the position until the next Annual Shareholders' Meeting or until his successor is duly elected and qualified.  Messrs. Baker and Pearson were elected at our last Annual Shareholders' Meeting which was held on August 12^th, 2005. We have not entered into any formal service contracts with any of our directors.

We do not have any standing audit, nominating, or compensation committees of the Board of Directors The Board of Directors undertakes the role of audit and compensation committees at this time.    Our executive officers are elected annually by our Board of Directors and hold such positions until the following year or until his successor is duly elected by our Board of Directors.

17

EMPLOYEES

The Company had no employees as of Dec 31, 2005.  KCP had 10 employees including one President, one Office Manager, two clerks and six field personnel all located in Edmonton, Alberta. This represents an increase of four field personnel from August 31, 2004.

Presently we have a total of 7 employees.

SHARE OWNERSHIP

The following table sets forth information, as of June 28, 2006, with respect to the beneficial ownership of Capital Reserve Canada Limited's Class A common stock by each of the company's officers and directors, and by the officers and directors of the company as a group. Information is also provided regarding beneficial ownership of Class A common stock if all outstanding options, warrants, rights and conversion privileges are exercised and additional shares of Class A common stock are issued.

TITLE OF CLASS	BENEFICIAL OWNER	AMOUNT AND NATURE OF BENEFICIAL OWNER	PERCENT OF CLASS (1)
Class A Common	James Baker,  director of Capital  Reserve Canada Limited and President c/o Suite 2440, 10303 Jasper Avenue, Edmonton, Alberta T5J 3N6	4,000,000 common shares held indirectly (2)	9.1%
Class A Common	Ken Pearson, director of Capital Reserve Canada and  President and director of KCP Innovative Services Inc.; c/o 4304-74 Avenue Edmonton, Alberta, Canada	8,585,814common shares held directly	19.4%
Class A Common	Donald Getty, director of Capital Reserve Canada Limited, and Chairman of the Board c/o 1273 Potter Greens Dr Edmonton, Alberta T5T 5Y8	1,500,000 common shares  held indirectly.(3)	3.4%
Class A Common	Robert Hawkes, director of KCP Innovative Services Inc. 136 Woodford Close SW Calgary, Alberta T2W 6E2	300,000 common shares held directly	0.068%
	All Officer and Directors as a group	14,385,814 common shares	32.6%

(1)

Based on 44,166,421 shares of Class a Common Stock.

(2)

Held in Projex Corporation Ltd. a company of which Mr. James Baker is the sole shareholder.

(3)

Held in Sunnybank Investments Ltd. a company of which Mr. Getty is the sole shareholder.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

The following table sets forth information, as of June 28, 2006, with respect to the beneficial ownership of Capital Reserve Canada Limited's Class A common stock by each person know to be the beneficial owner of more than 5% of the outstanding Class A common stock. As at June 28, 2006, there were a total of 838 shareholders holding 44,166,421 Class A common

18

shares of the Company. Of these, 182 of the registered shareholders are Canadian shareholders holding a total of 25,559,337 Class A common shares.

Information is provided regarding beneficial ownership of Class A common stock if all outstanding options, warrants, rights and conversion privileges are exercised and additional shares of Class A common stock are issued.

TITLE OF CLASS	BENFICIAL OWNER	AMOUNT AND NATURE OF BENEFICIAL OWNER	PERCENT OF CLASS (1)
Class A Common	Ocean Exploration Ltd. 25 Regent St. Belize City, Belize	2,667,958 shares held directly	6.04%
Class A Common	Seven Seas Enterprises Ltd. Cor of Baymen Ave & Calle Al Mar      Belize City, Belize	3,551,000 shares held directly	8.04%

(1) Based on 44,166,421 shares of Class A common stock.  

(2)  The beneficial owner of Ocean Exploration Ltd. is Walter Brown

(3)  The sole officer and director of Seven Seas Enterprises Ltd. is Mark C.Hulse.

RELATED PARTY TRANSACTIONS

On August 8, 2005, the Company issued a total of 7,585,814 Class A common shares to Ken Pearson, a director of the Company and KCP, and 4,000,000 Class A common shares to 966358 Alberta Ltd. (transferred to Projex Corporation) a company controlled by James Baker who is a director and officer of the Company and KCP.  The shares were issued for the aquisition of KCP.

On November 24, 2005, the Company issued a total of 1,000,000 Class A common shares to Ken Pearson, the a  shareholder of the Company in settlement of certain debt of the Company and a total of 500,000 Class A common shares to Sunnybank Investments Ltd., a company controlled by Don Getty, a director of the Company and KCP.  

KCP borrows funds from its shareholders, directors and employees from time to time in order to meet working capital requirements and to ensure that it is able to pay its liabilities as they come due.   As at December 31, 2005, all amounts due had been repaid and there was an overpayment of $2.00 due back from the director.  As at the date of this report the amount outstanding under these loans was Nil.

On January 28, 2004, KCP appointed  an employee of one of KCP’s customers as a director,  Robert Hawkes, who is an employee of  BJ Services Company Ltd.  During the fiscal year ended August 31, 2005, the Company earned approximately $97,000 of revenues from this customer in the normal course of operations.

On February 1, 2005, KCP entered into a management contract with Projex Corporation Ltd., a company controlled by a shareholder, officer and director of the KCP.  During the four months period ended December 31, 2005, the Company paid $20,000 ( Fiscal year ended August 31, 2005 - $63,880), in consulting fees.   Pursuant to the terms of the contract Projex  Corporation Ltd. receives $5,000 per month and has been paid up to date as of the date of filing this report.

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On February 1, 2005, KCP entered into an employment agreement with an officer, director and shareholder of KCP.  During the four months period ended December 31, 2005, the Company paid a shareholder, director and officer $ 32,000.

(Fiscal year ended August 31, 2005 - $ 108,000, for services rendered.  Pursuant to the terms of the contract Mr. Pearson receives $8,000 per month and has been paid up to date as of the date of filing of this report.

On February 1, 2005, KCP entered into an employment agreement with the wife of a shareholder, officer and director. During the four months period ended December 31, 2005, the Company paid the wife of a shareholder, director and officer $ 12,000

(Fiscal year ended August 31, 2005 - $ 44,000) for office management services.  Pursuant to the terms of the contract, Ms. Pearson receives $3,000 per month and has been paid up to date as of the date of filing of this report.

During the fiscal year 2005, Mr. James Baker, an officer and director of KCP placed key man insurance on Mr. Pearson in the amount of $2,000,000 payable to KCP.  The cost of this insurance was paid for by KCP.

INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

ITEM 8.

FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

The required financial statements are provided at the end of this Annual Report starting on Page F-1.

SIGNIFICANT CHANGES

On June 13, 2006, the Company incorporated Two Hills Environmental Inc. in the Province of Alberta, Canada as a wholly owned subsidiary to acquire the assets of Southbend Power Ltd.  On June 16, 2006, as amended July, 5 2006, Two Hills Environmental Inc. and Southbend Power Ltd. entered into an asset purchase agreement for the purchase of acquiring awater diversion permit, 147 acres of surface rights with a water pumping station, and certain mineral rights from Southbend, in exchange for 13,200,000 Class A common shares of the Company.  Share certificates have been issued for the 13,200,000 shares, but these are held in trust pending completion of due diligence and closing.  We have not included these shares in any of the issued and outstanding share numbers disclosed in this report.  Should we complete the asset purchase then there will be a total of 57,366,421 Class A common shares of the Company issued an outstanding.   The Company is undertaking due diligence on this acquisition at the time of this report and the estimated closing date is on or before July 28, 2006.

ITEM 9.

THE OFFER AND LISTING

OFFER AND LISTING DETAILS

Not Applicable

PLAN OF DISTRIBUTION

Not Applicable

MARKETS

Our Class A common shares trade on the Nasdaq OTC Market under the symbol CRSVF.

SELLING SHAREHOLDERS

Not Applicable

DILUTION

Not Applicable

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EXPENSES OF THE ISSUE

Not Applicable

ITEM 10.

ADDITIONAL INFORMATION

SHARE CAPITAL

Not Applicable

MEMORANDUM AND ARTICLES OF ASSOCIATION

The Company incorporates by reference herein the information set forth under the heading “MEMORANDUM AND ARTICLES OF ASSOCIATION” located in the Company’s Amendment No. 4 to Form 20F/A filed with the Securities and Exchange Commission on March 16, 2004.

MATERIAL CONTRACTS

Since the date of its incorporation, KCP has not entered into any contracts material to investors in the normal course of business other than the following:

1.

The Zone Acquisition Agreement

KCP acquired all of the issued and outstanding shares of Zone on June 14, 2004.  Zone's primary asset was the Injection Technology.  The Zone Acquisition gave KCP the capacity to increase revenue and create synergy with KCP’s existing products and services, fulfilling the Company’s strategic plan.

The vendors of Zone were Messrs. Darren Klassen and Ken Pearson.  As Mr. Pearson was an Insider of KCP, the acquisition of Zone was considered a Non-Arms Length Transaction.  KCP's net cost for Zone was $156,000 cash and the issuance of 1,294,444 KCP Shares. The deemed value of the share consideration was $582,500.  The following table summarizes the key terms of the acquisition of Zone.

Vendor	Percent Ownership	Cash Consideration	Share Consideration
Darren Klassen	50%	$200,000(1)	425,000 KCP Shares
Ken Pearson	50%	$	869,444 KCP Shares
Total	100%	$200,000	1,294,444 KCP Shares

Note:

(1) KCP paid $200,000 to Mr. Klassen as part of the Zone Acquisition.  As Zone had a cash balance of $44,000 on June 14, 2004, the net cost to KCP was $156,000.

Consideration for the Zone Acquisition was negotiated between the parties, based on a valuation of Zone by Evans & Evans Inc., an independent valuator.  The valuation focused on the existing cash, the contracts and the customer base of Zone.  Zone had as of the date of Zone Acquisition, outstanding work order of approximately $196,600 which included work in progress. There are no material obligations that KCP must comply with in order to keep the agreement relating to the Zone Acquisition in good standing.  On September 28, 2005,  Zone was dissolved and the assets of Zone were rolled directly into KCP.

2.

The PID Acquisition Agreement  

Effective January 1st, 2004, KCP acquired from a group of individuals, one of whom was Mr. Ken Pearson, a computer modeling system to analyze the underground formations that contain natural gas and oil.  This modeling system provides information to the engineers and geologists so they can finish the wells at a higher production level than traditional analyses.  See “Tools and Services”.  Consideration consisted of 14,966,270 KCP Shares.  As Mr. Pearson was an Insider of KCP, the acquisition of the PID Technology was considered a Non-Arm’s Length Transaction.  As this related party transaction did not

21

result in a substantive change in the ownership interest of the technology, the technology has been recorded at the nominal carrying value of $1.

3.

The Canadian Western Bank Financing – dated March 22nd, 2005

KCP has a financing agreement with Canadian Western Bank for $423,500 dated March 22^nd, 2005 for the construction of the 2 PID trucks.  The loan is a 60 month term bearing interest at 6.375%. The monthly payment is $8313.29. CAD  The balance of the loan on June 18^th, 2006 is $325,363.19.

4.

CRC and KCP Office Leases

Our principal corporate and administrative offices are located at Suite 2440, 10303 Jasper Avenue, Edmonton, Alberta, Canada.  Up to June 1, 2006 the space was provided free of charge by LFC corporation.  On June 1, 2006 the Company agreed to pay LFC a monthly rent of $2000 per month which includes telephone, computers, photocopier, fax and reception. Rental is on a month to month basis and will be reviewed once the Southbend agreement is concluded and future requirements are determined.

KCP leases space in Edmonton at 4304-74 Ave. The Lease is for $3500 per month and has sufficient space to carry out the operations of KCP for the foreseeable future.  The lease is dated October 15, 2004 for a 3 year term and expires on October 15, 2007.

5.

Management and Employment Agreements with James Baker, Ken Pearson, Faye Pearson  

KCP has a management contract with Projex Corporation Ltd., a company of which James Baker is the sole officer and director for the provision of CEO services for $5,000 per month on a part-time basis, commencing Feb 1^st, 2005.  The contract has a 90 day termination provision and there are no company benefits.  Mr. Baker devotes approximately 50% of his time to the Company and KCP.

KCP has an employment agreement with Ken Pearson as President of KCP for $8,000 per month commencing on February 1^st, 2005.  Employment includes benefits and a company health plan.

KCP has an employment agreement with Faye Pearson for Office Management services for $3,000 per month.  Employment includes benefits and a company health plan.

6.

The purchase of KCP

On  August 2^nd, 2005, the Company incorporated a wholly owned subsidiary, Capital Reserve Canada Projects Ltd. to effect the acquisition of an operating business in the oil and gas services industry, KCP Innovative Services Inc.  On August 8, 2005, the Company issued a total of 17,335,814 Class A common shares of the Company and Capital Reserve Canada Projects Ltd. acquired a 78.2% interest in KCP Innovative Services Inc.    This effected a change in control of the Company.   

On February 3^rd, 2006, the Company issued a further 4,834,300 shares of Class A common stock for the remaining 21.8% of the shares of KCP Innovative Services Inc. and Capital Reserve Canada Projects Ltd. effected an amalgamation with KCP Innovative Services Inc.(“KCP”) with KCP the surviving entity.  KCP is now a wholly owned subsidiary of the Company.   All of the operations of the Company are carried on by KCP.

7.

 The Agreement with Southbend Power Ltd. to acquire all of its major assets   

On June 16, 2006, amended July 5, 2006 the Company entered into an agreement to acquire all of the major assets of Southbend Power Ltd., which include a water diversion permit, 147 acres of surface rights with a water pumping station, and certain mineral rights, in exchange for 13,200,000 Class A common shares of the Company.  Share certificates have been issued for the 13,200,000 shares, but these are held in trust pending completion of due diligence and closing.  There is no cash being considered in the agreement.  The shares were valued at .50 USD at the time of the Letter of Intent. The Company is undertaking due diligence on this acquisition at the time of this report and the estimated closing date is on or before July 28, 2006. The Company established a new subsidiary, Two Hills Environmental Inc, to acquire these assets.

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EXCHANGE CONTROLS

There are no governmental laws, decrees, regulations or other legislation of Canada that may affect the import or export of capital for use.

Other than the withholding of any taxes due under the terms of specific treaties between countries on dividends paid to shareholders of the Corporation there are no restrictions on the remittance of dividends, interests or other payments.

TAXATION

The discussions below summarize the material tax considerations relevant to an investment in common shares by individuals and corporations who, for income tax purposes, are resident in the U.S. for purposes of the Convention (as hereinafter defined) and are not resident in Canada, who hold common shares as a capital asset, and who do not hold the common shares in carrying on a business through a permanent establishment in Canada or in connection with a fixed base in Canada (collectively, "Unconnected U. S. Shareholders" or "Holders"). The tax consequences of an investment in common shares by investors who are not Unconnected U.S. Shareholders may differ substantially from the tax consequences discussed herein. The discussion of U.S. tax consideration is addressed only to Unconnected U. S. Shareholders whose "functional currency" within the meaning of Section 985 of the Internal Revenue Code of 1986, as amended (the "Code"), is the U. S. dollar, and to U. S. citizens who are not residents in the U.S. for the purpose of the Convention, but who otherwise meet the definition of Unconnected U.S. Shareholders. Furthermore, the discussion of U.S. tax consideration does not address the tax treatment of Unconnected U. S. Shareholders that own, or are deemed for U.S. federal income tax purposes to own, 10% or more of the total combined voting power of all classes of voting stock of Capital Reserve Canada Limited. The discussion of Canadian tax considerations does not address the tax treatment of a trust, company, organization or other arrangement that is a resident of the U.S. and that is generally exempt from U. S. tax.

This discussion does not address all of the income tax consequences that may be applicable to any Holder subject to special treatment under the U.S. federal income tax law or to any particular Holder in light of such Holder's particular facts and circumstances. Some Holders, including tax exempt entities, banks, insurance companies and persons who hold common shares as part of a hedging transaction may be subject to special or different rules not discussed below. The discussion of U.S. tax considerations is based on the provisions of the Code.

 The discussion of Canadian tax consideration is based upon the provisions of the Income Tax Act (Canada), as amended from time to time (the "Tax Act"), the Convention between Canada and the U.S. with Respect to Taxes on Income and Capital, as amended from time to time (the "Convention"), and the company's understanding of published administrative practices of Canada Customs and Revenue Agency and judicial decision, all of which are subject to change. The discussion does not take into account the tax laws of the various provinces or territories of Canada or the tax laws of the various state and local jurisdictions in the U. S.

U.S. Federal Income Tax Considerations

Unconnected U.S. Shareholders generally will treat the gross amount of the distributions paid by the company, including the amount of any Canadian tax withheld, as foreign source dividend income for U.S. federal income tax purposes to the extent of the company's current or accumulated earnings and profits, as computed for U.S. federal income tax purposes. Distribution in excess of that amount will reduce an Unconnected U.S. Shareholder's tax basis in the common shares, but not below zero, and the remainder, if any, will be treated as taxable capital gains. In general, in computing its U.S. federal income tax liability, an Unconnected U.S. Shareholder may elect for each taxable year whether to claim a deduction or, subject to the limitations described below, a credit for Canadian taxes withheld from dividends paid on its common shares. If the Unconnected U.S. Shareholder elects to claim a credit for such Canadian taxes, the election will be bind ing for all foreign taxes paid or accrued by the Shareholder for such taxable year. The Code applies various limitations on the amount of foreign tax credit that may be available to a U.S. taxpayer based upon the segregation of foreign source income into separate categories of income. The amount of credit which may be claimed with respect to the category of income to which the dividend is allocated, and to which the foreign taxes are attributable generally may not exceed the same portion of the U.S. tax on worldwide taxable income, before applying the foreign tax credit as the U.S. holder's foreign source taxable income allocation to such category bears to such U.S. holder's entire taxable income. The foreign tax credit is disallowed for dividends on stock unless a minimum holding period is satisfied and additional limitations may restrict the ability of some individuals to claim the foreign tax credit. Accordingly, we urge investors to consult their own tax advisors with respect to the potential consequence s to them of the foreign tax credit limitations.

23

For U. S. federal income tax purposes, the amount of any distributions made on a common share to an Unconnected U.S. Shareholder in Canadian dollars will equal the U.S. dollar value of the Canadian dollars calculated by reference to the appropriate exchange rate in effect on the date of receipt of the distribution, regardless of whether the Canadian dollars are actually converted into U.S. dollars upon receipt. Unconnected U.S. Shareholders are urged to consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any Canadian dollars which are converted into U.S. dollars subsequent to receipt by the shareholder.

The sale of common shares generally will result in a gain or loss to the Holder in an amount equal to the difference between the amount realized and the Holder's adjusted cost basis in the shares. Provided that the Holder is not considered a "dealer' in the shares sold, gain or loss on the sale of the common shares will generally be capital gain or loss.

Capital losses are used to offset capital gains. Individual taxpayers may deduct the excess of capital losses over capital gains of up to US$3,000 a year, US$1,500 in the case of a married individual filing separately, from ordinary income. Non-corporate taxpayers may carry forward unused capital losses indefinitely.  Unused capital losses of a corporation may be carried back three years and carried forward five years.

Canadian Tax Considerations

Dividends received or deemed to be received, on the common shares by Unconnected U.S. Shareholders will be subject to Canadian withholding tax at the rate of 25%, subject to reduction under the Convention. Under the Convention, the maximum rate of withholding tax on such dividends is reduced to 15% if the beneficial owner of such dividends is an Unconnected U.S. Shareholder. However, that rate is reduced to 5% under the Convention if the beneficial owner of such dividends is an Unconnected U.S. Shareholder that is a corporation that owns at least 10% of the voting stock of the company.

An Unconnected U.S. Shareholder will not be subject to tax in Canada on any capital gain realized upon the disposition or deemed disposition of the common shares, provided that the common shares do not constitute "taxable Canadian property" of the shareholder within the meaning of the Tax Act.

Canada does not currently impose any estate taxes or succession duties.

DIVIDENDS AND PAYING AGENTS

Not applicable.

STATEMENTS BY EXPERTS

Not Applicable

DOCUMENTS ON DISPLAY

All documents filed in connection with this registration statement have been filed with the Securities and Exchange Commission using the EDGAR (Electronic Data Gathering, Analysis and Retrieval) system.  The Securities and Exchange Commission maintains a Web site on the Internet at the address http://www.sec.gov that contains reports, proxy information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission.

SUBSIDIARY INFORMATION

As at June 16^th, 2006 the company has two subsidiaries, KCP Innovative Services Inc. and Two Hills Environmental Inc. which was formed June 16, 2006, to receive the assets from Southbend Powers Ltd.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

24

This annual report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be material ly 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.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.

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

None.

ITEM 15.

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our President and acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   

At the end of the period covered by this annual report we carried out an evaluation, under the supervision and with the participation of our management, including our President and acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the foregoing, our President and our acting Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

The company does not presently have an audit committee.

ITEM 16B.

CODE OF ETHICS

As of the date of this report, the company has not adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.  As the Company has gone through a recent change of control, the Company did not finalize its adoption of the Code of Ethics.  The present Board of Directors of the Company is presently preparing a Code of Ethics for review and adoption.   Upon adoption, the company will file a copy of its code of ethics with the Securities and Exchange Commission as an exhibit to its annual report for the year ending December 31, 2006 and post it on its website.

25

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the fees billed to the Company and its subsidiary KCP for professional services rendered by the Company's principal accountant:

Services	2005	2004
Audit fees	$27,435	$46,290
Audit related fees	$19,300	0
Tax fees	0	0
Total fees	$51,325	$46,290

Audit fees consist of fees for the audit of the company's annual financial statements or the financial statements of the company’s subsidiaries or services that are normally provided in connection with the statutory and regulatory filings of the annual financial statements.

Audit-related services include the review and preparation of the company's financial statements and quarterly reports that are not reported as Audit fees.  .

Tax fees included tax planning and various taxation matters.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not Applicable

PART III

ITEM 17.

FINANCIAL STATEMENTS

See Item 18 Below.

ITEM 18.

FINANCIAL STATEMENTS

The required financial statements are provided herein starting on page F-1.

ITEM 19.

EXHIBITS

Exhibit No.	Exhibit
1.1	Certificate of Incorporation of the company consisting of the Articles of Incorporation filed with the Alberta Registries on December 8, 1999, filed with the Registrant’s Form 20-F filed on July 11, 2003 (file # 000-50339)
1.2	Amendment to Articles of Incorporation of the company filed with Alberta Registries on January 15, 2003, incorporated by reference to the Exhibits filed with the Registrant's Form 20-F filed on July 11, 2003 (file # 000-50339)
1.3	By-Laws of the company, dated December 8, 1999, incorporated by reference to the Registrant's Form 20-F filed on July 11, 2003 (file # 000-50339)

26

4.1	Petroleum, Natural Gas, and General Rights Conveyance between Capital Reserve Canada Limited and Stone Canyon Resources Ltd. dated December 23, 2004, incorporated by reference to the Exhibits filed with the Company’s 20-F filed Annual Return for the year ended December 31, 2004. (file # 000-50339)
4.2	Share Exchange Agreement between Capital Reserve Canada Ltd., Capital Reserve Canada Projects Ltd., KCP Innovative Services In., and Ken Pearson, 966358 Alberta Ltd., 989320 Alberta Ltd., 332601 Alberta Ltd. and Ben Marshall dated  August 8, 2005, incorporated by reference to the Exhibit filed with the Company’s 8K filed on August 12, 2005. (file # 000-50339)
4.3	Proxy and Information Circular of KCP Innovative Services Inc. with respect to the Amalgamation with Capital Reserve Canada Projects Ltd. and Capital Reserve Canada Ltd. and Notice of Annual and Special Meeting of Shareholders of KCP Innovative Services Inc.,  dated December 22, 2005, incorporated by reference to the Exhibit filed with the Company’s 6-K filed on February 8, 2006 (file # 000-50339)
4.4	Offer to lease office space entered into between Sabo Bros. and KCP Innovative Services Inc. dated August 24, 2004 and effected October 15, 2004, filed herewith.
4.5	Management Agreement between KCP Innovative Services Inc. and Projex Corporation dated February 1, 2005, filed herewith.
4.6	Employment Agreement between KCP Innovative Services Inc. and Ken Pearson dated February 1, 2005, filed herewith.
4.7	Employment Agreement between KCP Innovative Services Inc. and Faye Pearson dated February 1, 2005, filed herewith.
4.8	Loan agreement between Canadian Western Bank and KCP Innovative Services Inc. dated March 22, 2005, filed herewith.
4.9	Asset Purchase Agreement between Two Hills Environmental Inc. and South Bend Powers Ltd. dated June 16, 2006 and amendment dated July 5, 2006, filed herewith.
12	Certifications required by Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
13	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States code (18 U.S.C. 1350), filed herewith.

SIGNATURES

The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

CAPITAL RESERVE CANADA LIMITED

/s/ James Baker

James Baker

Chief Executive Officer

Date:  July 17, 2006

27

CAPITAL RESERVE CANADA LIMITED.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

Child Van Wagoner &

Bradshaw, PLLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Capital Reserve Canada Limited

We have audited the accompanying consolidated balance sheets of Capital Reserve Canada Limited as of December 31, 2005 and August 31, 2005, 2004, and 2003, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the four months ended December 31, 2005, and for the years ended August 31, 2005, 2004, and 2003.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Reserve Canada Limited as of December 31, 2005 and August 31, 2005, 2004 and 2003, and the results of its operations, changes in stockholders' equity, and its cash flows for the four months ended December 31, 2005 and for the years ended August 31, 2005, 2004, and 2003, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 4 to the consolidated financial statements, the Company currently has cash flow constraints and an accumulated deficit.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 4.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Child, Van Wagoner & Bradshaw

CERTIFIED PUBLIC ACCOUNTANTS

Salt Lake City, Utah

July 10, 2006

1284 W. Flint Meadow Dr. #D

Kaysville, Utah  84037

Telephone 801.927.1337

Facsimile  801.927.1344

5296 S. Commerce Dr. #300

(53^rd So. @ 1-15)

Salt Lake City, Utah 84107

Telephone 801.281.4700

Facsimile 801.281.4701

Suite B. 4F,

North Cape Commercial Bldg,

388 King’s Road

North Point, Hong Kong

www.cpaone.net

F-1

CAPITAL RESERVE CANADA LIMITED

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND

AUGUST 31, 2005, 2004, AND 2003

ASSETS

December

31, 2005

2005

2004

2003

Current

     Cash and cash equivalents

$

24,768

$

18,832

$

1,209,552

$

10,210

     Term deposits (Note 7)

436,445

600,554

20,300

20,000

     Accounts receivable

247,604

134,798

70,044

71,091

     Income taxes recoverable

9,263

-

11,693

-

     Work in process

0

45,270

-

-

     Prepaid expenses

9,543

19,468

4,267

-

727,623

818,922

1,315,856

101,301

Cash - restricted (Note 6)

45,000

45,000

45,000

-

Retainer - on deposit with lawyer

0

-

15,000

-

Intangible assets (Note 9)

281,759

320,175

612,426

-

Goodwill (Note 5)

138,155

138,155

138,155

-

Property, plant and equipment (Note 8)

505,634

680,780

358,177

50,519

$

1,698,171

$

2,003,032

$

2,484,614

$

151,820

LIABILITIES

Current

     Bank indebtedness (Note 10)

$

48,000

$

-

$

7,807

$

14,811

     Accounts payable and accrued liabilities

102,771

117,059

145,518

11,725

     Income and commodity taxes payable

0

21,186

37,514

6,456

     Due to shareholder (Note 16)

(2

)

130

6,723

474

     Demand bank loan (Note 11)

364,040

312,167

-

-

     Current portion of long-term

          debt (Note 11 and 12)

7,050

86,523

26,924

7,614

521,859

537,065

224,486

41,080

Long-term

     Long-term debt (Note 12)

31,962

31,962

131,340

47,672

     Due to affiliated company

258,426

1,101,394

0

0

     Future tax liability (Note 15)

2,616

40,885

80,300

-

293,004

1,174,241

211,640

47,672

814,863

1,711,306

436,126

88,752

Minority interest

0

0

0

0

SHAREHOLDERS' EQUITY

Share capital (Note 13)

3,242,434

2,320,783

2,320,783

2,320,783

Retained earnings (Deficit)

(2,359,126

)

(2,029,057

)

(272,295

)

(2,257,715

)

883,308

291,726

2,048,488

63,068

$

1,698,171

$

2,003,032

$

2,484,614

$

151,820

The accompanying notes are a part of these financial statements.

F-2

CAPITAL RESERVE CANADA LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED AUGUST 31, AND

THE FOUR MONTHS ENDED DECEMBER 31, 2005

December

31, 2005

2005

2004

2003

Revenue

$

355,017

$

933,441

$

380,606

420,314

Cost of sales

184,165

605,370

186,501

259,371

      Gross profit

170,852

328,071

194,105

160,943

Expenses

  Salaries and benefits

54,358

173,460

53,971

48,984

  General and administrative

279,027

430,431

263,703

52,824

  Amortization

229,154

553,924

68,113

9,204

  Interest (Note 10, 11 and 12)

8,143

32,522

6,235

2,627

570,682

1,190,337

392,022

113,639

        Loss before income taxes

               and minority interest

(399,830)

(862,266)

(197,917)

47,304

Income tax (recovery) (Note 15)

     Current

(31,492)

-

0

(13,933)

8,515

     Future

(38,269)

(39,415)

(5,900)

-

        Net loss before minority interest

(330,069)

(822,851)

(178,084)

38,789

Minority interest

71,955

179,382

0

0

        Net loss

$

(258,114)

$

(643,469)

$

(178,084)

$

38,789

Basic and diluted earnings(loss) per share

     Before income taxes and minority interest

$

(0.02)

$

(0.04)

$

(0.01)

$

0.00

     Before minority interest

$

(0.01)

$

(0.04)

$

(0.01)

$

0.00

     Net loss

$

(0.01)

$

(0.03)

$

(0.01)

$

0.00

Weighted average number

     of shares outstanding

24,155,896

21,792,268

17,335,814

17,335,814

The accompanying notes are a part of these financial statements.

F-3

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED AUGUST 31, 2003, 2004 AND 2005,

AND THE FOUR MONTHS ENDED DECEMBER 31, 2005

				TOTAL
	COMMON	STOCK	RETAINED	STOCKHOLDERS'
	SHARES	AMOUNT	EARNINGS	EQUITY
Balance at August 31, 2002	17,335,814	$ 2,320,783	$                     24,179	$            2,344,962
Adjustment due to acquisition Net Income	0 0	0 0	(2,320,683) 38,789	(2,320,683) 38,789
Balance at August 31, 2003	17,335,814	$ 2,320,783	$              (2,257,715)	$                 63,068
Adjustment due to acquisition Net Loss	0 0	0 0	2,163,504 (178,084)	2,163,504 (178,084)
Balance at August 31, 2004	17,335,814	$ 2,320,783	$                 (272,295)	$             2,048,488
Shares issued to acquire subsidiary	2,000,000	-	(933,911)	(933,911)
Net Loss	-	-	(643,469)	(643,469)
Net Loss-Minority Interest	-	-	(179,382)	(179,382)
Balance at August 31, 2005	19,335,814	$ 2,320,783	$             (2,029,057)	$                291,726
Shares issued for debt settlement	15,451,000	921,411	-	921,411
Options exercised	24,000	240	-	240
Net Loss	-	-	(257,454)	(257,454)
Net Loss-Minority Interest	-	-	(72,615)	(72,615)
Balance at December 31, 2005	34,810,814	$ 3,242,434	$             (2,359,126)	$                883,308

The accompanying notes are a part of these financial statements.

F-4

CAPITAL RESERVE CANADA LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED AUGUST 31, AND

THE FOUR MONTHS ENDED DECEMBER 31, 2005

December

August

August

August

31, 2005

31, 2005

31, 2004

31, 2003

Operating Activities

  Net loss

$

(330,069

)

$

(822,851)

$

(178,084)

$

38,789

  Adjustments to reconcile net income (loss) to

net cash provided (used) by operating

activities:

Amortization

229,154

553,924

68,113

9,204

Accrued interest

0

(7,807)

0

0

             Future income taxes                                        (38,269)

            (39,415)               (5,900)

                        0

(Increase) decrease in operating assets:

Accounts receivable

(112,806

)

(64,754)

22,461

(11,681)

Corporation income taxes

(9,263

)

11,693

(11,693)

-

Work in process

45,270

(45,270)

-

-

Retainer on deposit with lawyer

                  0

15,000

(15,000)

-

Prepaid expenses and deposits

            9,925

(15,201)

(4,267)

-

Accounts payable and accrued liabilities

        (14,287)

(28,459)

129,386

11,137

Income and commodity taxes payable

(21,186

)

(16,328)

(4,958)

(892)

Cash provided ( used ) by operating activities

241,532

(459,468)

58

46,557

Financing Activities

  Shares issuances

        921,651

(933,911)

997,800

-

  Increase (decrease) in due to shareholder

             (132)

(6,593)

6,249

(9,337)

  Increase (decrease) in bank indebtedness

          48,000

-

(7,004)

(5,695)

  Share subscriptions received in advance

                   0

-

583,211

-

  Change in long-term debt

        (79,473)

(39,779)

        (19,902)

        (35,286)

  Due to affiliated company

       (842,968)

1,101,394

0

0

  Change in demand bank loan

58,873

312,167

0

0

Cash provided by financing activities

98,951

433,278

1,560,354

20,254

Investing Activities

  Increase in restricted cash

                  0

-

(45,000)

-

  Purchase of property, plant and equipment

        (15,593)

(584,276)

(159,724)

(56,601)

  Investment in Zone, net of cash acquired

     of $43,954

                   0

-

(156,046)

-

  Increase in term deposit

164,109

(580,254)

(300)

-

Cash provided (used) for investing activities

148,516

(1,164,530)

(361,070)

(56,601)

Increase (Decrease) in cash during the year

            5,936

(1,190,720

)

1,199,342

10,210

Cash and cash equivalents, beginning of year

18,832

1,209,552

10,210

-

Cash and cash equivalents, end of year

$

24,768

$

18,832

$

1,209,552

$

10,210

During the year ended August 31, 2005, the Company paid interest of $32,522 (2004 - $6,235; 2003 - $2,627).  As at August 31, 2005, 2004, and 2003, cash and cash equivalents is comprised solely of cash.

The accompanying notes are a part of these financial statements.

F-5

CAPITAL RESERVE CANADA LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

1.

Description of the Company

Capital Reserve Canada Ltd. (the "Company" or "CRC") was incorporated as a private corporation in the Province of Alberta on December 8, 1999, and is a reporting company registered with the U.S. Securities and Exchange Commission.  Pursuant to a share exchange agreement dated August 12, 2005, the Company effected a share exchange indirectly with the shareholders of KCP Innovative Services Ltd. ("KCP"), resulting in  Company acquiring  78.2% of the outstanding shares of KCP through the exchange of shares with the Company's wholly owned  subsidiary, Capital Reserve Canada Projects Ltd.  Capital Reserve Canada Projects Ltd. ("Projects") was incorporated as a private corporation in the Province of Alberta on August 2, 2005, for the purpose of completing the acquisition of KCP with the intent that Capital Reserve Canada Projects Ltd. and KCP would amalgamate upon the Company acquiring 100% of the issued and outstanding shares of KCP. This amalgamation was effected subsequent to the period covered by these financial statements.

Because the shareholders of KCP became the controlling shareholders of the Company, this transaction was accounted for as a reverse merger whereby KCP was deemed to be the acquirer as described more fully in Note 2.

KCP was incorporated as a private corporation named K C Pearson Consulting Inc. in the Province of Alberta on February 20, 1996.  The name was changed to KCP Innovative Services Inc. on May 22, 2003.  KCP has developed a series of devices that are used to diagnose the pay-zone in oil and gas wells.  The diagnostic information collected from these devices is used by production engineers to complete the well at the most efficient level.  KCP's customers are oil and gas companies.

2

Share exchange

On August 12, 2005, Projects issued 17,335,814 common shares in exchange for 17,335,814 common shares (78.2%) of KCP Innovative Services.  CRC then issued 17,335,814 Class A common shares to the shareholders of Projects in exchange for 17,335,814 common shares from Projects.

The share exchange transaction between CRC (legal parent) and KCP (legal subsidiary) was accounted for as a reverse merger in accordance with U.S. generally accepted accounting principles.  As a result, no goodwill is accounted for in this transaction.  

Application of the reverse merger accounting results in the following:

(a)

KCP is deemed to be the parent company and CRC is deemed to be the subsidiary company for accounting purposes;

(b)

The financial statements of the combined entity are issued under the name of the legal parent, CRC, but are considered a continuation of the financial statements of the legal subsidiary, KCP; and

(c)

Since KCP is deemed to be the acquirer for accounting purposes, its assets and liabilities are included in its consolidated balance sheet at their historical carrying values.

(d)

The remaining shareholders holdings of KCP (21.8%) are presented as a minority interest in these financial statements.

Following the share exchange transactions as at the fiscal year ended December 31, 2005, CRC owns indirectly 78.2% of KCP.

F-6

3.

Summary of significant accounting policies

These consolidated financial statements include the accounts of the Company and its legal subsidiary, KCP, and have been prepared in accordance with U.S. generally accepted accounting principles.

(a)

Principles of consolidation

The consolidated financial statements include the accounts of the KCP and its wholly owned subsidiary, Zone Technologies Ltd. (“Zone”) through to September 28, 2005 when Zone was dissolved and the assets were rolled up to KCP.   All significant intercompany transactions and balances are eliminated in the preparation of these consolidated financial statements.

(b)

Cash and cash equivalents

Cash and cash equivalents consist of cash on deposit and short-term investments with original maturities of 90 days or less and are recorded at the lower of cost and market value.

(c)

Leases

Leases are classified as either capital or operating.  Leases which transfer substantially all of the benefits and risks of ownership of property to the Company are accounted for as capital leases.  The capitalized lease obligation reflects the present value of future rental payments, discounted at the appropriate interest rates.  The amount capitalized as the cost of the asset is amortized as set out below under property, plant and equipment.  Rental payments under operating leases are expenses as incurred.

(d)

Property, plant and equipment

Property, plant and equipment are recorded at cost and are depreciated using the diminishing balance method at the rates set out below which are estimated to be sufficient to depreciate the cost of the assets to residual value by the expiration of their useful lives:

Building

- 4% diminishing balance

Equipment

- 20% diminishing balance

Furniture and fixtures

- 20% diminishing balance

Vehicles

- 30% diminishing balance

Computer and software

- 30% diminishing balance

(e)

Goodwill and intangible assets

The cost of intangible assets is amortized over the period in which the benefits of such assets are expected to be realized, principally on a straight-line basis.  The Company's policy is to amortize client relationships with determinable lives over four years.  Contract backlog is amortized over the estimated period of completion, generally less than one year.  Technology is being amortized over an estimated life of four years.  Goodwill is not amortized but is evaluated annually for impairment by comparing the fair value of the reporting unit, determined on a discounted after-tax cash flow basis, to the carrying value.  An impairment loss would be recognized if the carrying value of the goodwill exceeds its fair value.  At December 31, 2005, the Company evaluated its goodwill and determined that it was not presently impaired.  Therefore, no impairment l oss has been recognized.

F-7

(f)

Future income taxes

The Company uses the liability method of accounting for income taxes.  Under this method, future income tax assets and liabilities are determined based on differences between financial reporting and the tax bases of assets and liabilities and measured using the substantively enacted rates and laws that will be in effect when these differences are expected to reverse.

(g)

Per share amounts

Basic earnings (losses) per share are calculated using the weight-average number of shares outstanding during the year.  Diluted earnings (losses) per share are calculated based on the treasury stock method, which assumes that any proceeds obtained on exercise of warrants would be used to purchase common shares at the average price of shares issued during the year.  The weighted average number of shares outstanding is then adjusted by the net change in the number of shares.  At December 31, 2005 there were no warrants outstanding and at August 31, 2005 and 2004, it was determined that any warrants outstanding would have an antidilutive effect, therefore they have been excluded for purposes of determining the diluted loss per shares.

(h)

Stock-based compensation and other stock-based payments

The Company accounts for stock options and warrants issued to its directors using the fair value-based method of accounting for stock-based compensation.  Compensation expense for the warrants is measured at the fair value at the date of issuance using the Black-Scholes option valuation model.

(i)

Revenue recognition

The Company's services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices based upon daily, hourly or job rates.  Customer contract terms do not include provisions for significant past service delivery obligations.  Revenue is recognized when services and equipment rentals are rendered and only when collectibility is reasonably assured.

(j)

Statement of cash flows

The statement of cash flows has been prepared using the indirect method.

(k)

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies.

F-8

CAPITAL RESERVE CANADA LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

4.

Basis of presentation and going concern

These financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations.

Because of the operating losses for the four months ended December 31, 2005, and for the years ended August 31, 2005 and 2004, the Company's continuance as a going concern is dependent upon its ability to obtain adequate financing and to reach profitable levels of operation.  Management believes it has sufficient capital by way of cash on hand and term deposits to allow it to continue as a going concern.

5.

Acquisition of Zone Technologies Ltd.

On June 11, 2004, KCP acquired 100% of the issued and outstanding shares of Zone Technologies Ltd. ("Zone") from an existing shareholder and an unrelated party.  The transaction was recorded at the exchange amount, as the change in ownership interests in Zone was substantive.

Consideration for the acquisition was $782,500 and it consisted of 1,294,444 common shares of KCP at a fair value of $0.45 per share and cash of $200,000.  Zone was an Alberta-based company focused on providing diagnostic and consulting services to customers exploring for coal based methane gas.  The fair value of the acquisition was determined through an independent third party appraisal of Zone as at the date of acquisition.

The acquisition was accounted for using the purchase method and the results of operations subsequent to the acquisition are included in these consolidated financial statements.  The fair value of the net assets acquired is summarized as follows:

Cash

$

43,954

Accounts receivable

21,414

Property, plant and equipment

48,000

Zone Technology (Note 9)

277,000

Backlog

196,600

Customer relationships

184,000

Goodwill

138,155

909,123

Accounts payable and accrued liabilities

4,407

Income and commodity taxes payable

36,016

Future income tax liability

86,200

126,623

Net assets acquired

$

782,500

Cash consideration

200,000

Share consideration (Note 13)

582,500

Purchase price

$

782,500

The goodwill is non-deductible for income tax purposes. On September 28, 2005, Zone was dissolved and the assets were rolled up to KCP.

F-9

6..

Restricted cash

Trust agreements with investors require the Company to hold “in trust” the amount of $45,000 until the Company commences trading.  During 2006, the Company met this requirement and those funds were released from their restrictions..

7.

Term deposits

The term deposits mature on March 14, 2006 and October 28, 2006 and bear interest at 1.4% per annum and at prime less 2.25% per annum respectively.

8.

Property, plant and equipment

       Net

Net

     Accumulated      December 31,       August 31,

Cost

Amortization

 2005

2005

Building

$

-

$

-

$

-

$       1,682

Equipment

129,117

44,978

84,139

88,674

Furniture and fixtures

101,730

40,476

61,254

75,793

Vehicles

741,806

390,456

351,350

501,929

Computer and software

26,954

18,063

8,891

12,702

$

999,607

$

493,973

$

505,634

$

680,780

9.

Intangible assets

Net

Net

Accumulated       December 31,       August 31,

Cost

Amortization

 2005

2005

PID Technology

$

1

$

-

$

1

$

1

Zone Technology

277,000

107,701

169,299

192,382

Backlog

196,600

196,600

-

-

Customer relationships

184,000

71,541

112,459

127,792

$

657,601

$

375,842

$

281,759

$

320,175

Perforation Inflow Diagnostics ("PID")

Effective January 1, 2004, KCP acquired from a group of individuals, one of which was a shareholder of KCP, a computer modeling system to analyze the underground formations that contain natural gas and oil.  Consideration consisted of 14,966,270 common shares of KCP.  As this related party transaction did not result in a substantive change in the ownership interest of the technology, the technology has been recorded at the nominal carrying value of $1.

Zone Technology

Effective June 11, 2004, KCP acquired 100% of the outstanding shares of Zone Technologies Ltd. Zone Technologies Ltd. has developed a computer modeling system to explore the underground formations that contain coal based methane gas.  Zone Technologies Ltd. was dissolved on September 26, 2005 and the assets were rolled up to KCP.

F-10

10.

Operating line of credit

The Company has an operating line of credit to a maximum of $95,000.  Interest is charged monthly on the

outstanding balance at the rate of Bank of Canada prime plus 1%.  The interest rate at December 31, 2005 was 6.0%.

11.

Demand bank loan

The bank loan is repayable over 60 months commencing March 2005 and ending in February 2010.  Monthly blended payments of principal and interest are $8,313 with an interest rate of 6.375%.  The first payment was $4,130 and was made on March 18, 2005.  One half of the loan was drawn on February 18, 2005 upon completion of Slick Line unit 101.  The balance was drawn on March 31, 2005 upon completion of Slick Line unit 102. Two Sterling Slick Line units, included in property, plant and equipment, are pledged as collateral for this loan.

Aggregate principal payments required on the vehicle loan over the next five fiscal years are as follows:

2006

$

53,220

2007

82,231

2008

87,597

2009

93,380

2010

47,612

$

364,040

12.

Long-term debt

The vehicle loan is repayable over 72 months commencing in August 2003 and ending in July 2009.  The blended payments of principal and interest are $1,027 per month with an interest rate of 7.99% per annum.  A 2003 Dodge truck, included in property, plant and equipment, is pledged as collateral for this loan.

Aggregate principal payments required on the vehicle loan over the next five fiscal years are as follows:

2006

$

6,621

2007

10,133

2008

10,973

2009

10,856

$

38,583

13.

Share capital

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

On January 1, 2004, KCP issued 14,966,270 common shares in exchange for the PID technology.  An independent valuation of the PID technology estimated a value of $450,000 at the date of the transaction.  The number of shares issued as a result of the transaction resulted in the ownership interest of the technology remaining the same both prior and subsequent to the transaction.  As there was not a substantive change in the ownership interest of the technology, the transaction was recorded at the nominal carrying value of $1.

F-11

13.

Share capital (continued)

On January 15, 2004, KCP reached an agreement with unrelated parties to issue 2,150,000 common shares of KCP in connection with their commitment to pay certain legal fees.  These parties agreed to pay legal fees to a maximum of $100,000 in connection with KCP obtaining a listing on the TSX Venture Exchange . On January 29, 2004, $15,000 was received and deposited in a trust account at KCP's lawyers and the associated 322,500 common shares were issued.  The remaining $85,000 was received on September 23, 2004 and the associated 1,827,500 shares were issued at that time.

On June 11, 2004, KCP issued 2,302,897 common shares at $0.45 each to qualified investors as part of a private placement closing in exchange for cash consideration of $1,036,302.  Share issuance costs of $53,502 have been deducted from the gross proceeds.

On June 11, 2004, KCP issued 1,294,444 common shares as part of the purchase of Zone Technology Ltd.  More information relating to this issuance is described in note 5.

On September 27, 2004, KCP issued 1,296,006 common shares for $0.45 each to qualified investors as part of a private placement closing for cash consideration of $583,203.

On June 30, 2005 KCP issued 315,953 common shares for $0.45 each to qualified investors as part of a private placement closing for cash consideration of $142,179.

KCP cancelled 155,556 common shares on April 12, 2005 for $0.45 each from two qualified investors for cash consideration of $70,000.

On August 11, 2005, KCP exchanged 17,335,814 shares for 17,335,814 shares of Projects.  Projects then exchanged 17,335,814 Projects shares for 17,335,814 of CRC, resulting in CRC having an indirect majority position in KCP.  This transaction was accounted for as a reverse merger in which KCP is considered to be the acquirer and CRC is considered to be the acquire.  Prior to the transaction, CRC had 2,000,000 outstanding shares.  As a result of the reverse merger, those outstanding shares are regarded as newly issued as part of the transaction.

14. Warrants

On January 15, 2004, KCP issued Warrants to purchase 1,500,000 common shares to two Directors.  The warrants are not transferable except in limited circumstances.  Each warrant entitles the holder thereof to acquire one common share at a price of $0.03 each, subject to anti-dilution protection.

The fair value of the warrants of $15,000 was determined at the date of grant using the Black-Scholes option-pricing model using the following assumptions:

Risk-free interest rate

3.45%

Expected life of the award

3 years

Volatility

0.521

Dividend yield

0.0

A share based compensation expense for these warrants has not been recognized in the financial statements as the vesting condition was not met and the warrants were cancelled on December 31, 2005.

F-12

15.

Income taxes

Details of the components of the income tax expense are as follows:

December

August

August

August

31, 2005

31, 2005

31, 2004

31, 2003

Net income (loss) for the year before income taxes

$

(399,830)

$

(862,266)

$

(197,917)

$

47,204

Statutory income tax recovery

16.7%

16.7%

16.7%

17.12%

Computed income tax recovery

(66,772)

(143,998)

(33,052)

8,515

Adjustment in income tax resulting from:

Unrecorded potential income tax benefits of

operating losses

0

85,353

13,360

0

Rate differential on losses carried back for refund

0

0

(2,012)

0

Non-deductible expenses and other items

(2,989)

19,230

1,871

434

$

(69,761)

$

(39,415)

$

(19,833)

$

8,515

The income tax effect of the significant components of the Company’s future tax assets and liabilities is as follows:

Future tax assets

December

August

August

August

31, 2005

31,2005

31, 2004

31, 2003

Net non-capital loss carryforwards

$

122,050

$

70,771

$

13,300

$

0

Share issue costs

0

0

7,900

0

Total gross future tax assets

122,050

70,771

21,200

0

Less: valuation allowance

(122,050)

(70,771)

(21,200)

0

Net future tax asset

$

0

$

0

$

0

$

0

Future tax liabilities

Carrying value of intangible assets in excess of tax value

$

32,254

$

38,670

$

76,600

$

0

Carrying value of capital assets in excess of tax value

(29,638)

2,215

3,700

0

$

2,616

$

40,885

$

80,300

$

0

In assessing the valuation of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will be realized.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income and tax planning strategies.

Due to the Company's accumulated deficit and current stage of operations, the Company believes there is significant uncertainty over the amount of and timing when non-capital losses may be claimed against future taxable income.  Consequently, a valuation allowance has been provided against the value of the future tax asset.  The valuation allowance is reviewed periodically and when and if the more likely than not criterion is met for accounting. purposes, the valuation allowance will be adjusted by a credit or charge to earnings in that period.

F-13

1.

Income taxes (continued)

The Company has non-capital losses carried forward for income tax purposes in the amount of approximately $692,000 at December 31, 2005 that may be applied against future taxable income.  The losses begin to expire in 2011.  The potential benefits relating to these amounts have not been recognized in the financial statements.

16.

Related party transactions

The amounts due to the shareholders are non-interest bearing, unsecured and due on demand.

The Company periodically borrows funds from a director.  As at December 31, 2005, there were no terms for the repayment of this loan and as such, the Company has classified this loan as a current liability.

Effective January 1st, 2004, KCP acquired from a group of individuals, one of whom was Mr. Ken Pearson, an Insider of KCP, a computer modeling system to analyze the underground formations that contain natural gas and oil.  Consideration consisted of 14,966,270 KCP Shares, and Mr. Pearson received certain of those shares.  As Mr. Pearson was an Insider of KCP, the acquisition of the PID Technology was considered a Non-Arm’s Length

On June 14, 2004,KCP acquired all of the issued and outstanding shares of Zone Technology.  Mr. Pearson director and officer of KCP, received a total of 869,444 KCP shares pursuant to the acquisition.

On January 28, 2004, the Company appointed a Director who is an employee of one of the Company's customers.  During the year ended August 31, 2005, the Company earned approximately $97,000 of revenues from this customer in the normal course of operations.  The transactions have been recorded at the exchange amount.

On August 8, 2005 Capital Reserve Canada Ltd. indirectly acquired 78.2% of the issued and outstanding shares of KCP and issued issued a total of 7,585,814 Class A common shares to Ken Pearson, director and officer  of KCP and 4,000,000 Class A common shares to 966358 Alberta Ltd., a company of which Mr. James Baker, a director and officer of Capital Reserve Canada,  is the controlling shareholder.  The 4,000,000 Class A common shares were later transferred to Projex Corporation.

On November 23, 2005, Capital Reserve Canada Ltd. issued a total of 500,000 Class A common shares to Sunnybank Investments Ltd., company controlled by a director of KCP and Capital Reserve Canada Ltd. and 1,000,000 shares to Ken Pearson, a director and officer of KCP and Capital Reserve Canada Ltd.

During the four months period ended December 31, 2005, the Company paid a shareholder, director and officer $20,000 (2005 - $63,880, 2004 - $43,976) in consulting fees which are included in general and administrative expenses.

During the four months period ended December 31, 2005, the Company paid a shareholder director and officer $32,000 (2005 - $108,000) in salaries and wages which are included in general and administrative expenses.   The Company also paid the wife of a shareholder, director and officer $12,000 (2005 - $33,000) in salaries and wages for office manager and secretarial work which are included in general and administrative expenses.

F-14

17.

Commitment

The Company leases shop and office space under operating leases.  The future office and shop lease payments in each of the next three years are as follows:

2006

$

28,000

2007

42,000

2008

5,250

18.

Financial instruments

Credit risk

The Company's sales are to customers in the oil and gas industry, which results in a concentration of credit risk.  The Company generally extends unsecured credit to these customers, and therefore the collection of receivables may be affected by changes in economic or other conditions and may accordingly impact the Company's overall credit risk.  Management believes the risk is mitigated by size, reputation and diversified nature of the companies to which the Company extends credit.  At December 31, 2005 one customer accounts for about 15% ( 2005, four customers account for 60%; 2004 two customers account for 94%) of the accounts receivable.

Interest rate risk

The Company is exposed to interest rate risk to the extent that it has bank indebtedness that carries a variable rate of interest.  Notwithstanding this, unless otherwise indicated, it is management's opinion that the Company's exposure to interest rate risk arising from these financial instruments is insignificant.

Fair value of financial assets and liabilities

The Company has estimated the fair value of its financial instruments, which include cash and cash equivalents, cash-restricted, term deposit, accounts receivable, bank indebtedness, accounts payable, accrued liabilities, due to shareholder and long-term debt.  The Company used valuation methodologies and market information available at December 31, 2005 and has determined that the carrying amounts of such financial instruments approximate fair value in all cases.

Significant customers

During the four months period  ended December 30, 2005,  only one customer provided more than 10% of the Company's total revenues representing 15% of revenues for the period. In management's opinion, the future viability of the Company is not dependent upon any one of these major customers.

Change of year end date

KCP Innovative Services Inc. changed its year end date from August 31 to December 31, to have the same year end as Capital Reserve Canada Ltd., its parent company.

19.

Segmented information

The Company operates in one geographic segment within one industry segment.  Oilfield services are provided in Canada.

F-15

1.

Subsequent Events

On February 3^rd, 2006, the Company issued a further 4,834,300 shares of Class A common stock for the remaining 21.8% of the shares of KCP Innovative Services Inc. and Capital Reserve Canada Projects Ltd. effected an amalgamation with KCP Innovative Services Inc.(“KCP”) with KCP the surviving entity.  KCP is now a wholly owned subsidiary of the Company.   

On February 15, 2006, the Company received notification of the conversion of the remaining balance of the convertible loans in the amount of $226,065US and issued a total of 4,521,307 Class A common shares.  This was full and final settlement of all of the outstanding debt under the convertible notes.

On June 16, 2006, amended July 5, 2006 the Company entered into an agreement to acquire all of the major assets of Southbend Power Ltd., which include a water diversion permit, 147 acres of surface rights with a water pumping station, and certain mineral rights, in exchange for 13,200,000 Class A common shares of the Company.  Share certificates have been issued for the 13,200,000 shares, but these are held in trust pending  completion of due diligence and closing.  There is no cash being considered in the agreement.  The shares were valued at .50 USD at the time of the Letter of Intent. The Company is undertaking due diligence on this acquisition at the time of this report and the estimated closing date is on or before July 28, 2006. The Company established a new subsidiary, Two Hills Environmental Inc, to acquire these assets.

F-16

EX-4

                                                                                                        Date: August 24^th, 2004

8704 .. 51 AVENUE EDMONTON. ALBERTA

                          T6E SEB

PH, (403) 46S-0041

Dear Sirs:

This is to confirm that I/we are leasing the property municipally known as:- 4303-74 Avenue

Approximately 6500 sqft up & down_____________________________________________

On the following basic terms:

1.

That I/we lease this land/building for the term of   3  years at a monthly rental of $3500.00 & gst the lease commencing  from Oct. 15/04 rent to be adjusted with real property taxes.  The rent shall be due and payable in advance on the 1^st day of each and every month of the said term.

2.       Such lease contains the following covenants and provisions:

•

Lessee to pay the rent in advance promptly when due on the 1^st of every month of the said term.  Rents not paid promptly on due date shall then be deemed to be in arrears.  Time to be strictly of the essence.

•

Lessee to pay for the cost of all utilities and business tax, license or there rates all utilities.

•

Lessee to abide by and comply with all lawful by-laws. rules and regulations by any municipal or other authority.

•

Lessee to indemnify and save the Lessor harmless from and against all loss, expense, damages, claims, and costs. Lessor shall not be liable for any damage to any property at any time in the demised premises occasioned by negligence, default or misfeasance of Lessee or any other tenant.

•

Lessee to maintain and insure and keep in good order all glass, including plate glass and glass doors. and protect water and drain pipes, water closets, faucets, sinks and accessories from frost during winter and cold weather.

•

Lessee to repair all damages, wear or tear which would occur in conducting their business, normal wear and tear only excepted.

•

Lessee to pay interest to Lessor at two (2%) per cent per month for rent In arrears.

•

Lessee to pay all costs and attorney fees between solicitor and client on account of any default by Lessee.

•

Lessee allow Lessor to distrain for rent, including accelerated rent.

•

Lessor will pay real property taxes and fire insurance premium monthly.

•

It is understood and agreed that there are no representations or warranlies made by the Lessor or any of his representatives affecting the said property, other than as expresses herein in writing.

•

Special Conditions:Paint warehouse and office , walls and carpet, up& down where there is no rubber mats.  All lights, furnace & unit heater working.  All door to be in good working order.  Block Walls between bays.  Ceiling tiles painted.  Overhead panel (Bent); damage acknowledged.  Lessor to pay Lessee lease unitl rented.  Utilities on separate meters.

3.

The formal lease shall be prepared by the Lessor and shall be executed by the Lessee and the Lessor respectively on or before the commencement of the said term.  Pending execution of the formal lease, this Interim Lease Agreement upon execution shall constitute a lease and the parties hereto shall be bound by the covenant’s and provisos herein set forth.

4.

In order to bind this agreement I/We hereby hand you the sum of $7000.00 to be applied as rent on the first one month and the last one month of the tenancy, provided that if I/We  as Lessee(s) fail to complete a formal lease with the Lessor or fail to comply with the terms and conditions of this interim lease agreement the sum of money hereby tendered shall become forfeit to the Lessor as liquidated damages and I hereby grant the Lessor permission to turn over to you as agreed compensation for services rendered, that portion of the sum of money that would have equaled your commission had a sale been consummated, and this agreement shall be null and void, at the Lessors option.

This agreement shall enure to and be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto.

Witness__________________________________

Lessee:_____”Ken Pearson, KCP Innovative Services Inc”

                                    Address:____________________

                        Phone – Res___________Bus 913-2033

Receipt of deposit is hereby acknowledged:

Moses Sabo of Sabo Bros.  Realty Ltd.  Is

Acting as Dual Agent for the

Seller X

PurchaserX

Solicitor________________________________________

ACCEPTANCE

I/We the undersigned, the owners of the above described property hereby accept the above offer according to its terms and conditions.  I hereby authorize you to deduct from the deposit the commission payable, a and I hereby irrevocably assign the rentals to you to cover any unpaid balance of the commission, and I hereby charge this property with such sum, and I direct the Lessee to pay the rent to you my agent as the same falls due until the commission is paid In full.  In the event the sum of the money noted above shall become forfeit to the Lesser, as herein before provided, I then authorize you to deduct from the said deposit a sum to your equal commission as agreed compensation for services rendered.

Witness__________________________________

Lessor:”John Sabo Enterprises ltd”

EX-4

MEMORANDUM OF AGREEMENT made as of the 1^st day of February, 2005.

BETWEEN:     KCP INNOVATIVE SERVICES INC., a corporation incorporated pursuant to the laws of Alberta,

(hereinafter referred to as the “Corporation”)

OF THE FIRST PART

-and-

PROJEX CORPORATION LTD., a corporation incorporated pursuant to the laws of the Province of Alberta,

(hereinafter referred to as the “Consultant”)

OF THE SECOND PART

MANAGEMENT AGREEMENT

WHERAS:

1.

The Corporation is engaged in the business of Oil& Gas Services.

2.

The Corporation has agreed to retain the management services of The Consultant; and

3.

The parties wish to reduce their agreement to writing;

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

1.

The effective date of this Agreement is the 1^st day of January 2004 (the “Effective Date”).

2.

The engagement of The Consultant by The Corporation shall commence of the Effective Date and shall continue unless terminated earlier in accordance with this Agreement.

3.

The Consultant shall provide to The Corporation all such management consulting, organizational, development and promotional services as The Corporation shall from time to time reasonably required and shall provide all such services associated with the office of Vice President Corporate Development of The Corporation (hereinafter called the “Services”).

4.

The Consultant shall retain James Baker to perform and carry out the Services.  The parties hereto agree and acknowledge that this Agreement is conditional upon the Services being performed by James Baker.

5.

The Consultant covenants and agrees to:

(a)

provide Services to the Corporation

(b)

have its personnel devote such time as is necessary for the efficient and expedient provision of the Services;

(c)

be responsible for and give adequate attention to the faithful prosecution and completion of the Services in the manner which is to the greatest advantage of The Corporation;

(d)

carry out to the best of its ability all lawful directions and instructions and resolution of the Board of Directors of The Corporation within a reasonable time; and

(e)

not enter into any contracts or incur any obligations or expenses which, in any single transaction or in an any series or related transactions, create liability or obligation in excess of $5,000, without the approval of the Board of Directors of The Corporation.

6.

The Corporation covenants and agrees that in consideration of the Services  to be rendered by The Consultant:

(a)

The Corporation shall pay to The Consultant the amount of FIVE THOUSAND ($5,000) DOLLARS per month for the term of this Agreement; and

(b)

The Corporation shall reimburse The Consultant for its reasonable expenses incurred in providing the Services to The Corporation except that The Corporation shall not be responsible for providing a vehicle to The Consultant.

(c)

The Consultant agrees that, except for expenses, no payment will be made until sufficient capital financing is raised and that the monthly payments accrue until then.  Should no capital financing be raised, The Corporation has no obligation to the Consultant to pay anything.

7.

This Agreement may be terminated:

(a)

by the mutual agreement of the parties hereto;

(b)

by the Corporation giving ninety (90) days’ written notice to The Consultant;

(c)

by the Consultant giving ninety (90) days’ written notice to The Corporation; or

(d)

by the Corporation without notice if terminated for just cause.

8.

The Consultant shall not be entitled to assign or transfer the whole or any part of this Agreement without prior written consent of The Corporation.

9.

The Consultant covenants and agrees, during the term of this Agreement and thereafter to not release or disclose any information respecting the business and affairs of The Corporation, except as may be reasonable required in carrying out the Services.

10.

This Agreement may not be amended except in writing.

11.

This Agreement shall be governed in accordance with the laws of the Province of Alberta.

12.

Unless the context otherwise requires.

(a)

words importing either male persons or corporations include male persons, female persons and corporation; and

(b)

Words in the singular include the plural and words in the plural include the singular.

13.

Any notice or other communications required or permitted to be given or served pursuant to the Agreement shall be in writing and shall be delivered personally or may be mailed by registered mail, postage prepaid, as follows:

As to

The Corporation:

8212-17^th Avenue

Edmonton, AB T6K 2C8

As to

The Consultant:

112 Weber Close

Edmonton, AB T6M 2H1

Or such other address of which any one of the parties may have been notified in writing.  Any such notice shall be delivered by hand or by mail and shall be deemed to have been given, if delivered by hand, on the day delivered, and if mailed, five (5) days following the date of posting, provided that if there shall be between the time of mailing and actual receipt of the notice a mail strike, slowdown or other labor dispute which might affect delivery of such notice by the mails, then such notice shall be effective only if actually delivered.

14.

The parties covenant and agree to execute such further documents and assurances as counsel for either deem necessary to give full effect to the true intent and means of this Agreement.

15.

This Agreement constitutes the entire and final agreement between the parties with respect to all matters herein and its execution has not been induced by, nor has either of the parties relied upon nor do they regard as material, any representations or writings whatsoever not incorporated herein and made apart hereof.

16.

This Agreement shall enure to the benefits of and shall be binding upon the parties hereto and their respective successors and permitted assigns.

17.

This Agreement shall enure to the benefits of and shall be binding upon the parties hereto and their respective successors and permitted assigns.

IN WITNESS WHEREOF

of the parties hereto have properly executed this Agreement as of the day and year above written.

[THE CORPORATION]

Per: “Ken Pearson”

[THE CONSULTANT]    

Per: “James Baker”

EX-4

EMPLOYMENT AGREEMENT

This Agreement made as of the 1^st day of February, 2005

BETWEEN:

KCP INNOVATIVE SERVICES INC. (KCP)

And

KEN PEARSON (EMPLOYEE)

1.0

TERM

1.1

The term of the employment of the Employee shall be on a full time basis commencing February 1^st, 2005.

2.0

SALARY

2.1

The monthly rate of the employee for all hours worked will be $8,000.00/month and can be paid semi-monthly at the employee’s discretion.  The employee will be subject to a performance review periodically by management.  At the end of a six month period, a salary review will be conducted and further salary reviews will be on a semi-annual basis thereafter.

3.0

EMPLOYEE BENEFITS

3.1

Employee will have access to any group benefits plan providing basic services of life insurance, accidental death and dismemberment insurance, long term disability benefits, extended health care benefits and basic dental care.  

4.0

COURSES

4.1

A copy of our company policy on staff training and further education is attached as Schedule A.  Such training will be undertaken at the employee’s discretion only during the course of employment.

5.0

FUTURE ROLE OF EMPLOYEE

5.1

The Employee will fill the role The President will report directly to the CEO and will be responsible for overseeing, guiding, and shaping day to day activities of the field operators of the firm.  The President role will be detailed and updated periodically in a job description.

6.0

EXPENSE REIMBURSEMENT

6.1

KCP shall reimburse the Employee for all out-of-pocket expenses actually and reasonably incurred by him in connection with project, promotional and administrative activities; provides to KCP an itemized written account and receipts of such expenses acceptable to KCP incurred by the Employee.  Such expenses shall be paid by KCP to the Employee within fifteen days following the end of the month in which such expenses have been incurred by the Employee.

7.0

INTELLECTUAL PROPERTY

7.1

In consideration of the Employee entering into this Employment Agreement with KCP, the Employee agrees that any inventions and any other information acquired, generated or developed through the performance of the work under this Employment Agreement, shall be the sole property of KCP and shall not be used, published, patented, copyrighted or disclosed by the Employee without prior written consent of KCP.

All materials, reports, notes, studies, inventions and confidential information of any kind whatsoever developed by the Employee in the performance of work shall remain the property of KCP.  The Employee shall inform KCP of all such materials, report, notes, studies, inventions and confidential information and shall, upon KCP request, deliver such materials, reports, notes, studies, inventions and confidential information to KCP.

8.0

CONFIDENTIALITY

A copy of our company policy on confidentiality is attached as Schedule B, the terms of which are deemed to be incorporated herein.

9.0

STOCK OWNERSHIP

The Employee agrees to obey all policies set out by the Board of KCP with respect to the disposition shares by the employee.

IN WITNESS WHEREOF the parties have duly executed this Agreement as of the date first written above.

“James Baker”___________________

Per: KCP Innovative Services Inc.

“Faye Pearson”____________________

“Ken Pearson”__________________

Witness

Employee

EX-4

EMPLOYMENT AGREEMENT

This Agreement made as of the 1^st day of February 2005

BETWEEN:

KCP INNOVATIVE SERVICES INC. (KCP)

And

FAYE PEARSON (EMPLOYEE)

1.0

TERM

1.1

The term of the employment of the Employee shall be on a full time basis commencing February 1^st, 2005.

2.0

SALARY

2.1

The monthly rate of the employee for all hours worked will be $3000.00/month and can be paid semi-monthly at the employee’s discretion.  The employee will be subject to a performance review periodically by management.  At the end of a six month period, a salary review will be conducted and further salary reviews will be on a semi-annual basis thereafter.

3.0

EMPLOYEE BENEFITS

3.1

Employee will have access to any group benefits plan providing basic services of life insurance, accidental death and dismemberment insurance, long term disability benefits, extended health care benefits and basic dental care.  The cost of these benefits will be shared between the Employee and KCP.  Employee will be eligible for the benefits plan after three months of employment pending the implementation of said plan.

4.0

COURSES

4.1

A copy of our company policy on staff training and further education is attached as Schedule A.  Such training will be undertaken at the employee’s discretion only during the course of employment.

5.0

FUTURE ROLE OF EMPLOYEE

5.1

The Employee will fill the role of Office Manager and Secretary.  The Office Manager will report directly to the President and will be responsible for day to day activities of the office.

6.0

EXPENSE REIMBURSEMENT

6.1

KCP shall reimburse the Employee for all out-of-pocket expenses actually and reasonably incurred by him in connection with project, promotional and administrative activities and which have been authorized by KCP; provided that the Employee provides to KCP an itemized written account and receipts of such expenses acceptable to KCP incurred by the Employee.  

7.0

INTELLECTUAL PROPERTY

7.1

In consideration of the Employee entering into this Employment Agreement with KCP, the Employee agrees that any inventions and any other information acquired, generated or developed through the performance of the work under this Employment Agreement, shall be the sole property of KCP and shall not be used, published, patented, copyrighted or disclosed by the Employee without prior written consent of KCP.

All materials, reports, notes, studies, inventions and confidential information of any kind whatsoever developed by the Employee in the performance of work shall remain the property of KCP.  The Employee shall inform KCP of all such materials, report, notes, studies, inventions and confidential information and shall, upon KCP request, deliver such materials, reports, notes, studies, inventions and confidential information to KCP.

8.0

CONFIDENTIALITY

A copy of our company policy on confidentiality is attached as Schedule B, the terms of which are deemed to be incorporated herein.

IN WITNESS WHEREOF the parties have duly executed this Agreement as of the date first written above.

“James Baker”

Per: KCP Innovative Services Inc.

“Ken Pearson”

“Faye Pearson”

Witness

Employee

EX-4

KCP Innovative Services Inc.
Commitment Letter #2

March 22, 2005

March 22, 2005

KCP Innovative Services Inc.
430474 Avenue

Edmonton, AB

T6B 2K3

Attention: James Baker

Re: Credit Application

Dear James:

In accordance with your request, the Canadian Western Bank ("the "Bank") is pleased to advise that the following credit has been authorized subject to the terms and conditions outlined below.

“LENDER"

 CANADIAN WESTERN BANK ('the Bank')

“BORROWER"

KCP INNOVATIVE SERVICES INC. ('the Borrower')

“AMOUNT”

Subject to all conditions precedent being fulfilled the Bank is prepared to extend to the Borrower the following increase to your existing credit facility:

Principal Balance as at March 22, 2005

$208,560.27 CDN

Authorized Increase

$211 75000 CDN

Total Authorization

$420,310.27 CDN

The increased authorization will represent 65% of the capitalized costs of the Slickline Unit #1 02 to a maximum of $211,750.00.

The Bank is prepared to accept monthly payments giving effect to an equalized repayment over time subject to adherence to certain terms and conditions.

“PURPOSE OF LOAN

AND PROGRAM”

Loans to be advanced for the following program:

Term Loan #1: Currently advanced to assist in the financing of one (1) 2005 Sterling SlickLine Unit, Serial # 2FZACGDD45AN66422, complete with draworks, Wireline, Crane and all attachments and accessories. The additional advance will assist in the financing of (1)
2005 Sterling SlickLine Unit, Serial #2FZACGDD65AN66423, complete with draworks, Wireline, Crane and all attachments and accessories.

No material change may be made in the program without the prior written consent of the Bank. If, as the program progresses, it becomes evident that its cost will be greater than the above figures, the Bank may, at its sole discretion, withhold further disbursements of the loan until the amount of the overrun has been provided by the Borrower or otherwise arranged on a basis acceptable to the Bank. In the event that the cost exceeds, or the Borrower becomes aware that it will exceed, the above figures, the Borrower shall immediately notify and provide particulars to the Bank.

“INTEREST RATE”

Demand non-revolving equipment acquisition loan:

The rate of interest payable by the Borrower to the Bank in relation to the term loan to finance the aforementioned equipment purchases shall remain at current interest rate of 6.375%.

“REPAYMENT"

Equal blended monthly payment shall be increased to an amount sufficient to repay the loan in full over the original 60-month term and amortization.

 “SECURITY"

Refer attached Schedule "A".

“KEY COVENANTS/

CONDITIONS”

Prior to any advance, the Bank is to be satisfied with the value of the equipment to be financed. The Bank reserves the right to have the equipment inspected by a Bank appointed inspector/appraiser. The equipment purchased must meet the guidelines as set out in the Bank's Industrial Lending & Leasing Guidelines Policy. The Bank must be satisfied with the business, assets and financial condition of the Borrower and all security documentation and supporting agreements and documents must be completed in a form satisfactory to the Bank and its solicitors, and must be executed and registered, as appropriate.

“REPORTING REQUIREMENTS”

The Bank shall be provided with the annual "Audited" financial statements of KCP Innovative Services Inc., prepared by a firm of qualified professional accountants within 90 days of Borrower's fiscal year-end. If requested by the Bank, the Borrower shall also provide
profit and loss, cash budget and capital expenditures forecasts for
the current fiscal year, showing purpose and source of financing.

“CONDITIONS

PRECEDENT TO

DRAWDOWN"

The Bank shall be satisfied with the business, assets and financial condition of the Borrower and all security documentation and supporting agreements and documents must be completed in a form satisfactory to the Bank and must be executed and registered, as appropriate.

GENERAL
CONDITIONS·

Refer attached Schedule "B".

REVIEW·

All loans are subject to review at any time, and in any event will be reviewed annually, based on the year-end financial statements of the Borrower. The next review is to be completed by April 30 2005.

PREPAYMENT
OF TERM LOAN·

Under the Fixed rate option, prepayment of the loan is not

                                                             permitted without penalty.

COSTS·

All costs, including legal and appraisal fees incurred by the Bank relative to security and other documentation, shall be for the account of the Borrower and may be charged to the Borrower's deposit account when submitted.

FEES·

In consideration of the agreement to lend herein set out, the Borrower agrees to pay in Canadian funds, to the Bank a Commitment Fee equal to $500.00. The Borrower acknowledges and agrees that payment of the said Commitment Fee is in consideration of the
commitment to lend made by the Bank to the Borrower as set out in this Commitment Letter and in consideration of the time, effort and expenses by any and all of the Bank's employees and officers incurred in review and study of any documents, appraisals, financial statements,
plans, inspections, legal review, reservation of the funds, and loss of opportunity to use the funds elsewhere, it being further acknowledged and agreed by the Borrower that the actual determination of said costs and expenses so incurred is not feasible and that the said fees
represent a reasonable estimate of the value thereof.

NON.MERGER·

The terms and conditions set out herein shall not be superseded by nor merge in and shall survive the execution, delivery and/or registration of any instruments of security or evidences of indebtedness granted by the Borrower and/or any Guarantors hereafter, and the advancement of any funds by the Bank.

ACCEPTANCE·

To become effective, this Commitment Letter must be accepted in writing by the Borrower and Guarantors. If you are in agreement with the above terms and conditions, please sign and return the enclosed copy of this letter. This Commitment Letter will expire if not accepted by March 31 2005.

The foregoing Commitment Letter is offered in good faith and is to be held in strict confidence.

Yours truly,

CANADIAN WESTERN BANK

Jeff Suggitt

Gary Mitchell

Account Manager, Commercial Banking

AVP. Commercial Banking

Accepted this

___day of _______________, 2005.

KCP INNOVATIVE SERVICES INC.

Per:

__________________________________________

Per:

__________________________________________

10303 Jasper Avenue, Edmonton, Alberta, T5J 3N6 Ph: (780) 423-8801 Fax: (780) 421-0379

SCHEDULE "A"

SECURITY

All security documentation described herein must be prepared, executed and registered, as required by the Bank, prior to drawdown of any funds. The types of security, supporting resolutions and agreements to be provided by the Borrower to the Bank will be in form and content satisfactory to the Bank and/or its solicitors, and without restricting the generality of the foregoing, will include:

Held:

a)

General Security Agreement providing a first security interest in all present and after acquired property to be registered in all appropriate jurisdictions;

b)

Schedule to the General Security Agreement providing a first fixed charge over 2005 SlickLine Unit;

c)

Promissory Note(s);

d)

Evidence of insurance coverage for full insurable values of all assets of the Borrower taken as security by the Bank, to be provided to the Bank.

To be obtained

e)

Schedule to the General Security Agreement providing a first fixed charge over 2005 SlickLine Unit;

f)

Promissory Note(s);

g)

Evidence of insurance coverage for full insurable values of all assets of the Borrower taken as security by the Bank, to be provided to the Bank.

h)

Such further security instruments, assurances and supporting documents (including legal opinion of borrower's solicitor) as the Bank may deem necessary or advisable for the purpose of obtaining and perfecting the foregoing security.

The Borrower(s) and Guarantor(s) acknowledge and agree that the securities above described
provided by the Borrower(s), support all loans and secure all indebtedness of the Borrower to the
Bank.

SCHEDULE "B"

GENERAL CONDITIONS

Environment

The Borrower agrees:

a)

to obey all applicable laws and requirements of any federal, provincial, or any other governmental authority relating to the environment and the operation of the business activities of the Borrower;

b)

to allow the Bank access at all times to the business premises of the Borrower to monitor and inspect all property and business activities of the Borrower;

c)

to notify the Bank from time to time of any business activity conducted by the Borrower which involves the use or handling of hazardous materials or wastes or which increases the environmental liability of the Borrower in any material manner;

d)

to notify the Bank of any proposed change in the use or occupation of the property of the Borrower prior to any change occurring;

e)

to provide the Bank with immediate written notice of any environmental problem and any hazardous materials or substances which have an adverse effect on the property, equipment, or business activities of the Borrower and with any other environmental information requested by the Bank from time to time.

f)

to conduct all environmental remedial activities which a commercially reasonable person would perform in similar circumstances to meet its environmental responsibilities and if the Borrower fails to do so, the Bank may perform such activities; and

g)

to pay for any environmental investigations, assessments or remedial activities with respect to any property of the Borrower that may be performed for or by the Bank from time to time.

1)

If the Borrower notifies the Bank of any specified activity or the Bank receives any environmental information from other sources, the Bank, in its sole discretion, may decide that an adverse change in the environmental condition of the Borrower or any of the property, equipment, or business activities of the Borrower has occurred which decision will constitute, in the absence of manifest error, conclusive evidence of the adverse change. Following this decision being made by the Bank, the Bank shall notify the Borrower of the Bank's decision concerning the adverse change.

2)

If the Bank decides or is required to incur expenses in compliance or to verify the Borrower's compliance with applicable environmental or other regulations, the Borrower shall indemnify the Bank in respect of such expenses, which will constitute further advances by the Bank to the Borrower under this Agreement.

Acceleration

a)

All indebtedness and liability of the Borrower to the Bank payable on demand, is repayable by the Borrower to the Bank at any time on demand;

b)

All indebtedness and liability of the Borrower to the Bank not payable on demand, shall, at the option of the Bank, become immediately due and payable, the security held by the Bank shall immediately become enforceable, and the obligation of the Bank to make further advances or other accommodation available under the Credits shall terminate, if anyone of the following Events of Default occurs;

i)

the Borrower or any guarantor fails to make when due, whether on demand or at a fixed payment date, by acceleration or otherwise, any payment of interest, principal, fees, commissions or other amounts payable to the Bank;

ii)

there is a breach by the Borrower of any other term or condition contained in this
Commitment Letter or in any other agreement to which the Borrower and the Bank are parties;

iii)

any default occurs under any security listed in this Commitment Letter under the
headings "Specific Security" or "General Security" or under any other credit, loan or security agreement to which the Borrower is a party;

iv)

any bankruptcy, re-organization, compromise, arrangement, insolvency or
liquidation proceedings or other proceedings for the relief of debtors are instituted
by or against the Borrower and, if instituted against the Borrower, are allowed
against or consented to by the Borrower or are not dismissed or stayed within 60
days after such institution;

a receiver is appointed over any property of the Borrower or any judgement or order or any process of any court becomes enforceable against the Borrower or any property of the Borrower or any creditor takes possession of any property of the Borrower;

vi)

any adverse change occurs in the financial condition of the Borrower or any
guarantor.

i)

any adverse change occurs in the environmental condition of: the Borrower or any guarantor of the Borrower; or any property, equipment, or business activities of the Borrower or any guarantor of the Borrower.

MISCELLANEOUS CONDITIONS

a)

The rights and remedies of the Bank pursuant to this Letter of Commitment and the securities taken pursuant hereto are cumulative and not alternative, and not in substitution for any other rights, remedies, or powers of the Bank.

b)

 Any failure or delay by the Bank to exercise, or exercise fully, its rights and remedies pursuant to this Letter of Commitment and the securities taken pursuant hereto shall not be construed as a waiver of such rights and remedies.

c)

Time is of the essence.

d)

This Letter of Commitment is not assignable in any manner. In the absence of a formal Loan Agreement being entered into, this Letter of Commitment
shall continue in force and effect and shall not merge in any securities provided by Borrower to the Bank.

e)

This Letter of Commitment and the security documentation to be provided by the Borrower
pursuant hereto shall be construed in accordance with and governed by the laws of the Province of Alberta and Canada.

f)

Your acceptance of this letter will constitute authority for the Bank to prepare the necessary documentation.

EX-4

ASSET PURCHASE AGREEMENT

THIS AGREEMENT is made effective this 16 day of June, 2006.

BETWEEN:

TWO HILLS ENVIRONMENTAL INC., a corporation pursuant

 to the laws of the Province of Alberta, at 2440, 10303 Jasper Ave.,

 Edmonton, Alberta, T5J 3N6

(hereinafter the "Purchaser")

OFTHE FIRST PART

-and-

SOUTH BEND POWERS LTD., (SPL) a company incorporated

pursuant to the laws of the Province of Alberta, at 112, 80

Chippewa Road, Sherwood Park, AS T8A 4W6

(hereinafter "Vendor")

OF THE SECOND PART

WHEREAS:

A.

The Vendors own Assets;

B.

The Vendors desire to sell the Assets, and

C.

The Vendors have agreed to sell and the Purchaser has agreed to purchase the Assets for Shares upon the following terms and conditions.

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and mutual agreements and covenants herein contained, the patties hereby covenant and agree as follows:

ARTICLE 1

INTREPRETATION

1.1

Interpretation

In this Agreement:

(a)

the inclusion of headings and a table of contents are for convenience of reference only and are not to be considered or taken into account in construing the provisions of this Agreement or to in any way qualify, modify or explain the effect of any such provisions;

(b)

references to an Article, Section or Schedules are references to an Article, Section or Schedule, as the case may be, in this Agreement;

(c)

words importing the singular shall include the plural and vice versa and words importing a particular gender shall include all genders;

(d)

references to a statute includes the regulations and any other subordinate legislation made pursuant to that statute and includes any amendment, consolidation, reenactment, substitution or replacement of all or any part of such statute, regulation or other subordinate legislation;

(e)

all monetary amounts are expressed in Canadian currency; and

(f)

where a term is defined in this Agreement, a derivative of that term shall have a corresponding meaning unless the context otherwise requires.

ART1CLE 2

PURCHASE AND SALE

2.1

Agreement of Purchase and Sale

Subject to the terms and conditions hereafter set forth, the Vendor hereby agrees to sell, assign, transfer and convey its entire right, title and interest in the Assets to the Purchaser and the Purchaser agrees to purchase the Assets from the Vendor, for the Purchase Price and payable in accordance with Section 2.3.

2.2

Goods and Services Tax

If applicable, the parties agree that they will make a joint election pursuant to subsection 167(1) of the Excise Tax Act (Canada) in prescribed form,

2.3

Payment of Purchase Price

As consideration for the Purchase Price, the Purchaser shall cause the transfer by Capital Reserve Canada Ltd. (“CRC”) of 13,200,000 restricted Class A common shares (“Shares) of CRC as full and ‘final payment of the Purchase Price.

ARTICLE 3

CONDITIONS OF CLOSING

3.1

Vendor’s Conditions

The Vendor’s obligations to complete the transactions contemplated by this Agreement are subject to satisfaction or waiver of the following conditions on or by the Closing Date or such earlier date as may be specified below:

(a)

the board of directors of the Vendor shall have authorized the execution and delivery of this Agreement and the transactions contemplated herein.

(b)

the representations and warranties of the Purchaser set forth in Section 6.3 shall be true and correct at the Closing Date, with the same force and effect as if made at and as of such time;

(c)

the Purchaser shall have paid the Purchase Price, as contemplated in Section 2.\ hereof;

(d)

The Vendor to obtain prior to closing a salt lease for property adjoining section 27,55,12, W4, and provided that, if any term, covenant or condition of the Purchaser to be performed or complied with prior to the Closing Date shall not have been performed or complied with prior to the Closing Date, the Vendor shall either: (i) rescind this Agreement by notice in writing to Purchaser and the Vendor shall thereupon be released from all obligations hereunder and, unless the term, covenant or condition for which the Vendor has rescinded this Agreement was reasonably capable of being performed or complied with by the Purchaser, the Purchaser shall also be released from all obligations hereunder; or (ii) waive compliance of any such term, covenant or condition in whole or in part, without prejudice to any of its rights of rescission in the event of non-performance of any other term, covenant or condition in whol e or in part.

3.2

Purchaser’s Conditions

The Purchaser’s obligation to complete the transactions contemplated under this Agreement is subject to the satisfaction or waiver of the following conditions on or by the Closing Date or such earlier date as may be specified below:

(a)

the Purchaser, in its sole discretion, is satisfied on the Closing Date with its due diligence review with respect to the Assets;

(b)

the board of directors of the Purchaser shall have authorized and approved the execution and delivery of this Agreement and the transactions contemplated herein on or by the Closing Date;

(c)

the representations and warranties of the Vendor set forth in Section 6.1 shall be true and correct at the Closing Date with the same force and effect as if made at and as of such time;

(d)

the Vendor shall have performed or complied with all of the terms, covenants, deliverables and conditions of this Agreement to be performed or complied by it at or prior to the Closing Date;

(e)

the Purchaser shall have been provided with releases and no interest letters from all parties holding any security which may be found to exist on or prior to the Closing Date affecting the Assets;

(f)

the Purchaser entering into employment agreements, satisfactory to the Purchaser, with both Steve Hoof and Fergus Ismond in a reasonable time after the Closing Date;

(g)

the Vendor shall have received all applicable third party consents to the assignment of the Assets; and

(h)

there shall be no claims or proceedings threatened or pending involving the Vendor in connection with the Vendor or the Assets which claims or proceedings in the aggregate would, in the opinion of the Purchaser, have a material adverse effect on the Assets; provided that, if any term, covenant or condition of the Vendor to be performed or complied with prior to the Closing Date shall not have been performed or complied with prior to the Closing Date, the Purchaser shall, at its sole option, either: (i) rescind this Agreement by notice in writing to the Vendor and the Purchaser shall thereupon be released from all obligations hereunder and, unless the term, covenant or condition for which the Purchaser has rescinded this Agreement was reasonably capable of being performed or complied with by the Vendor, the Vendor shall also be released from all obligations hereunder; or (ii) waive compliance of any such te rm, covenant or condition in whole or in part, without prejudice to any of its rights of rescission in the event of non-performance of any other term, covenant or condition in whole or in part.

ARTICLE4

CLOSING

4.1

Place of Closing

Closing shall take place at the offices of the Purchaser’s counsel on the Closing Date or at such other place as the parties hereto might agree.

4.2

Closing Date of Transfer

The transfer and assignment of the Assets from the Vendor to the Purchaser and the issuance of the Shares from the Purchaser to the Vendor shall be effective as of the Closing Date being on or before July 5, 2006.

4.3

Vendor’s Deliveries at Closing

At Closing, the Vendor shall deliver the following to the Purchaser:

(a)

all releases and no interest letters from all parties holding security interests in the Assets;

(b)

any necessary assignment agreements, licenses, transfers, permits, third party consents or any other deliverables required pursuant to this Agreement and such further documentation required by the Purchaser in order to operate the Assets as an ongoing concern;

(c)

a certificate of an officer of the Vendor that the representations and warranties found in Section 6.1 of this Agreement are true and correct at Closing, that all of Vendor’s conditions precedent have been satisfied or waived, that the covenants to be performed by the Vendor have been duly performed and that there has been no material change to the Assets between the execution of this Agreement and the Closing Date;

(d)

a certified copy of a resolution of the board of directors of the Vendor authorizing the execution and delivery of this Agreement and the completion of the sale of the Assets to the Purchaser in accordance with the provisions of this Agreement; and

(e)

such other documents as may be specifically required hereunder or as may be reasonably requested by the Purchaser upon reasonable notice to the Vendor.

4.4

Purchaser's Deliveries at Closing

At Closing, the Purchaser shall deliver the following to the Vendor:

(a)

a share certificate issuing the Shares as directed by the Vendors.

(b)

a certified copy of a resolution of the board of directors of the Purchaser authorizing and approving the execution and delivery of this Agreement and the transactions contemplated herein;

(c)

a certificate of an officer of the Purchaser certifying that the representations and warranties found in Section 6.3 of this Agreement are true and correct at Closing, that all conditions precedent have been satisfied or waived, and that the covenants to be performed by the Purchaser prior to Closing, have been duly performed; and

(d)

any and all other documents which are required to be delivered by the Purchaser to the Vendors under this is Agreement.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES

5.1

Vendor's Representations and Warranties

The Vendor represents and warrants to the Purchaser that: Corporate Standing, Power and Authorization

(a)

the Vendor is a corporation duly incorporated, organized and subsisting under the laws of Alberta;

 (b)

the Vendor has good and sufficient power, authority and right to enter into this Agreement and to complete the transactions to be completed by them contemplated hereby;

(c)

the execution and delivery of this Agreement by the Vendor and the consummation by the Vendor of the transactions contemplated by this Agreement have been duly and validly authorized and will not violate, nor be in conflict with:

(i)

any of the articles, by-laws or governing documents of the Vendor;

(ii)

any provisions of any agreement or instrument to which the Vendor is a party or by which it is bound; or

(iii)

to the best of the Vendor's knowledge, any law applicable to the Vendor or the Assets;

(d)

this Agreement has been duly executed and delivered by the Vendor and all other documents and instruments required hereunder to be executed and delivered by the Vendor have and shall be duly executed and delivered and this Agreement does, and such documents and instruments will, constitute legal, valid and binding obligations of the Vendor enforceable against the Vendor in accordance with the respective terms of this Agreement and such documents and instruments;

(e)

no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body exercising jurisdiction over the Assets of the Vendor is required for the due execution, delivery and performance by the Vendor of its obligations under this Agreement;

Assets of the Vendor

(f)

the Vendor is and will be on the Closing Date, the legal and beneficial owner of the Assets, with good and marketable title thereto, free and clear of all mortgages, liens, other than those outlined in Appendix "A", charges, security interests, encumbrances, equities, pre-emptive rights of purchase (such as rights of first refusal), restrictions, deemed trusts or other claims and the Vendor represents and warrants to the Purchaser that the Vendor, has not encumbered or alienated the Assets or any interest therein and the Assets are now and at the Closing Date will be free and clear of all liens, except those outlined in Appendix "A", charges, encumbrances and adverse claims;

(g)

the Assets comprise all or substantially all of the assets of the Vendor with the exception of two pressure vessels (serial # 430 and 431) and one infrared sterilizer (both of which shall remain the Vendor's property after the Closing Date) ;

(h)

there are no material claims, proceedings, actions, lawsuits, administrative proceedings or governmental investigations, other than that outlined in Appendix "8", in existence, or, to the best of the Vendor's knowledge, contemplated or threatened against or with respect to the Vendor or the Assets which might result in impairment or loss of the Assets or which might otherwise adversely affect the Assets. The Vendor is not aware of any existing basis upon which any of such claims, proceedings, actions or lawsuits might be commenced by any person;

(i)

the Vendor has not received any notices of violation or alleged violation of (i) the provisions of any material agreement or material contract in respect of the Assets, or (ii) default or violation of any legislation or regulations, other than that outlined in Appendix "8", which, in either case, would materially adversely affect the Assets; the Vendor has made available to the Purchaser all material documents, books and records and agreements within its possession and has not knowingly withheld any such documents or agreements from the Purchaser affecting the Assets, the Vendor's title to the Assets;

Books and Corporate Records

(k)

the books and records of the Vendor appropriately reflect the financial and accounting transactions pertaining to the Assets, have been maintained and will be maintained until the Closing Date in accordance with prudent business practice and disclose all material transactions relating to the Assets;

Taxes

(I)

all income, property, severance and similar taxes and assessments based on or measured by the ownership of the Assets or the receipt of proceeds there from payable by the Vendor in respect of the period prior to the Closing Date have been properly paid and discharged;

(m)

all taxes, assessments and levies which the Vendor is required by the Income Tax Act (Canada) and the regulations thereto to withhold or collect to the date hereof from any amount paid or credited by it to or for the account or benefit of any third party, including, without limitation, any of the Vendor's employees, officers, directors and shareholders and any non-resident person, have been duly and timely withheld and collected and paid over to the appropriate taxing or government authority or agency pursuant to the regulations to the Income Tax Act (Canada) or held by or on behalf of the Vendor for such payment;

(n)

the Vendor is not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada);

(o)

the Vendor is a GST registrant and the Vendor's goods and services tax registration number is. &;

Employment

(p)

there is no lien against the Assets as a result of worker's compensation legislation and the Worker's Compensation Board does not possess, nor is entitled to a claim or lien against the Assets or any of them due to any payments not being made to the Worker's Compensation Board. To the best of the Vendor's knowledge, the Vendor has complied with the requirements of the Worker's Compensation Act (Alberta) and the Employment Standards Act (Alberta);

Real Properties

(q)

the Vendor is the registered and beneficial owner of, and has good and marketable title and fee simple to, the Real Properties, free and clear of any and all encumbrances;

(r)

there are no agreements to sell, transfer or otherwise dispose of the Real Properties or which would restrict the ability of the Vendor to transfer the Real Properties and there are no contracts or agreements allowing third parties rights of occupancy on the Real Properties and no person other than the Vendor occupies or uses any portion of the Real Properties, except as outlined in Appendix "B";

(s)

the Real Properties and the conduct of any business on the Real Properties do not violate any laws including zoning or building laws, ordinances, regulations, covenants or official plans. The Vendor has not received any notification alleging any such violations. None of the plants, buildings, structures, improvements or fixtures comprised within the Real Properties encroach upon any lands not owned by the Vendor. There are no expropriations, condemnation or similar proceedings pending or, to the best of the knowledge of the Vendor, threatened, with respect to any of the Real Properties. The Vendor has adequate rights of ingress to an egress from the Real Properties for the operation of a business in the ordinary course;

(t)

the Real Properties comply with any contracts entered into with governmental authorities, and all easements and rights of way granted to governmental authorities or other persons and the construction of all plants, buildings, structures and fixtures comprised within the Real Properties.

(u)

Deleted;

(v)

the Vendor has delivered to the Purchaser a true and complete copy of all environmental audits, evaluations, assessments or tests relating to the Assets or Real Properties;

(w)

Real properties are on an "as is" basis.

5.2

Purchaser's Representations and Warranties

The Purchaser represents and warrants to the Vendor that:

Corporate Standing, Power and Authorization

(a)

the Purchaser is a corporation duly incorporated, organized and subsisting under the laws of Alberta and has full corporate power and authority to carryon its business, to enter into this Agreement and to carry out its obligations hereunder;

(b)

the execution and delivery of this Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated by this Agreement have been duly and validly authorized and will not violate, nor be in conflict with:

(i)

any of the articles, by-laws or governing documents of the Purchaser;

(i i)

any provisions of any agreement or instrument to which the Purchaser is a party or by which it is bound; or

(iii)

to the best of the Purchaser's knowledge, any law applicable to the Purchaser;

(c)

this Agreement has been duly executed and delivered by the Purchaser and all other documents and instruments required hereunder to be executed and delivered by the Purchaser have and shall be duly executed and delivered by the Purchaser and this Agreement does, and such documents and instruments will, constitute legal, valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with the respective terms of this Agreement and such documents and instruments;

(d)

the Purchaser has good and sufficient power, authority and right to enter into this Agreement and to complete the transactions to be completed by the Purchaser contemplated hereby;

(e)

the Purchaser is a GST registrant and its goods and services tax registration number is and

(f)

CRC is the sole shareholder of the Purchaser and the Purchaser shall have and ability to ensure the issuance of the Shares for the payment of Purchase Price.

ARTICLE 6

 ISSUANCE OF SHARES

6.1

Regarding the issuance of the Shares by CRC as payment of the Purchase Price, the Vendor and Purchaser agree that:

(a)

the Shares are restricted securities as that term is defined in Rule 144 under the United States Securities Act of 1933 (the "U.S. Securities Act"). As restricted securities, they may be resold only in accordance with Rule 144 or Regulation S under the U.S. Securities Act or pursuant to an effective registration statement under the U.S. Securities Act or an exemption from the U.S. Securities Act. Hedging transactions involving these securities may not be conducted unless in compliance with the U.S. Securities Act.

(b)

the Shares have not been registered with the United States Securities and Exchange Commission or the securities commission of any state. This Agreement does not constitute an offer to sell nor a solicitation of an offer to buy the securities in any jurisdiction in which such offer or solicitation would be unlawful. The Shares may not be resold or transferred except as permitted pursuant to registration under the U.S. Securities Act or an exemption from it.

(c)

the Shares have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not reviewed, confirmed or determined the accuracy or adequacy of this document.

(d)

the Vendor has been advised to consult its own legal advisers in connection with any applicable statutory hold periods and resale restrictions, both in Canada and in the United States, relating to Shares and no representation has been made by the Purchaser or CRC or its representatives respecting the applicable statutory hold period or resale restrictions;

(e)

the Vendor is solely responsible (and the Purchaser or CRC is not in any way responsible) for compliance with applicable hold periods and resale restrictions, including without limitation the filing of any documentation and, if applicable, the payment of any fees with any applicable securities regulatory authority, and the Vendor, is aware that the Vendor, may not be able to resell the Shares except in accordance with limited exceptions under applicable securities legislation and regulatory policy and the Vendor, will not sell, resell or otherwise transfer the Shares except in compliance with applicable laws; and

(f)

the Vendor, specifically agrees that the Vendor will not offer, sell, pledge or otherwise transfer the Shares except: (i) to the Purchaser or CRC; (ii) or inside the United States in a transaction, (A) made in compliance with an exemption from registration under the U.S. Securities Act provided by Rule 144 or Rule !44A there under, if available, and any applicable state securities laws of the United States or (B) in a transaction exempt from registration requirements under the U.S. Securities Act and any applicable state securities laws of the United States; we understand that the Shares will bear a legend to the foregoing effect and that prior to any transfer pursuant to the foregoing clauses (ii) and (iii), the Purchaser or CRC may require that the seller furnish the Purchaser or CRC and the applicable transfer agent with an opinion of counsel of recognized standing, in substance and form satisfactory to the Purchaser or CRC, that such transfer is exempt from registration under the U.S. Securities Act and any applicable state securities laws; the Vendor understands and acknowledges that the certificates for the Shares and any certificates issued in replacement thereof or exchange therefore, shall have endorsed thereon a legend reflecting such restrictions on transfer and the Vendor understands and acknowledges that the Purchaser or CRC is not obligated to file and has no present intention of filing with the United States Securities and Exchange Commission or with any state securities administrator or commission any registration statement in respect of resale’s of the Shares in the United States.

(g)

the Vendor acknowledges and agrees that the issuance of the Shares applicable is conditional upon, among other things:

(i)

such issuance being exempt from the prospectus filing requirements and the requirements for the delivery of an offering memorandum (as defined in any applicable Canadian securities legislation), of all applicable securities legislation relating to such sale or upon the issuance of such rulings, orders, consents or approvals as may be required to permit such issuance without the requirement of filing a prospectus or delivering an offering memorandum; and

(ii)

the Purchaser or CRC obtaining any necessary regulatory approvals.

(h)

the Vendor has not received, requested or been provided with, nor have any need to receive, a prospectus, offering memorandum (as defined in any applicable Canadian securities legislation) or similar disclosure document relating to the issuance of the Shares and/or the business and affairs of the Purchaser or CRC and that the decision to enter into this Agreement and accept the Shares as payment of the Purchase Price has not been based upon any verbal or written representation as to fact or otherwise made by or on behalf of the Purchaser or CRC or any officer, director, employee or agent of the Purchaser or CRC and that such decision is based entirely upon information set out in this Agreement and currently available public information concerning the Purchaser or CRC;

(i)

no agency, governmental authority, regulatory body, stock exchange or other entity has made any finding or determination as to the merit for investment of, nor have any such agencies or governmental authorities made any recommendation or endorsement with respect to the Shares;

(j)

no prospectus has been filed by the Corporation with a securities commission or other securities regulatory authority in any province of Canada or any other jurisdiction in connection with the issuance of the Shares and such issuances are exempt from the prospectus requirements otherwise applicable under the provisions of Canadian securities laws and, as a result, in connection with the issuance of the Shares:

(i)

the Vendor is restricted from using most of the civil remedies available under Canadian securities laws;

(i i)

the Vendor will not receive information that would otherwise be required to be provided to them under applicable securities laws or contained in a prospectus prepared in accordance with applicable securities laws; and

(iii)

the Purchaser or CRC is relieved from certain obligations that would otherwise apply under such applicable securities laws;

(k)

the Vendor acknowledges that the Purchaser or CRC may be required to provide applicable securities regulatory authorities with a list setting forth the identities of the beneficial purchasers of the Shares and the Vendor consents to the disclosure of any such information relating to the issuance hereunder as required for the Purchaser or CRC to properly comply with all regulatory and legislative requirements.

(I)

the Vendor understands and acknowledges that: (i) none of the Shares have been or will be registered under the United States Securities Act of /933, as amended (the "U.S. Securities Act") nor any applicable state securities laws and may not be offered or sold or re-offered or resold, directly or indirectly, in the United States or to any U.S. person (as defined in Regulation Sunder the U.S. Securities Act, a "U.S. Person"), unless such securities have been registered under the U.S. Securities Act and any applicable state securities laws, or are otherwise exempt from such registration; and (ii) certificates representing the Shares shall bear a legend to such effect.

(m)

the Vendor represents and warrants to the Purchaser or CRC that (i) the Vendor is not a "U.S. person" as that term is defined in Rule 902(c) of Regulation S; (ii) at the time of execution of this agreement, the Vendor was outside the United States and no offer of the Shares was made to the Vendor within the United States; (iii) the Vendor purchased the Shares for their own account and not on behalf of any U.S. person, and the sale of the Shares has not been prearranged with any buyer in the United States; and (iv) the Vendor is not a distributor as defined in Regulation S. the Vendor will not, before the expiration of one year from the Closing (the "Restricted Period"), offer or sell the Shares to U.S. persons or for the account or benefit of U.S. persons and will offer and sell the Shares only in compliance with the provisions of Regulation S or a valid and effective registration state ment covering the Shares.

(n)

the Patties agree that upon the original issuance thereof, and until such time as the same is no longer required under applicable requirements of the U.S. Securities Act or applicable state securities laws, or Canadian securities laws the certificates representing the Shares and all certificates issued in exchange therefore or in substitution thereof, shall bear a legend in substantially the form set forth below:

"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND MAY BE OFFERED, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY (A) TO THE CORPORATION; (B) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE U.S. SECURITIES ACT; (C) WITHIN THE UNITED STATES IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATIONS UNDER THE U.S. SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, AND THE SELLER HAS FURNISHED TO THE CORPORATION AN OPINION TO SUCH EFFECT FROM COUNSEL OF RECOGNIZED STANDING REASONABLY SATISFACTORY TO THE CORPORATION PRIOR TO SUCH OFFER, SALE OR TRANSFER."

"UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY MUST NOT TRADE THE SECURITY BEFORE THE DATE THAT IS FOUR (4) MONTHS AND ONE (I) DAY AFTER THE LATTER OF l(i)THE DISTRIBUTION DATE]; AND (ii) THE DATE THE ISSUER BECAME A REPORTING ISSUER IN THE PROVINCE OR TERRITORY."

provided, that if the Shares are being sold outside the United States in compliance with the requirements of Rule 904 of Regulation S under the U.S. Securities Act, the seller shall provide the Purchaser or CRC with the applicable declaration;

(o)

the Vendor is acquiring the Shares for their own account and not as a nominee. The Vendor understands that the purchase of the Shares involves a high degree of risk and that the Vendor must bear the economic risk of this investment indefinitely unless sale of the Shares is registered pursuant to the U.S. Securities Act, or an exemption from registration for their sale is available. The Vendor understands that, in the view of the United States Securities and Exchange Commission, the statutory basis for the exemption claimed for this transaction would not be present if the offering of the Shares, although in technical compliance with Regulation S, is part of a plan or scheme to evade the registration provisions of the U.S. Securities Act.

(p)

The Vendor covenants that they will not knowingly sell, transfer or otherwise dispose of the Shares in violation of the U.S. Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or the rules and regulations of the Securities and Exchange Commission. The Vendor will only offer and sell the Shares pursuant to an effective registration statement under the U.S. Securities Act or an exemption from the registration provisions of the U.S. Securities Act or outside the United States in accordance with applicable securities laws.

(q)

the Vendor has been independently advised as to, and is aware of the restrictions with respect to trading in the Shares underlying the Shares pursuant to the applicable securities laws and any applicable stock exchanges.

ARTICLE 7

FURTHER ASSURANCES

7.1

Further Assurances

The parties hereto covenant and agree to do such further acts and execute and deliver all such further deeds and documents as shall be reasonably required in order to fully perform and carry out the terms and intent of this Agreement.

ARTICLE 8

ENTIRE AGREEMENT

8.1

Entire Agreement

This Agreement constitutes the entire agreement to date between the parties hereto and supersedes every previous agreement, communication, expectation, negotiation, representation or understanding, whether oral or written, express or implied, statutory or otherwise, between the parties with respect to the subject of this Agreement.

ARTICLE 9

 TIME OF ESSENCE

9.1

Time of Essence

Time shall be of the essence of this Agreement and this Agreement shall expire 60 days from the Date, if the exchange of shares has not happened before pursuant to this Agreement.

ARTICLE 10

TITLES

10.1

Titles

The titles to the respective sections hereof shall not be deemed a part of this Agreement but shall be regarded as having been used for convenience only.

ARTICLE 11

SEVERABILITY

11.1

Severability

If anyone or more of the provisions contained herein should be invalid, illegal or unenforceable in any respect in any jurisdictions, the validity, legality and enforceability of such provisions shall not in any way be affected or impaired thereby in any other jurisdiction and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

ARTICLE 12

APPLICABLE LAW

12.1

Applicable Law

The situs of the Agreement is Edmonton, Alberta, and for all purposes this Agreement will be governed exclusively by and construed and enforced in accordance with laws prevailing in the Province of Alberta, The Parties agree to attOI11 to the jurisdiction of the Courts of the Province of Alberta.

ARTICLE 13

 ENUREMENT

13.1

Enurement

This Agreement shall enure to the benefit of and be binding upon the Patties hereto and their respective successors and permitted assigns.

ARTICLE 14

CONFIDENTIALITY

14.1

Confidentiality

The Purchaser agrees to keep this Agreement confidential and not disclose it to any other person(s).

IN WITNESS WHEREOF this Agreement has been executed as of the day and year first above

written.

The Vendor:Southbend Power Ltd

_ “Fergus Ismond”______

_____________________________

Authorized Signatory

Witness

The Purchaser: Two Hills Environmental Inc.

_ “James Baker”______

_________________________

Authorized Signatory

Witness

APPENDIX "A"

ASSETS TO BE TRANSFERRED:

1.

147 Acres (more or less), excepting all minerals, but including all buildings, and latest Alberta Environmental reports, together with existing caveats and liens, located at: Meridian 4, Range 12, Township 55, Section 27.

(the "Land")

2.

Salt lease to 160 acres adjacent to section 27 (to be transferred).

3.

The Water pumping station at the North Saskatchewan River and Water Diversion Permit 00193287-00-00, File no 12892 will be transferred to the Purchaser.

(the "Pumping Station")

(the Land, Salt Rights and Pumping Station shall collectively be referred to as the "Real Properties")

LIENS ON THE ABOVE ASSETS

$800,000 debt to Ra-el Drilling Ltd. that comes due July 1,2008 to be assumed by the Purchaser. Purchaser has the option to convert the debt Lien to shares at any time.

$50,000 (maximum) mortgage to BDC Bank in Two Hills, Alberta to be assumed by the Purchaser. No personal guarantee will be placed by CRC or its directors.

APPENDIX "8"

Actions or Orders on the Real Property

Dumping Action Violation Notice from Alberta Environment which has since been corrected,

Leases on the Real Property

Purchaser shall accept Genoil as tenant pursuant to Lease Agreement disclosed to the Purchaser. Lease paid up until April 1, 2007. After this date, lease payments go to the Purchaser.

AMENDMENT DATED JULY 5TH, 2006

TO

THE ASSET PURCHASE AGREEMENT DATED JUNE 16TH, 2006

BETWEEN:

TWO HILLS ENVIRONMENTAL INC., a corporation pursuant

to the laws of the Province of Alberta, at 2440, 10303 Jasper Ave.,

Edmonton, Alberta. T5J 3N6

(hereinafter the "Purchaser")

OF THE FIRST PART

-and-

SOUTHBEND POWERS Ltd., (SPL) a company incorporated pursuant

to the laws of the Province of Alberta. at 112, 80 Chippewa Road,

Sherwood Park, AB T8A 4W6

(hereinafter "Vendor")

OF THE SECOND PART

WHEREAS Article 4.2 of the Asset Purchase Agreement anticipated a closing date on or before July 5th, 2006.

NOW THEREFORE both parties agree to extend the date to: on or before July 28th, 2006.

IN WITNESS WHEREOF this Agreement has been executed as of the day and year first above written.

The Vendor: Southbend Power Ltd.

__”Fergus Ismond”_________

_____________________

Authorized Signatory

Witness

The Purchaser: Two Hills Environmental Inc.

__”James Baker”____________

______________________

Authorized Signatory

Witness

EX-12

CERTIFICATION

I, James Baker, certify that:

(1) I have reviewed this annual report of Capital Reserve Canada Ltd. (the “Registrant”).

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.

(3) Based on my knowledge, the financial statement, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

(4) As the Registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

(5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  July 17, 2006

By:  /s/ James Baker
Name:  James Baker
Title:  President (Principal Executive Officer and Principal Accounting Officer)

EX-13

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Capital Reserve Canada Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Baker, President and Principal Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  July 17, 2006

By:  /s/ James Baker

Name: James Baker

Title:    President (Principal Executive Officer and Principal

            Accounting Officer)