CAPCO ENERGY, INC. ANNUAL REPORT ON FORM 10-KSB FOR YEAR ENDED DEC 31, 2004

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HoM3iJKiKugz2stG/EnCWtUkMLW4H8N6lDO7OHX2FR5NnW3M4ebNjG55MX7ZwuzN CKPRxQ6sLLMaUfP5XxgdJA== 0001090002-05-000126.txt : 20050511 0001090002-05-000126.hdr.sgml : 20050511 20050511153711 ACCESSION NUMBER: 0001090002-05-000126 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050511 DATE AS OF CHANGE: 20050511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPCO ENERGY INC CENTRAL INDEX KEY: 0000354767 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840846529 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10157 FILM NUMBER: 05820650 BUSINESS ADDRESS: STREET 1: 5555 SAN FELIPE STREET 2: SUITE 725 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 713-622-5550 MAIL ADDRESS: STREET 1: 5555 SAN FELIPE STREET 2: SUITE 725 CITY: HOUSTON STATE: TX ZIP: 77056 FORMER COMPANY: FORMER CONFORMED NAME: ALFA RESOURCES INC DATE OF NAME CHANGE: 19920703 10KSB 1 capco10k2004v5.htm ANNUAL REPORT ON FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 2004 CAPCO ENERGY, INC. ANNUAL REPORT ON FORM 10-KSB FOR YEAR ENDED DEC 31, 2004

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES AND EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Commission File No. 0-10157

CAPCO ENERGY, INC.

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(Exact Name of Small Business Issuer as Specified in its Charter)

COLORADO 84-0846529

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(State or other jurisdiction of (I.R.S. Employer Identification No.)

Incorporation or Organization)

5555 San Felipe, Suite 725, Houston, TX 77056

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(Address of Principal Executive Office, Including Zip Code)

Registrant's telephone number including area code: (713) 622-5550

Securities registered pursuant to Section 12(b) of the Act: None.

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

COMMON STOCK, $.001 PAR VALUE

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Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required

to have been filed by Section 13 or 15(d) of the Securities and 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.

Yes X No

As of May 5, 2005, 113,280,769 shares of Common Stock were outstanding.

The aggregate market value of the Common Stock of the Registrant held by

non-affiliates on that date was approximately $23.9 million.

State Issuer's revenues for its most recent fiscal year: $5,254,824

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405

of Regulation SB is not contained herein, and will not be contained, to the best

of Registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-KSB or any amendment to

this Form 10-KSB.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant’s proxy statement

relating to Registrant’s 2005 Annual Meeting of Shareholders have been incorporated

by reference into Part III hereof.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

Capco Energy, Inc. ("Capco" or the "Company"), with its mailing address at 5555 San Felipe, Suite 725, Houston, TX 77056, was incorporated as Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November 1999, the Company changed its name to Capco. Capco was organized for the purpose of engaging in oil and gas exploration, development and production activities.

Effective December 31, 1999, Capco closed on the acquisition of 100% of Capco Resource Corporation ("Resource"), a corporation involved in oil and gas production. Based on the ownership of the respective companies at the time of this acquisition, it was determined that a change in control had occurred and accordingly, the transaction was considered a reverse acquisition for accounting purposes. The historical accounts of Resource are reflected in the financial statements for the period beginning with January 19, 1999, the inception date of Resource, at cost.

In March 2000, the Company acquired an additional 70.2% equity ownership in Capco Resources Ltd. ("Limited"), increasing its equity ownership to approximately 80.4%, by the issuance of 47,470,232 shares of its Common Stock. From April 2000 through December 2002, the Company increased its equity ownership in Limited to 88.9% in exchange for issuing 5,095,720 Common Shares of the Company.

In October 2000, the Company consummated a private placement with Chaparral Resources, Inc. by tendering $3.0 million in cash for 1.6 million restricted shares of Chaparral. These restricted shares were then exchanged with Limited for all of the outstanding shares of Capco Asset Management, Inc., a wholly-owned subsidiary of Limited.

In April 2001, the Company purchased Meteor Enterprises, Inc. ("Enterprises") from Meteor Industries, Inc. ("Industries") for $5.6 million and assumption of certain environmental liabilities and other indemnities. Effective December 31, 2000, Industries had contributed substantially all of its assets and all of its businesses to its wholly owned subsidiary, Enterprises. The significant wholly owned subsidiaries of Enterprises at the date of acquisition were: Meteor Marketing, Inc. (“Marketing”), Graves Oil & Butane Co., Inc. ("Graves"), Tri-Valley Gas Co. and Innovative Solutions and Technologies, Inc. Enterprises also owned 73% of Meteor Holdings LLC and 61% of Rocky Mountain Propane LLC ("Propane").

In August 2001, the Company formed Capco Monument, LLC ("Monument"), and acquired the operation of convenience stores.

In May 2002, the Company closed on the sale of its interest in properties in Kansas, realizing sales proceeds in the amount of $1.1 million. Approximately $0.7 million of the sales proceeds was used to repay long-term debt and the balance was used for working capital. The Company recorded a gain in the amount of $0.3 million on this transaction.

In June 2002, the Company closed on an acquisition of producing oil and gas properties located in Michigan and related accounts receivable at a total cost of $1.7 million. Approximately $0.4 million of the acquisition cost was allocated to accounts receivable and the remainder, $1.3 million, was allocated to producing oil and gas property. Funding for the acquisition consisted of cash payments in the total amount of $0.4 million and the assumption of seller-provided financing in the amount of $1.3 million payable to the operator of the properties.

Effective December 31, 2002, the Company sold 100.0% of its equity ownership in Graves and Monument for $10,000 cash. The operations of Graves and Monument are reported as discontinued operations for the year ended December 31, 2002.

In January 2003, Marketing closed on the sale of its preferred membership interests in Propane. Total consideration of $1.1 million consisted of (1) a cash payment in the amount of $0.8 million, (2) an 8% promissory note in the amount of $0.2 million due January 2006, and (3) a cash retention in the of $0.1 million to be paid upon the delivery of asset title transfer documents relating to Marketing’s sale of Propane in April 2002.

Effective January 1, 2003, the Company agreed to sell Enterprises to a private company owned by the Company's Chief Executive Officer. The transaction closed September 30, 2003. The operations of Enterprises for the nine-month period ended September 30, 2003, and for the year ended December 31, 2002, are reported as discontinued operations in the financial statements.

Effective September 30, 2003, the Company restored assets and liabilities attributable to the business interests of Graves and Monument that had previously been reported as sold as of December 31, 2002. A gain resulting from the sale had been deferred by the Company at December 31, 2002, due to debt guarantees provided by the Company on a significant level of debt that was included in the sales transaction.

In October 2003, the Company participated in the acquisition of producing properties and related gas processing and transmission facilities located in the state of Montana. The Company acquired an approximate 4.3% interest in the acquired properties. Funding for the acquisition consisted of a loan in the amount of $4.5 million provided by the operator of the acquired property, a cash payment in the amount of $250,000 and a credit in the amount of $500,000 extended to the Company's Chief Executive Officer for his participation in the acquisition process. The Company acquired the credit by issuing 8.7 million shares of Common Stock to the Chief Executive Officer. In addition, the seller deferred receipt of a portion of the sales amount which is to be repaid from future cash flow from the acquired properties. The Company's portion of this obligation is $229,000. The Company sold a portion of the total acquired property interest to other owners, realizing proceeds in the amount of $1.4 million that were credited against the Company's basis in the acquired property. The Company's cost of the acquisition was approximately $4.1 million. The loan from the operator is collateralized by the Company's interest in the acquired property and by the Company's interest in producing oil and gas property located in the state of Michigan. The Michigan and Montana properties were sold in December 2004 as described below.

In October 2003, the Company acquired from a third party a 3% working interest in the Caplen Field in Galveston County, Texas at a recorded cost of $207,000.

production. The Company's recorded cost of the acquisition, including a funding obligation to the seller of the property in the amount of $1.1 million, and net of fees earned from joint interest partners, was $1.2 million. In connection with the acquisition the Company and its joint interest partners were required to provide a surety bond in the amount of $1.3 million to the seller of the property. The surety company required a cash deposit in the amount of $700,000, of which the Company's portion was $278,000. A portion of monthly net cash flow from the acquired property will be used to fund the deposit account until the bond limit of $1.3 million is fully funded. Effective February 2005, this requirement was amended to provide for a series of twenty-four (24) monthly payments of $24,000 ($12,000 net to Capco’s interest) to fully fund the deposit account. The surety company was given a security interest in the Company's working interests in the Brazos Field and the Caplen Field as collateral for this obligation. The Company's Chief Executive Officer also provided his personal guarantee to the surety company. An additional portion of the monthly net cash flow from the property will be used to fund another deposit account to the seller. When this account balance reaches $1.7 million the $1.3 million bond will be released. The Company's portion of this obligation, $1.1 million, is included in the Company's recorded cost of the acquisition.

Effective December 31, 2003, the Company sold its equity ownerships in Resource and Limited to the Company's Chief Executive Officer for the assumption of certain liabilities.

In February 2004, the Company closed on an acquisition of a production platform with nine additional wells in the Brazos Field, offshore in Matagorda County, Texas. The Company owns a 90% working interest in the wells and will be operator of the property. In conjunction with the acquisition, Capco plans to acquire leases for the mineral interests at an estimated cost of $144,000. Such expenditure is necessary before the Company can initiate production from any of the acquired wells. Under the terms of the agreement, the seller agreed to contribute as much as $1.0 million to apply toward payment of abandonment costs when, and if, such costs are incurred by the Company. As of December 31, 2004, the Company had not finalized its work program for this property, and had not expended any funds for lease acquisition.

In February 2004, the Company entered into an agreement to drill and complete a coal bed methane well in Stephens County, Texas. The well was drilled to a depth of 1,100 feet at a cost of $0.1 million, and following a period of “dewatering” and evaluation, was determined to be non-productive. By drilling the well Capco earned the right to negotiate the purchase of a leasehold interest in approximately 4,000 acres, along with wells previously drilled on the property.

Effective July 1, 2004, the Company exercised its option to acquire a 92.8% working interest in the property located in Stephens County, Texas. In addition to the acreage, the acquisition included one producing gas well drilled by the former owners, the coal bed methane well drilled by the Company during the year and seismic and geological studies. The Company issued 3.6 million shares of Common Stock as consideration for the acquisition cost of $0.4 million. The number of shares issued was negotiated between the parties based on analysis of the value of the underlying assets. The per share price of $0.16 approximated the market price of the Company’s Common Stock at that time. Approximately 70% of the acquired working interest in the property was acquired as a result of Capco’s exchange of shares for 100% equity ownership of Packard Gas Company with individuals, or entities controlled by individuals, who hav e either a direct, or beneficial, relationship to the Company, including the President of the Company. The negotiated acquisition price was determined in amounts prorata to all members of the selling group. Subsequent to the exercise of its option, the Company drilled and completed a gas well on the property

at a cost of $0.2 million. Following a period of evaluation of the two producing gas wells the decision was made to discontinue further drilling activities on the property, and as a result, the Company only earned acreage attributable to each well location actually drilled on the property.

In July 2004, the Company participated with a 15% working interest in the acquisition of leases covering approximately 7,000 gross acres in a drilling prospect located in Fayette County, Alabama. Two wells were drilled on the property and both were determined to be incapable of commercial production. The Company plans to further evaluate the undeveloped acreage to determine if additional drilling is warranted. Capco incurred expenditures for lease acquisition and drilling costs in the total amount of $0.2 million for its 15% participation.

Effective September 30, 2004, the Company sold its interests in non-operated producing properties located in Alabama and Louisiana to a company owned by the Company’s Chief Executive Officer. Sales proceeds in the amount of $0.4 million were received by the Company in October 2004 and were used for working capital. The sales proceeds were credited against the Company’s basis in oil and gas properties. No gain or loss was recognized from the sale as the disposition represented only 3% of the Company’s proved reserves at the time of sale. If it is determined through due diligence by the Company that the properties could have been sold for an amount greater than $0.4 million, then the related party has the obligation to pay such excess to the Company, or the Company, at its option, may repurchase the properties at the original sales price.

In October 2004, the Company acquired a 45% working interest in two properties located in Creek County, Oklahoma. The properties consisted of approximately 100 oil wells, the majority of which were not in production at the time of acquisition by the Company. Under the terms of the purchase agreement the Company is obligated to expend a total of $0.6 million over a specified period of time in an effort to bring injection and production wells back in to service to earn the entire 45% interest. As of December 31, 2004, the Company had incurred $48,000 of such costs.

In December 2004, the Company sold a parcel of undeveloped land consisting of approximately 160 acres located in the province of Alberta, Canada. The Company had owned the land since 1999 with a recorded cost basis of $0.2 million. Consideration for the sale consisted of a cash payment of $0.1 million received in December 2004, assumption by the buyer of related indebtedness in the amount of $0.4 million and the issuance of a note receivable in the amount of $0.3 million. The Company realized a gain in the amount of $0.6 million from the sale. The note receivable was paid in full by the buyer in March 2005.

the seller. The Common Stock was issued to the seller in March 2005. The seller of the property retained a net profits interest in the amount of $0.3 million that is to be paid from one-third of the net production from the property until paid in full. The net profit distributions will be included with the acquisition cost of the property as they are paid by Capco. In addition, the purchase agreement stipulates that Capco expend a minimum of $0.1 million of property development costs within one year from the date of acquisition.

Effective December 31, 2004, the Company sold its interests in non-operated producing properties located in Michigan and Montana and other assets to the Company’s Chief Executive Officer for the amount of $4.7 million. The Company received a fairness opinion for the sale in January 2005. The sales amount was settled by the payment of a cash deposit in the amount of $0.7 million, assumption of debt against the properties in the amount $3.3 million and the issuance of a note payable to the Company in the amount of $0.7 million. The note was paid in full in March 2005. The disposition resulted in a significant change to the depletion rate in the Company’s full cost pool cost center, which required that gain or loss recognition be given to the sale. The Company recorded a gain in the amount of $0.4 million from the sale.

NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

Capco is an independent energy company engaged primarily in the acquisition, exploration, development, production for and sale of oil, gas and natural gas liquids.

OIL AND GAS PRODUCTION

Property Acquisitions and Sales

In October 2003, the Company participated in the acquisition of producing properties and related gas processing and transmission facilities located in the state of Montana. The Company acquired an approximate 4.3% interest in the acquired properties. Funding for the acquisition consisted of a loan in the amount of $4.5 million provided by the operator of the acquired property, a cash payment in the amount of $250,000 and a credit in the amount of $500,000 extended to the Company's Chief Executive Officer for his participation in the acquisition process. The Company acquired the credit by issuing 8.7 million shares of Common Stock to the Chief Executive Officer. In addition, the seller deferred receipt of a portion of the sales amount which is to be repaid from future cash flow from the acquired proper ties. The Company's portion of this obligation is $229,000. The Company sold a portion of the total acquired property interest to other owners, realizing proceeds in the amount of $1.4 million that were credited against the Company's basis in the acquired property. The Company's cost of the acquisition was approximately $4.1 million. The loan from the operator is collateralized by the Company's interest in the acquired property and by the Company's interest in producing oil and gas property located in the state of Michigan. The Montana and Michigan properties were sold in December 2004 as described below.

In October 2003, the Company acquired from a third party a 3% working interest in the Caplen Field in Galveston County, Texas at a recorded cost of $207,000.

seller of the property in the amount of $1.1 million, and net of fees earned from joint interest partners, was $1.2 million. In connection with the acquisition the Company and its joint interest partners were required to provide a surety bond in the amount of $1.3 million to the seller of the property. The surety company required a cash deposit in the amount of $700,000, of which the Company's portion was $278,000. A portion of monthly net cash flow from the acquired property will be used to fund the deposit account until the bond limit of $1.3 million is fully funded. Effective February 2005, this requirement was amended to provide for a series of twenty-four (24) monthly payments of $24,000 ($12,000 net to Capco’s interest) to fully fund the deposit account. The surety company was given a security interest in the Company's working interests in the Brazos Field and the Caplen Field as collateral for this obligation. The Company's Chief Executive Officer also provided his personal guarantee to the surety company. An additional portion of the monthly net cash flow from the property will be used to fund another deposit account to the seller. When this account balance reaches $1.7 million the $1.3 million bond will be released. The Company's portion of this obligation, $1.1 million, is included in the Company's recorded cost of the acquisition.

Effective July 1, 2004, the Company exercised its option to acquire a 92.8% working interest in the property located in Stephens County, Texas. In addition to the acreage, the acquisition included one producing gas well drilled by the former owners, the coal bed methane well drilled by the Company during the year and seismic and geological studies. The Company issued 3.6 million shares of Common Stock as consideration for the acquisition cost of $0.4 million. The number of shares issued was negotiated between the parties based on an analysis of the value of the underlying assets. The per share price of $0.16 approximated the market price of the Company’s Common Stock at that time. Approximately 70% of the acquired working interest in the property was acquired as a result of Capco’s exchange of shares for 100% equity ownership of Packard Gas Company with individuals, or entities controlled by individuals, who have either a direct, or beneficial, relationship to the Company, including the President of the Company. The negotiated acquisition price was determined in amounts prorata to all members of the selling group. Subsequent to the exercise of its option, the Company drilled and completed a gas well on the property at a cost of $0.2 million. Following a period of evaluation of the two producing gas wells the decision was made to discontinue further drilling activities on the property, and as a result, the Company only earned acreage attributable to each well location actually drilled on the property.

In September 2004, the Company’s 80%-owned subsidiary, Bison Energy Company, acquired a 33.33% working interest in an oil property located in Natrona County, Wyoming. The property consists of 720 gross acres and includes nine wells, four of which are currently in production. Rework operations are in progress in an effort to restore the remaining wells to production.

In December 2004, the Company acquired a 100% working interest in an oil property consisting of approximately 80 wells located in Osage County, Oklahoma. The acquisition cost of $0.2 million is to be settled by the issuance of 1.0 million shares of the Company’s Common Stock. The per share price of $0.20 approximated the market price of Capco’s Common Stock at the time the agreement was negotiated with the seller. The Common Stock was issued in March 2005. The seller of the property retained a net profits interest in the amount of $0.3 million that is to be paid from one-third of the net production from the property until paid in full. The net profit distributions will be included with the acquisition cost of the property as they are paid by Capco. In addition, the purchase agreement stipulates that Capco expend a minimum of $0.1 million of property development costs within one year from the date of acq uisition.

opinion for the sale in January 2005. The sales amount was settled by the payment of a cash deposit in the amount of $0.7 million, assumption of debt against the properties in the amount $3.3 million and the issuance of a note payable to the Company in the amount of $0.7 million. The note was paid in full in March 2005. The disposition resulted in a significant change to the depletion rate in the Company’s full cost pool cost center, which required that gain or loss recognition be given to the sale. The Company recorded a gain in the amount of $0.4 million from the sale.

Equipment, Products and Raw Materials

Capco owns no drilling rigs, but it does own two pulling units which may be used for workover activities on Company-operated wells. In addition, Capco owns one crew vessel which is used to transport personnel and material to its properties located in the Texas Gulf Coast, and one lift boat which is used in connection with remediation activities at its production facilities in the Texas Gulf Coast.

Capco's principal products are crude oil and natural gas. Crude oil and natural gas are sold to various purchasers including pipeline companies which service the areas in which Capco's producing wells are located. Capco's business is seasonal in nature, to the extent that weather conditions at certain times of the year may affect its access to oil and gas properties and the demand for natural gas. Principally all of Capco's oil and gas production is sold on a month-to-month basis with no firm sales contracts.

The existence of commercial oil and gas reserves is essential to the ultimate realization of value from properties, and thus may be considered a raw material essential to Capco's business.

The acquisition, exploration, development, production and sale of oil and gas are subject to many factors, which are outside Capco's control. These factors include national and international economic conditions, availability of drilling rigs, casing, pipe and other fuels, and the regulation of prices, production, transportation, and marketing by federal and state governmental authorities.

Capco acquires oil and gas properties from landowners, other owners of interests in such properties, or governmental entities. For information on specific properties of Capco see Item 2. Capco currently is not experiencing any difficulty in acquiring necessary supplies or services as long as Capco can pay for the services and supplies nor is it experiencing any difficulty selling its products.

Competition

The oil and gas business is highly competitive. Capco's competitors include major companies, independents and individual producers and operators. Many of Capco's numerous competitors throughout the country are larger and have substantially greater financial resources than Capco. Oil and gas, as a source of energy, must compete with other sources of energy such as coal, nuclear power, synthetic fuels and other forms of alternate energy. Domestic oil and gas must also compete with foreign sources of oil and gas, the supply and availability of which have at times depressed domestic prices. Capco has an insignificant competitive position in the oil and gas industry.

Governmental and Environmental Laws

Capco's activities are subject to extensive federal, state and local laws and regulations controlling not only the exploration for oil and gas, but also the possible effect of such activities upon the environment. Existing as well as future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of properties, the extent of which cannot

be predicted. Many states have been authorized by the Environmental Protection Agency to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state as well as local authorities that regulate the environment, some of which impose more stringent environmental standards than Federal laws and regulations. The penalties for violations of state laws vary but typically include injunctive relief, recovery of damages for injury to air, water or property, and fines for non-compliance. Since inception, Capco has not made any material expenditures for environmental control facilities and does not expect to make any material expenditures during the current and following fiscal year.

Insurance

The Company has a commercial general liability policy, as well as other policies covering damage to its properties. These policies cover Company facilities in all states of operation. The exploration for, and production of, oil and gas can be hazardous, including unforeseen events such as blowouts, cratering of surface locations, fires and loss of well control. Events such as these can result in damage to wells and production facilities, injury to persons, loss of life and damage to the environment. While management believes the Company's insurance coverage is adequate for most foreseeable problems, and is comparable with the coverage of other companies in the same business and of similar size, its coverage does not protect the Company against all operational risks or for most third party liabilities relating to damage of the environment. Such environmental related coverage to third parties, is generally unavailable or available only at a prohibitive cost.

Employees

The Company employs approximately 27 people, none of whom are represented by any collective bargaining organizations. Management considers its employee relations to be satisfactory at the present time.

ITEM 2. DESCRIPTION OF PROPERTIES.

OIL AND GAS PROPERTIES. Capco’s principal oil and gas properties during the year ended December 31, 2004, were located in the Texas Gulf Coast and the states of Michigan and Montana. In total, the properties located in these areas accounted for more than 93% of the Company’s total annual revenue. Producing properties located in Alabama, Louisiana, Oklahoma, Texas and Wyoming provided less than 7% of Capco’s annual revenue for year 2004.

Michigan Capco owned working interests ranging from 2.8% to 22.5% in thirteen (13) oil and gas wells located primarily in Manistee and Oceana Counties, Michigan. Capco acquired the property interests in June 2002 at a cost of approximately $1.3 million. The Company derived gross revenue of $1.7 million and $2.2 million from the property during the years ended December 31, 2004 and 2003, respectively. Substantially all of the net operating cash flow from the property was utilized to reduce debt incurred with the original acquisition in 2002, and a subsequent refinancing in year 2003 in connection with the acquisition of a producing property located in the state of Montana. Effective December 31, 2004, the property was sold to Capco’s Chief Executive Officer for the assumption of debt and cash (see Montana property).

Montana Capco owned working interests ranging from less than 1% to 4.3% in approximately 1,100 oil and gas wells located in several counties in northern Montana. The properties were acquired by the Company in October 2003 at a cost of approximately $4.1 million. Capco derived gross revenue of $1.3 million and $0.2 million from the property during the years ended December 31, 2004 and 2003, respectively. All of the net operating cash flow from the property was utilized to

reduce debt incurred with the acquisition of the property. As of December 31, 2004, there remained approximately three years of debt amortization, based on current levels of net cash flow from the Michigan and Montana properties. Effective December 31, 2004, the two properties were sold to the Company’s Chief Executive Officer for the assumption of $3.3 million of indebtedness against the properties and $1.2 million cash. Capco intends to use the cash proceeds to fund its drilling obligations in the first quarter of year 2005.

Texas Gulf Coast Capco owns working interests ranging from 65% to 100% in thirty-six (36) wells located in offshore Matagorda County in the Texas Gulf Coast. The initial acquisition in this area was made in November 2003 at a cost of $1.2 million. Subsequent acquisitions in the area were made during the year 2004. Operations during the year 2004 included restoration of wells to production and expenditures to improve the production infrastructure and gas transmission capability to accommodate expected increases in production quantities as wells were returned to service. Capco derived gross revenue of $1.9 million and $0.1 million from the properties during the years ended December 31, 2004 and 2003, respectively. Activities planned for year 2005 include the restoration of additional wells to production, including one major recompletion attempt on an existing inactive wellbore. In addition, the Company plans to dispose of as many as thirteen (13) inactive well locations during the year 2005 either by designating wells for plugging and abandonment or by selling locations to other oil and gas operators. The Company anticipates that such actions will reduce the Company’s bonding requirements. The previous owner of a property acquired by Capco during the year 2004 is expected to contribute as much as $1.0 million to certain abandonment costs to the extent such costs are incurred by the Company.

Other Effective September 30, 2004, the Company sold its working interest ownership in non-operated properties located in the states of Alabama and Louisiana to a company owned by Capco’s Chief Executive Officer. Sales proceeds in the amount $0.4 million were used for working capital. The properties provided net cash flow of $0.1 million during the nine-month period that Capco owned the interests in 2004.

During the year 2004, Capco acquired working interests in additional oil and gas properties located in Creek and Osage Counties, Oklahoma, Stephens County, Texas and Natrona County, Wyoming at a combined acquisition cost of $0.7 million, plus development cost and net profits obligations. These properties, plus a property located in Galveston County, Texas that was previously acquired by Capco, accounted for total revenue of $0.1 million in 2004. For the year 2005, Capco plans to continue development activities on the properties located in Oklahoma to return inactive wells to service, and has also initiated workover operations on two wells in the Galveston County property in an attempt to increase production from the property. The Company will assess other shut-in wells on this property throughout the year 2005 in an effort to identify additional re-work locations.

During the year 2004, the Company participated in the leasing of more than 7,000 gross acres and the drilling of two exploratory wells on a prospect in Fayette County, Alabama. Although both wells were determined to be non-productive, Capco does not consider the entire acreage block condemned at this time. The Company plans further evaluation of the remaining acreage under lease during the year 2005 to determine if additional drilling is warranted.

OIL AND GAS ACREAGE. Capco holds interests in oil and gas leaseholds as of December 31, 2004, as follows:

Developed Undeveloped Expiration

Properties Properties Date (1)

------------- --------------- ----------

Gross Net Gross Net

State Acres Acres Acres Acres

----- ----- ----- ----- -----

Alabama -- -- 6,409 961 Nov ’06-Mar ‘07

Mississippi 200 25 -- --

Oklahoma 4,140 2,655 -- --

Texas 14,958 9,671 -- --

Wyoming 720 240 -- --

Total 20,018 12,591 6,409 961

Net acres represent the gross acres in a lease or leases multiplied by Capco's working interest in such lease or leases.

(1) Expiration date(s) of leases for undeveloped properties. Leasehold interests for developed properties are held by production.

PROVED DEVELOPED AND PROVED UNDEVELOPED RESERVES. The following table sets forth the proved developed and proved undeveloped oil or gas reserves accumulated by Capco, for the years ended December 31, 2004, 2003 and 2002. All of such reserves are located in the United States of America. For the two-year period ended December 31, 2003, the Company also owned producing oil and gas property located in the province of Alberta, Canada, but the operations were minimal and estimates of proved reserves were not prepared at each year-end. In 2003, the Company sold the Canadian interests. As reported in the Company's Form 10-QSB/A for the quarterly period ended March 31, 2003 (filed on August 21, 2003), a review by the Securities and Exchange Commission of the Company's engineered proved reserves as previously reported resulted in the exclusion of certain proved undeveloped reserves. The excluded reserves consisted of the following at December 31, 2002: 10,005 mmcf of gas and 297,000 barrels of oil. The following information has been revised to include these changes.

2004 2003 2002

----------------- ----------------- -----------------

Oil Gas Oil Gas Oil Gas

(Bbls) (MCF) (Bbls) (MCF) (Bbls) (MCF)

Proved Developed

Reserves 307,818 1,458,287 351,194 15,507,081 326,873 2,535,627

Proved Undeveloped

Reserves 78,862 1,657,984 210,021 2,107,182 210,919 326,116

------- ---------- ------- --------- ------- ---------

Proved

Reserves 386,680 3,116,271 561,215 17,614,263 537,792 2,861,743

======= ========== ======= ========= ======= =========

Capco’s proved reserves at December 31, 2004, decreased significantly from the reported quantities at December 31, 2003, due principally to revisions of previous estimates and sales of properties. The independent engineers’ estimated proved reserves attributable to Capco’s interests in the Caplen and Brazos properties, exclusive of production during the year 2004, decreased 202,300 barrels of oil and 7,592,000 mcf of gas. The changes reflect the engineers’ subjective evaluation of the properties based on a number of factors including data that was available when

the evaluation was prepared, actual production during the current year and price changes. Properties sold by Capco during the year 2004 resulted in additional decreases of 190,400 barrels of oil and 6,262,000 mcf of gas. Properties acquired during the year 2004 resulted in an increase to proved reserves of 240,200 barrels of oil and 83,000 mcf of gas, while year 2004 production resulted in a decrease of proved reserves of 22,100 barrels of oil and 727,000 mcf of gas.

Proved reserves are estimates of oil and gas to be produced in the future. There are numerous uncertainties inherent in the process of preparing such estimates, including future rates of production, timing and cost of development expenditures and the actual results realized as a result of such expenditures. The estimates presented in this Report are based on several assumptions including constant oil and gas prices, operating expenses and capital expenditures. Actual future production, cash flow and ultimate recoverable quantities of oil and gas may vary significantly from the estimated quantities, as variances from the assumptions could result in significant differences in quantities and value.

No major discovery or other favorable or adverse event has occurred since December 31, 2004, which is believed to have caused a material change in the proved reserves of Capco.

RESERVES REPORTED TO OTHER AGENCIES. There have been no reserve estimates filed with any other United States federal authority or agency.

NET OIL AND GAS PRODUCTION. The following table sets forth the net quantities of oil (including condensate and natural gas liquids) and gas produced during the years ended December 31, 2004, 2003 and 2002:

2004 2003 2002

-------- -------- --------

Oil (Bbls):

United States 22,087 38,613 31,372

Canada -- -- --

Gas (Mcf):

United States 727,336 408,747 152,669

Canada -- 7,584 3,157

The following table sets forth the average sales price and production cost per units of production for the years ended December 31, 2004, 2003 and 2002:

2004 2003 2002

-------- -------- --------

Average Sales Price:

United States:

Bbl $37.13 $21.69 $22.93

Mcf $ 5.54 $ 4.92 $ 3.99

Canada-Mcf -- $ 1.78 $ 1.58

Average Production (Lifting)

Costs: Per Equivalent

Barrel of Oil:

United States $17.87 $14.25 $12.76

Canada -- $ 7.01 $15.66

During the periods covered by the foregoing tables, Capco was not a party to any long-term supply or similar agreements with foreign governments or authorities in which Capco acted as a producer.

PRODUCTIVE WELLS (1). The following table sets forth Capco's total gross and net productive oil and gas wells as of December 31, 2004:

OIL GAS

--------------------- ------------------------

State Gross(2) Net(3) Gross(2) Net(3)

----- -------- ------ -------- ------

Oklahoma 91 60.7 -- --

Texas 4 2.4 27 19.0

Wyoming 9 3.0 -- --

--- ---- ----- ----

Total 104 66.1 27 19.0

--- ---- ----- ----

(1) Productive wells are producing wells and wells capable of production including wells that are shut in.

(2) A gross well is a well in which a working interest is owned. The number of wells is the total number of wells in which a working interest is owned.

(3) A net well is deemed to exist when the sum of fractional ownership working interests owned in gross wells equals one. The number of net wells is the sum of the fractional ownership working interests owned in gross wells expressed in whole numbers and fractions thereof.

UNDEVELOPED PROPERTIES. During the year ended December 31, 2004, Capco acquired a 15% working interest in approximately 7,049 gross (1,057 net) acres of undeveloped property in Fayette County, Alabama. Two dry holes were drilled on the property, resulting in the condemnation of 640 gross acres. The remaining acreage (6,409 gross) is under evaluation by the Company to determine if additional drilling is warranted. Leases on the property expire at various times during the period November 2006 to March 2007.

During the year ended December 31, 2003, the Company acquired working interests in undeveloped leases comprising approximately 855 gross acres (670 net acres) in Kern County, California. Following a period of evaluation, which included monitoring drilling activity by other operators in the area, the decision was made to abandon the prospect in the year 2004.

Capco's oil and gas properties are in the form of mineral leases. As is customary in the oil and gas industry, a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Title investigations are generally completed, however, before commencement of drilling operations.

Capco believes that its methods of investigating are consistent with practices customary in the industry and that it has generally satisfactory title to the leases covering its proved reserves.

DRILLING ACTIVITY. The following table sets forth certain information for the year ended December 31, 2004, pertaining to Capco’s participation in the drilling of exploratory and development wells:

Gross(1) Net(2)

------- -----

Exploratory

Oil -- --

Gas 1 0.9

Dry(3) 3 1.2

Development

Oil -- --

Gas -- --

Dry(3) -- --

Total

Oil -- --

Gas 1 0.9

Dry(3) 3 1.2

(1) A gross well is a well in which a working interest is owned. The number of wells is the total number of wells in which a working interest is owned.

(2) A net well is deemed to exist when the sum of fractional ownership working interests owned in gross wells equals one. The number of net wells is the sum of the fractional ownership working interests owned in gross wells expressed in whole numbers and fractions thereof.

(3) A dry hole is an exploratory or development well that is not a producing well.

All of Capco’s drilling activities were conducted in the United States of America.

Capco did not conduct any drilling activities during the years ended December 31, 2003 and 2002.

DELIVERY COMMITMENTS. Capco is not obligated to provide a fixed and determinable quantity of oil and gas in the future pursuant to existing contracts or agreements.

OFFICE FACILITIES. Capco leases space for its executive offices at 5555 San Felipe, Suite 725, Houston, TX, and leases additional office space at locations in Tustin, CA and Tulsa, OK. Total leased space is approximately 5,500 square feet at the rate of $7,300 per month.

ITEM 3. LEGAL PROCEEDINGS.

The Company is a party to certain litigation that has arisen in the normal course of its business and that of its subsidiaries. A company engaged by Capco to provide well service in connection with workover operations on some of the Company’s offshore wells has filed a claim for unpaid invoices in the amount of approximately $0.2 million. Capco has recorded less than $50,000 of such costs in its accounts, and has claims against the service company for damages and costs to its wells in an estimated amount in excess of $1.0 million. The Company expects to show that its damages far exceed the claim amount asserted by the service company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of the fiscal year covered by this Annual Report, no matter was submitted to a vote of Capco's security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

The Common Stock of Capco has been traded on the Bulletin Board since June 2000. In December 2003, the Company approved a 4 for 1 forward stock split on the Common Stock, and all references to shares of Common Stock made herein have been adjusted to give effect to the stock split. The following table sets forth the high and low bid prices of the Common Stock in the over-the-counter market for the periods indicated (after giving effect to the 4 for 1 forward split). The bid prices represent prices between dealers, and do not include retail markups, markdowns or commissions, and may not represent actual transactions. Public trading in the Common Stock of Capco is minimal.

Quarter Ended Bid High Bid Low

------------- -------- -------

March 31, 2003 $ 0.12 $ 0.06

June 30, 2003 $ 0.09 $ 0.04

September 30, 2003 $ 0.16 $ 0.06

December 31, 2003 $ 0.20 $ 0.07

March 31, 2004 $ 0.37 $ 0.11

June 30, 2004 $ 0.26 $ 0.14

September 30, 2004 $ 0.21 $ 0.14

December 31, 2004 $ 0.23 $ 0.12

The number of record holders of Common Stock of Capco as of March 15, 2005, was approximately 677. Additional holders of Capco's Common Stock hold such stock in street name with various brokerage firms.

Holders of Common Stock are entitled to receive dividends as may be declared by the Board of Directors out of funds legally available. No Common Stock dividends have been declared to date by Capco, nor does Capco anticipate declaring and paying Common Stock cash dividends in the foreseeable future.

The following table presents information regarding the Company's equity compensation plans at December 31, 2004:

Number of

Number of securities

securities to remaining available

be issued upon Weighted-average for future issuance

exercise of exercise price under equity

outstanding of outstanding compensation

Plan category options options plans

------------- -------------- ---------------- -------------------

Equity compensation

plans approved by

security holders 4,585,000 $0.12 5,390,577

Equity compensation

plans not approved

by security holders 12,000,000 $0.15 --

---------- ---------

Total 16,585,000 $0.14 5,390,577

========== ==== =========

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that include, among others, statements concerning: the benefits expected to result from Capco's divestiture of petroleum marketing operations, including decreased expenses and expenditures that are expected to be realized by Capco as a result of the divestiture, and other statements of: expectations, anticipations, beliefs, estimations, projections, and other similar matters that are not historical facts, including such matters as: future capital requirements, development and exploration expenditures (including the amount and nature thereof), drilling of wells, reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues), future production of oil and gas, repayment of debt, realization of proceeds from d isposition of real property, business strategies, and expansion and growth of business operations. These statements are based on certain assumptions and analyses made by the management of Capco in light of past experience and perception of: historical trends, current conditions, expected future developments, and other factors that the management of Capco believes are appropriate under the circumstances. Capco cautions the reader that these forward-looking statements are subject to risks and uncertainties, including those associated with the financial environment, the regulatory environment, and trend projections, that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks and uncertainties identified below.

Significant factors that could prevent Capco from achieving its stated goals include: declines in the market prices for oil and gas, adverse changes in the regulatory environment affecting Capco, the inability to dispose of real property at prices sufficient enough to liquidate associated indebtedness, the inherent risks involved in the evaluation of properties targeted for acquisition, the Company’s dependence on key personnel, the availability of capital resources at terms acceptable to the Company, the uncertainty of estimates of proved reserves and future net cash flows, the risk and related cost of replacing produced reserves, the high risk in exploratory drilling and competition. Capco or persons acting on its or their behalf should consider the cautionary statements contained or referred to in this report in connection with any subsequent written or oral forward-looking statements that may be issued. Capco undertakes no obligation to re lease publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

LIQUIDITY AND CAPITAL RESOURCES

The following discussion is based on the continuing operations of the Company. Discontinued operations have been separately presented in the financial statements.

At December 31, 2004, the Company had a working capital deficit of $0.1 million. However, current liabilities included certain accrued expenses in the amount of $0.3 million and a promissory note in the amount of $0.4 million that will not require the use of working capital to satisfy the obligations. Those accrued expenses include a $0.2 million obligation incurred in connection with the acquisition of an oil property in Oklahoma, and other liabilities in the amount of $0.1 million that will be settled during the year 2005 by the issuance of 1.0 million shares of Common Stock. The Company anticipates that the promissory note in the amount of $0.4 million will be assumed by a third party in connection with the acquisition of a producing oil and gas property that is expected to close in May 2005.

Continuing Operations

Net cash provided by operating activities totaled $3.1 million for the year ended December 31, 2004, compared to cash provided by operating activities of $8,000 for the year ended December 31, 2003. In 2004, net income, adjusted for reconciling items, provided a cash source of $1.7 million. Changes in assets and liabilities in 2003 resulted in a cash source of $1.4 million. In 2003, net loss, adjusted for reconciling items, resulted in a cash source of $0.7 million. Changes in assets and liabilities resulted in a cash outflow of $0.7 million.

Net cash used in investing activities totaled $4.7 million for the year ended December 31, 2004, and net cash provided by investing activities totaled $1.1 million for the year ended December 30, 2003. A deposit in the amount of $0.4 million on a property acquisition, capital expenditures for oil and gas property in the amount of $4.0 million, purchases of other property and equipment in the amount of $0.7 million and the issuance of notes receivable in the amount of $1.0 million were the principal cash outflows in 2004. Proceeds in the amount of $1.7 million from the sale of oil and gas properties were the principal source of cash inflow in 2004. Net advances of $0.8 million received from related parties and proceeds of $0.8 million received from joint interest owners for their participation in property acquisitions were the principal sources of cash inflow in 2003. An equity contribution of $0.4 million to a subsidiary was the princip al cash outflow in 2003.

Net cash provided by financing activities totaled $3.4 million for the year ended December 31, 2004, and net cash used in financing activities totaled $1.1 million for the year ended December 31, 2003. Proceeds from borrowings and an increase in long-term liabilities provided cash inflows of $3.4 million and $1.4 million, respectively, in 2004. Payments on long-term debt resulted in a cash outflow of $1.4 million in 2004. Payments on long-term debt in 2003 totaled $1.1 million.

The Company’s total long-term debt decreased from a balance of $4.8 million at December 31, 2003, to a balance of $2.7 million at December 31, 2004. Proceeds in the amount of $1.6 million were received from the issuance of convertible promissory notes, convertible into the Company’s Common Stock. An additional $1.0 million was borrowed in December 2004, to be repaid over a period of twenty months. In addition to the $1.5 million of debt reduction by cash payments, an additional $3.2 million of long-term debt was assumed by the buyers of land and oil and gas properties.

The Company has various loans which require principal payments of $1.4 million in 2005. Of this amount, it is anticipated that $0.4 million will be assumed by a third party in connection with the acquisition of a producing oil and gas property that is expected to close in May 2005. The remainder of the payments are anticipated to be made from cash flow available from the operations of other producing property, and from proceeds from the sale of assets and equity and/or debt fundings.

To the extent such cash flow is insufficient to make the debt payments and provide adequate working capital for the business of the Company, the Company may be required to reduce or curtail certain operations or seek other sources of capital. Capco has historically secured financing for its acquisition and development activities on a project-financing basis. Such financing has included the sale of portions of target acquisitions or drilling ventures to third parties, participation with co-venturers on financing arranged by the other party, private borrowings from individuals and private placements of the Company’s Common Stock. Other than financing arrangements already consummated in the first quarter of 2005, the Company does not have any agreements or arrangements providing for such financing and it may not be available on terms acceptable to the Company.

In addition to debt service requirements, Capco has several other obligations that affect the Company’s available cash flow. The Company is obligated to pay operating lease costs of approximately $0.1 million in 2005 for land and facilities and has an obligation to a surety company to make monthly cash collateral deposits of $12,000 over a period of twenty-four months, beginning February 2005. Acquisitions of producing oil and gas properties that closed during the year ended December 31, 2004, include obligations to make development expenditures of $0.6 million during the year 2005 to earn the entire working interests stipulated in the purchase agreements. Various purchase agreements require that funding obligations of $1.1 million and $0.3 million be paid from the net profits, if any, derived from the respective operations of the properties. Utilization of available cash flow to fund these requireme nts may affect Capco’s ability to adequately fund other planned activities.

Capco disposed of its equity ownership in Enterprise and subsidiaries during the year 2003, but remained as guarantor of certain indebtedness incurred by those business interests prior to the date of sale by Capco. As of December 31, 2004, Capco was the guarantor of $1.1 million of obligations for trade accounts, real estate and equipment purchases and leases owed by Enterprise. The obligations are being serviced by Enterprise, and Capco believes that there is sufficient underlying collateral value in the related assets to significantly reduce the exposure of loss to the Company. Capco is also the guarantor of indebtedness issued to one lender by Graves, a former subsidiary of Enterprise, in the amount of $3.9 million at December 31, 2004. Graves is owned by Capco’s Chief Executive Officer. In December 2004, a Pay-Off Agreement (“Agreement”) was negotiated with the lender, which provided for the followin g: the outstanding amount of debt owed was reduced from $3.9 million to $2.7 million by application of proceeds from properties sold and a discount given by the lender, scheduled monthly payments were to be made for the period February 15, 2005, to June 15, 2005, with the balance owing at June 30, 2005, $2.6 million, to be paid at that date (“Date of Closing”). Alternatively, by making a payment of $1.0 million on or before May 31, 2005, the Date of Closing would be extended for a period of ninety (90) days. As a further condition of the Agreement, the buyer deposited into an escrow account ten million shares of the Company’s Common Stock. In the event that debt payments are not made in accordance with the terms of the Agreement, the lender has the right to proceed to collect the unpaid indebtedness based on the original amount owed and has the right to liquidate the Common Stock in escrow in addition to seeking other remedies available to it to collect the outsta nding balance. At this time Capco believes that the indebtedness will be satisfied in accordance with the terms of the Agreement and that the Company will not incur any loss attributable to the guarantee.

In the first quarter of year 2005, Capco closed on two financings to provide capital for its participation in the drilling of an exploratory well and for other planned activities. In January 2005, the Company received $1.5 million from the sale of portions of its working interests in producing oil and gas properties located in the Texas Gulf Coast, and an interest in an exploratory well on which drilling activities commenced in February 2005. On April 12, 2005, the Company announced that due to encountering excessive gas pressures at a depth of approximately 13,350 feet, the decision was made to sidetrack from the existing well bore and re-drill the well from a depth of approximately 8,500 feet to a depth in excess of 14,000 feet. As a result of the difficulties encountered in drilling this well, the cost has substantially exceeded the Company's planned expenditures in this regard and is increasing as the drilling continues. Significant capital resources of the Company have been and will continue to be utilized to pay the ongoing costs associated with the well. While the Company believes that it has sufficient capital resources to complete the drilling as currently planned, any further delays or complications may result in additional costs for which the Company will need to make financial arrangements. The Company anticipates that it will recover certain of the drilling costs from participants in

the well if and when the drilling reaches the targeted depth. Additionally, the Company intends to pursue a claim on the insurance covering the drilling of the well based upon the consequences of encountering the excessive gas pressures in the initial well bore, and any insurance proceeds would also assist in recovering a portion of the drilling costs. The Company cannot make any assurances concerning the potential completion of or production from this well.

On March 10, 2005, the Company entered into a Securities Purchase Agreement with certain accredited investors with respect to a private placement under Regulation D of 10 million shares of the Company's Common Stock and common stock purchase warrants for 5 million shares of the Company's Common Stock, for a total purchase price of $3.0 million. The transaction closed on March 11, 2005. Capco intends to use the net proceeds from this issuance and sale of securities in the acquisition and development of oil and gas properties and for general corporate purposes.

On March 15, 2005, the Company entered into an agreement for the acquisition of producing properties located in St. Bernard Parish, Louisiana, and Chandeleur Area, OCS Blocks 27, 29 and 30, and funded a $1.0 million cash deposit with the seller of the properties. Closing for the acquisition is scheduled for May 4, 2005. The closing cost is expected to approximate $12.0 million, after adjustment for net revenue credits from the effective date to the closing date and after credit for the $1.0 million cash deposit. Capco expects to fund the acquisition cost by selling the acquired property interests to third parties, while retaining an interest in the properties after the third parties receive payout on their investment amounts.

The Company is responsible for any contamination of land it owns or leases. However, there may be limitations on any potential contamination liabilities as well as claims for reimbursement from third parties.

The Company sells most of its oil production to certain major oil companies. However, in the event these purchasers discontinued oil purchases, Capco has made contact with other purchasers who would purchase the oil at terms standard in the industry.

Discontinued Operations

Discontinued operations reported for the year 2003 consist of operations for the nine-month period ended September 30, 2003.

Net cash provided by operating activities totaled $2.5 million in 2003. Net loss, adjusted for reconciling items, resulted in a cash outflow of $0.5 million. Changes in assets and liabilities in 2003 provided a cash inflow of $3.0 million.

Net cash provided by investing activities totaled $0.8 million in 2003. Proceeds of $0.8 million from the sale of an equity investment and $0.4 million from an equity contribution were the principal sources of cash inflow.

Financing activities resulted in cash used of $3.3 million in 2003. Payments on a revolving credit facility and on long term debt resulted in cash outflows of $3.7 million. A decrease in restricted cash resulted in a cash inflow of $0.4 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no material exposure to interest rate changes.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004, COMPARED TO YEAR ENDED DECEMBER 31, 2003

Capco's revenues from oil and gas activities were $5.3 million in 2004 compared to $3.1 million in 2003. This increase is due to increases in product prices paid at the

wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE increased to $33.67 in 2004 from $28.90 in 2003, resulting in an increase in revenue of $0.5 million. Total production was 143,300 BOE in 2004, compared with 108,000 BOE in 2003, resulting in an increase in revenue of $1.2 million. The increase in revenue was due principally to production from two acquisitions that closed in the fourth quarter of 2003. The Montana properties acquired in November 2003 provided revenue of $1.0 million (37,000 BOE) in 2004, and the Brazos properties located in the Texas Gulf Coast that were acquired in November 2003 provided revenue of $1.7 million (48,000 BOE) in 2004.

Capco's cost of sales increased to $3.0 million in 2004 from $1.5 million in 2003, due principally to the increase in production volumes from 108,000 BOE in 2003 to 143,300 BOE in 2004.

Net operating revenues from Capco's oil and gas production are very sensitive to changes in the price of oil and Capco sold a significant portion of its producing properties in late 2004; thus it is difficult for management to predict whether or not the Company will be profitable in the future.

General and administrative expenses were $1.3 million in 2004 and $0.9 million in 2003. The change is due to an increase in employment levels in Capco’s Houston, Texas office necessitated by the properties operated by Capco in the Texas Gulf Coast. In 2003, Capco realized cost savings from relocation of the Company's administrative office from Orange, California to Denver, Colorado in February 2003.

Depreciation, depletion and amortization was $0.8 million in 2004 and $0.6 million in 2003. This change is attributable to the increase in production volumes in 2004, cost additions to the Company's United States full cost pool in the second half of 2003 and during the year 2004, including acquisitions in Montana, Oklahoma and the Texas Gulf Coast.

Interest income decreased to $19,000 in 2004 from $45,000 in 2003 as notes receivable taken by Capco in April 2003 were collected during that same year.

Interest expense increased to $0.4 million in 2004 from $0.2 million in 2003, due principally to an increase in the average balance of interest-bearing indebtedness from $1.0 million in 2003 to $5.7 million in 2004. The increase was substantially related to debt incurred in the acquisition of oil and gas interests in Montana in late 2003 which was assumed by the buyer of those interests at December 31, 2004.

Gain (loss) from sale of marketable securities, including unrealized holding gains (losses), decreased from a gain of $0.1 million in 2003 to a loss of $0.1 million in 2004, due principally to market value declines.

In 2004, Capco recorded gains of $0.6 million and $0.4 million from the sale of land and oil and gas properties, respectively.

In 2003, the Company recorded a loss of $0.2 million resulting from potential deficits that may result from the liquidation of debt issued by a former subsidiary for which the Company is a guarantor.

YEAR ENDED DECEMBER 31, 2003, COMPARED TO YEAR ENDED DECEMBER 31, 2002

Capco's revenues from oil and gas activities were $3.1 million in 2003 compared to $1.3 million in 2002. This increase is due to increases in product prices paid at the wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE increased to $28.90 in 2003 from $23.23 in 2002, resulting in an increase in revenue of $0.3 million. Total production was 108,000 BOE in 2003, compared with 57,300 BOE in 2002, resulting in an increase in revenue of $1.5 million. Production from the Michigan properties acquired in June 2002 totaled 78,000

BOE in 2003 (27,400 BOE in 2002); sale of the Buried Hills property in Kansas in May 2002 resulted in a comparative production decrease of 8,900 BOE in 2003. Two acquisitions that closed in the fourth quarter of 2003 produced 9,500 BOE in 2003.

Capco's cost of sales increased to $1.5 million in 2003 from $0.7 million in 2002, due principally to the increase in production volumes from 57,300 BOE in 2002 to 108,000 BOE in 2003.

Net operating revenues from Capco's oil and gas production are very sensitive to changes in the price of oil; thus it is difficult for management to predict whether or not the Company will be profitable in the future.

General and administrative expenses were $0.9 million in 2003 and $1.5 million in 2002. The decrease is due to the closing of field offices in 2002, and the cost savings realized from relocation of the Company's administrative office from Orange, California to Denver, Colorado in February 2003.

Depreciation, depletion and amortization was $0.6 million in 2003 and $0.4 million in 2002. This change is attributable to the increase in production volumes in 2003, cost additions to the Company's United States full cost pool in the second half of 2002, including acquisitions in Michigan and Louisiana, and cost additions in 2003, including acquisitions in Montana and the Texas Gulf Coast.

Interest income increased to $45,000 in 2003 from $5,000 in 2002 as a result of interest accrued on notes receivable taken by the Company in April 2003.

Interest expense decreased to $0.2 million in 2003 from $0.3 million in 2002, due principally to a reduction in the average balance of interest-bearing indebtedness from $2.4 million in 2002 to $1.0 million in 2003 (exclusive of the Montana acquisition debt that was placed in November 2003).

Gain (loss) from sale of marketable securities, including unrealized holding gains (losses), increased from a loss of $0.1 million in 2002 to a gain of $0.1 million in 2003, due principally to market value appreciation.

In 2003, the Company recorded a loss of $0.2 million resulting from potential deficits that may result from the liquidation of debt issued by a former subsidiary for which the Company is a guarantor.

In 2002, the Company realized a gain of $0.3 million from the sale of the Kansas oil property, and recorded losses in the amount of $0.1 million from the acquisitions of minority interests in Limited. The Company did not have similar transactions in 2003.

EFFECT OF CHANGES IN PRICES

Changes in prices during the past few years have been a significant factor in the oil and gas industry. The price received for the oil produced by Capco fluctuated significantly during the last year. Changes in the price that Capco receives for its oil and gas is set by market forces beyond Capco's control as well as governmental intervention. The volatility and uncertainty in oil and gas prices have made it more difficult for a company like Capco to increase its oil and gas asset base and become a significant participant in the oil and gas industry. Capco sells most of its oil and gas production to certain major oil companies. However, in the event these purchasers discontinued oil and gas purchases, Capco has made contact with other purchasers who would purchase the oil and gas at terms standard in the industry.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, recovery of oil and gas reserves, financing operations, and contingencies and litigation.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, the discounted value of recoverable oil and gas reserves, the fair value of asset retirement obligations, the proceeds to be realized from the sale of real property, and the classification of net operating loss carryforwards between current and long-term ass ets.

Accounts Receivable

The Company has a diversified customer base and controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for un-collectible accounts.

Investment in Equity securities

For equity securities that the Company i) does not exercise control in the investee and ii) expects to divest within a short period of time, the Company accounts for the investment under the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with FASB No. 115, equity securities that have readily determinable fair values are classified as either trading or available-for-sale securities. Securities that are bought and held principally for the purpose of selling in the near term (thus held for only a short period of time) are classified as trading securities and all other securities are classified as available-for-sale. Trading and avai lable-for-sale securities are measured at fair value in the balance sheet. For trading securities any realized gains or losses and any unrealized holding gains and losses are reported in the statement of operations. For available-for-sale securities any realized gains and losses are reported in the statement of operations and any unrealized holding gains and losses are reported as a separate component of stockholders' equity until realized.

Oil and Gas Properties

geological and geophysical services, drilling, completion, equipment, and certain general and administrative costs directly associated with acquisition, exploration, and development activities. General and administrative costs related to production and general overhead are expensed as incurred. No gains or losses are recognized upon the sale or disposition of oil and gas properties, except in transactions that involve a significant amount of reserves.

Proceeds from the sale of oil and gas properties are generally treated as a reduction of oil and gas property costs. Fees from associated oil and gas exploration and development partnerships, if any, will be credited to oil and gas property costs to the extent they do not represent reimbursement of general and administrative expenses currently charged to expense.

In accordance with the full cost method of accounting, future development, site restoration and dismantlement and abandonment costs, net of salvage values, are estimated on a property-by-property basis based on current economic conditions and are amortized to expense as the Company's capitalized oil and gas property costs are amortized.

The provision for depreciation and depletion of oil and gas properties is computed on the unit-of-production method. Under this method, the Company computes the provision by multiplying the total unamortized costs of oil and gas properties including future development, site restoration, and dismantlement abandonment costs, but excluding costs of unproved properties by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. This calculation is done on a country-by-country basis. As of December 31, 2004, all of the Company’s oil production operations are conducted in the United States of America. The cost of unevaluated properties not being amortized, to the extent there is suc h a cost, is assessed quarterly to determine whether the value has been impaired below the capitalized cost. The cost of any impaired property is transferred to the balance of oil and gas properties being depleted. The costs associated with unevaluated properties relate to projects which were undergoing exploration or development activities or in which the Company intends to commence such activities in the future. The Company will begin to amortize these costs when proved reserves are established or impairment is determined. Management believes no such impairment exists at December 31, 2004.

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” the Company reports a liability for any legal retirement obligations on its oil and gas properties. The associated costs are capitalized as part of the full cost pool. Following is a reconciliation of the asset retirement obligation liability for the year ended December 31, 2004 (in thousands):

Asset retirement obligation at January 1, 2004 $ 1,105

Liabilities incurred 1,088

Liabilities settled --

Accretion expense --

Revisions in estimated liabilities --

-----

Asset retirement obligation at December 31, 2004 $ 2,193

=====

At the end of each reporting period, the unamortized cost of oil and gas properties, net of related deferred income taxes, is limited to the sum of the estimated future net revenues from proved properties using current prices, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects ("Ceiling Limitation").

The calculations of the ceiling limitation and provision for depreciation, depletion, and amortization are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proven reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered.

Other Property and Equipment

Non-oil and gas producing properties and equipment are stated at cost; major renewals and improvements are charged to the property and equipment accounts; while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed currently. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to operations.

Depreciation for non-oil and gas properties is recorded on the straight-line method at rates based on estimated useful lives ranging from three to fifteen years of the assets.

Impairment of Long-Lived Assets

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The statement also supersedes certain provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period or periods in which the losse s are incurred rather than as of the measurement date, as presently required. The Company adopted this new statement on January 1, 2002, and concluded that the effect of adopting this statement had no material impact on the Company’s financial position, results of operations, or cash flows.

Revenue Recognition

The Company recognizes revenue upon transfer of ownership of the product to the customer which occurs when (i) the product is physically received by the customer, (ii) the Company issues an invoice to the customer which evidences an arrangement between the customer and the Company, (iii) a fixed sales price has been included in such invoice, and (iv) collection from such customer is probable.

Stock Based Compensation

The Company accounts for employee stock options in accordance with APB No. 25 "Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted at a price below market price on the date of grant.

In 2002, the Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 123, which prescribes the recognition of compensation expense based on the fair value of options on the grant date, allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method, for which the Company uses the Black-Scholes option-pricing model. For non-employee stock based compensation the Company recognizes an expense in accordance with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards the value is based on the market value for the stock on the date of grant and if the stock has rest rictions as to transferability a discount is provided for lack of tradability. Stock option awards are valued using the Black-Scholes option-pricing model.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements.

Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, "Accounting for Income Taxes". As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the reporting and display of comprehensive income and its components in the financial statements. For the year ended December 31, 2004, the Company did not report any components of comprehensive income. For the year ended December 31, 2003, the Company had other comprehensive income relating to foreign currency translations.

Earnings per Share

The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the numerator is increased by the amount of interest expense attributable to the convertible promissory notes payable and the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. On a diluted basis, under the treasury method of calculating the additional shares outstanding, the Company's weighted average shares outstanding for the year ended December 31, 2004, have been increased for 5,192,941 shares of Co mmon Stock as associated stock options have a dilutive effect on net income. Additionally, the number of shares outstanding for the year ended December 31, 2004, have been increased for 4,481,148 shares of Common Stock determined under the "if converted" method, due to the issuance of convertible notes payable during the year ended December 31, 2004. On a diluted basis, the Company’s weighted average shares outstanding for the year ended December 31, 2003, have been increased for 1,212,992

shares of Common Stock as associated stock options have a dilutive effect on income from continuing operations, which is the benchmark number for determining whether potential common stock is included in determining earnings (loss) per share. In accordance with SFAS No. 128, the stock options are also considered to be potential common stock in determining loss per share on loss from discontinued operations and net loss, even though the stock options are antidilutive.

New Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of EITF 03-1 and does not believe the impact will be significant to the Company’s overall results of operations or financial position.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66 and 67 (SFAS 152)”. The amendments made by Statement 152 amend FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005, with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously,

Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair- value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after December 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In March 2005, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”). The interpretations in SAB 107 express views of the staff regarding the interaction between Statement of Financial Accounting Standards Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”) and certain SEC rules and regulations and provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial mea sures, first-time adoption of Statement 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of Statement 123(R), the modification of employee share options prior to adoption of Statement 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of Statement 123(R).

ITEM 7. FINANCIAL STATEMENTS.

Included at Pages F-1 through F-42 hereof.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

None

ITEM 8A. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Accounting Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Sections 13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period reported in this annual report (the “Evaluation Date”), concluded that the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and would be made know to them by others within those entities as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal controls

The Company does not believe that there are significant deficiencies in the design or operation of its internal controls that could adversely affect its ability to record, process, summarize and report financial data. Although there were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date, the Company’s senior management, in conjunction with its Board of Directors, continuously reviews overall Company policies and improves documentation of important financial reporting and internal control matters. The Company is committed to continuously improving the state of its internal controls, corporate governance and financial reporting.

The Company’s management, including the Chief Executive Officer and the Chief Accounting Officer, does not expect that its disclosure or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART III

Items 9, 10, 11, 12 and 14

The information required by Items 9 through 12 and Item 14 is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, which the Company has filed with the U. S. Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2004.

PART IV

ITEM 13. EXHIBITS

(a) Documents filed as part of this Report:

(1) The following Financial Statements are filed as part of this Report:

Page

----

Report of Independent Registered Public

Accounting Firm, April 1, 2005 F-1

Consolidated Balance Sheet, December 31, 2004 F-2 - F-3

Consolidated Statements of Operations and Comprehensive

Income (Loss) for the years ended

December 31, 2004 and 2003 F-4 - F-5

Consolidated Statements of Changes in Stockholders'

Equity for the years ended December 31, 2004 and 2003 F-6 – F-7

Consolidated Statements of Cash Flows for the years

ended December 31, 2004 and 2003 F-8 - F-12

Notes to Consolidated Financial Statements F-13 - F-38

Supplemental Information About Oil and Gas Producing

Activities (unaudited) F-39 - F-42

(2) Exhibits

Exhibit

Number Description Location

------- -------------------------- ------------------------------------

2 Not applicable

3.1 Articles of Incorporation (incorporated by reference to

and Bylaws Exhibits 4 and 5, respectively,

to Registration Statement

No. 2-73529)

3.2 Articles of Amendment (incorporated by reference to

the company's Form 10-K filed

May 31, 1984)

3.3 Articles of Amendment (incorporated by reference to

the company's Form 10-K filed

May 31, 1985)

3.4 Articles of Amendment (incorporated by reference to

the Company's Form 10-QSB filed

January 19, 2000)

4. Instruments Defining the (incorporated by reference to

Rights of Security Holders, Exhibits 4 and 5, respectively,

Including Indentures to Registration Statement

No. 2-73529)

Exhibit

Number Description Location

------- -------------------------- ------------------------------------

10.1 1999 Incentive Equity Plan (incorporated by reference to the

Company's definitive proxy statement

filed December 2, 1999)

10.2 Stock Exchange Agreement (incorporated by reference to the

between the Company and Company's Form 10-KSB for the year

Sedco related to Capco ended December 31, 1999, filed

Resource Corporation November 2, 2000

10.3 Stock Purchase Agreement, (incorporated by reference to

dated January 30, 2001, Form 8-K of Meteor Industries,

and between Capco Energy, Inc. dated February 13, 2001,

Inc. and Meteor Industries, SEC File No. 0-27698)

Inc.

10.4 First Amendment to Stock (incorporated by reference to the

Purchase Agreement dated Company's Form 8-K filed May 7, 2001)

April 27, 2001, by and

between Capco Energy, Inc.

and Meteor Industries, Inc.

10.5 Agreement by and among New (incorporated by reference to the

Mexico Marketing, Inc., Company's Form 10-KSB for the year

Meteor Marketing, Inc., ended December 31, 2002, filed

Graves Oil & Butane Co., April 23, 2003)

and the Sole Shareholder of

Graves Oil & Butane Co., Inc.

10.6 Stock Purchase Agreement (incorporated by reference to the

dated April 30, 2003, by Company's Form 8-K filed May 16,

and between Capco Energy, 2003)

Inc. and Sedco, Inc.

10.7 Amendment to Purchase (incorporated by reference to the

Agreement by and between Company's Form 10-QSB for the

Sedco, Inc. and Capco quarterly period ended September 30,

Energy, Inc., September 2003, filed December 10, 2003)

30, 2003

10.8 Purchase Agreement by (incorporated by reference to the

and between Sedco Energy, Company’s Form 10-KSB for the year

Inc. and Capco Energy, Inc., ended December 31, 2003, filed

December 31, 2003 April 15, 2004)

10.9 Purchase Agreement by (incorporated by reference to the

and between Sedco Energy, Company’s Form 10-KSB for the year

Inc. and Capco Energy, Inc., ended December 31, 2003, filed

December 31, 2003 April 15, 2004)

10.10 Letter agreement dated (incorporated by reference to the

July 25, 2003, by and Company’s Form 10-KSB for the year

between Omimex Canada, Ltd., ended December 31, 2003, filed

Jovian Energy, Inc., and April 15, 2004)

Capco Resource Corporation

Exhibit

Number Description Location

------- -------------------------- ------------------------------------

10.11 Letter agreement dated Filed herewith electronically

September 29, 2004, by and

between Packard Gas Company

and Midwest EOR, Inc.

10.12

Agreement dated November 23, Filed herewith electronically

2004, by and among Capco

Energy, Inc. and Ilyas

Chaudhary

10.13 Letter of Intent dated Filed herewith electronically

November 24, 2004, between

Packard Gas Company and

Midwest EOR, Inc.

10.14 Securities Purchase (incorporated by reference to the

Agreement dated March 10, Company’s Form 8-K filed March 16,

2005, by and among 2005)

Capco Energy, Inc. and

certain accredited

investors

10.15 Asset Purchase Agreement Filed herewith electronically

dated March 15, 2005, by

and among Manti Resources,

Inc., et al and Capco

Offshore, Inc.

14. Code of Business Conduct (incorporated by reference to the

and Ethics Company’s Form 10-KSB for the year

ended December 31, 2003, filed

April 15, 2004)

21. List of Subsidiaries Filed herewith electronically

23.1 Consent of Stonefield Filed herewith electronically

Josephson, Inc.

31.1 Certification of Chief Filed herewith electronically

Executive Officer

31.2 Certification of Chief Filed herewith electronically

Accounting Officer

32.1 Certification of Chief Filed herewith electronically

Executive Officer pursuant

to 18 U.S.C. section 1350

32.2 Certification of Chief Filed herewith electronically

Accounting Officer pursuant

to 18 U.S.C. section 1350

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

CAPCO ENERGY, INC.

/s/ Ilyas Chaudhary

Dated: May 11, 2005 By ---------------------------

Ilyas Chaudhary, CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

/s/ Ilyas Chaudhary

Dated: May 11, 2005 By ---------------------------

Ilyas Chaudhary, CEO, Chief

Financial Officer and Director

/s/ Mike Myers

Dated: May 11, 2005 By ---------------------------

Mike Myers, President and Director

/s/ Dennis R. Staal

Dated: May 11, 2005 By ---------------------------

Dennis R. Staal, Director

/s/ Irwin Kaufman

Dated: May 11, 2005 By ---------------------------

Irwin Kaufman, Director

/s/ William J. Hickey

Dated: May 11, 2005 By --------------------------

William J. Hickey, Director

/s/ Paul L. Hayes

Dated: May 11, 2005 By --------------------------

Paul L. Hayes, Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Capco Energy, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Capco Energy, Inc. and Subsidiaries, as of December 31, 2004, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years ended December 31, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 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 Capco Energy, Inc. and Subsidiaries as of December 31, 2004, and the results of its operations and its cash flows for the years ended December 31, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ Stonefield Josephson, Inc.

------------------------------

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California

April 1, 2005

F-1

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2004

ASSETS

(Dollars in Thousands)

Current Assets:

Cash $ 1,805

Accounts receivable-trade, net of

allowance of $45 482

Notes receivable, including a related party 981

Deferred tax asset 27

Other current assets 538

-------

Total Current Assets 3,833

Oil and gas properties, using full cost accounting,

less accumulated depreciation and depletion of $1,727 9,197

Other Assets:

Assets attributable to businesses under contract

for sale (Note 7) 4,063

Other property and equipment, less accumulated

depreciation of $70 649

Accounts receivable, related parties 14

Other assets 344

-------

Total Assets $ 18,100

=======

The accompanying notes are an integral part of the consolidated financial statements.

F-2

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (continued)

DECEMBER 31, 2004

LIABILITIES AND STOCKHOLDERS' EQUITY

(Dollars in Thousands)

Current Liabilities:

Accounts payable, trade $ 1,330

Current maturities, long-term debt, including a

related party 637

Notes payable 762

Accrued expenses 1,174

-------

Total Current Liabilities 3,903

-------

Non-current Liabilities:

Long term debt, less current maturities 515

Convertible promissory notes, net 1,516

Long-term liabilities 361

Asset retirement obligation 2,193

Deferred tax liability 27

-------

Total Non-current Liabilities 4,612

-------

Liabilities attributable to businesses under contract

for sale (Note 7) 4,346

-------

Total Liabilities 12,861

-------

Commitments and Contingencies (Note 11) --

Stockholders' Equity:

Common stock, $0.001 par value;

authorized 150,000,000 shares;

101,023,476 shares issued 101

Additional paid in capital 3,074

Treasury stock, 1,267,708 shares, at cost (138)

Retained earnings 2,202

-------

Total Stockholders' Equity 5,239

-------

Total Liabilities and

Stockholders' Equity $ 18,100

=======

The accompanying notes are an integral part of the consolidated financial statements.

F-3

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Years ended December 31, 2004 and 2003

(Dollars in Thousands except per share)

2004 2003

-------- --------

Sales $ 5,255 $ 3,148

Cost of sales 2,987 1,530

------- -------

Gross profit 2,268 1,618

------- -------

Selling, general and administrative expenses 1,266 872

Depreciation, depletion and amortization 809 615

------- -------

Total operating expenses 2,075 1,487

------- -------

Income from operations 193 131

Other Income (Expenses):

Interest income 19 45

Interest expense (399) (153)

Gains (losses) on sales of investments-

marketable securities (63) (7)

Holding gains (losses)-marketable securities (2) 145

Loss attributable to guarantees of

indebtedness of businesses sold under contract -- (151)

Gains on sale of land and oil and gas property 974 --

Other 3 40

------- -------

Income from continuing operations

before taxes and minority interest 725 50

Provision for income taxes -- --

Minority interest in (income) of

consolidated subsidiary -- (4)

------- -------

Income from continuing operations 725 46

Discontinued operations: (Note 6)

Loss from operations of business transferred under

contractual obligation to a related party

during the year 2003 (net of applicable

income tax benefit of $-0-) -- (1,264)

Loss on disposal of discontinued operations

to a related party -- (730)

------- -------

Net income (loss) 725 (1,948)

------- -------

Continued on Next Page

The accompanying notes are an integral part of the consolidated financial statements.

F-4

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Years ended December 31, 2004 and 2003

(Dollars in Thousands except per share)

(continued)

2004 2003

-------- --------

Other comprehensive income-net of tax

Foreign currency translation adjustment -- 6

Less: minority interest in comprehensive

income of consolidated subsidiary -- 1

------- -------

Comprehensive income (loss) $ 725 $ (1,943)

======= =======

Earnings per share-basic:

Income from continuing operations $ 0.01 $ --

Loss from discontinued operations,

including business transferred under

contractual obligation -- (0.02)

Loss on disposal of discontinued

operations -- (0.01)

------- -------

Net income (loss) $ 0.01 $ (0.03)

======= =======

Earnings per share-diluted:

Income from continuing operations $ 0.01 $ --

Loss from discontinued operations,

including business transferred under

contractual obligation -- (0.02)

Loss on disposal of discontinued

operations -- (0.01)

------- -------

Net income (loss) $ 0.01 $ (0.03)

======= =======

Weighted average common share and common

share equivalents:

Basic 96,067,502 77,897,657

========== ==========

Diluted 105,741,590 79,110,649

=========== ==========

The accompanying notes are an integral part of the consolidated financial statements.

F-5

CAPCO ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

Accumulated

Preferred Stock Common Stock Additional Cumulative Treasury Deficit/

--------------- ------------------ Paid-In Translation Stock Retained

Shares Amount Shares Amount Capital Adjustment Earnings Total

------- ------ ---------- ------ --------- ---------- --------- ---------- --------

Balance as

restated at

December 31, 2002 292,947 $ 293 78,298,216 $ 78 $ 1,231 $ (5) $ (124) $ 3,425 $ 4,898

Treasury stock - - - - - - (3) - (3)

(acquisitions)

Shares issued

in exchange for

cash 120,000 - 7 - - - 7

Shares issued

in exchange - - 200,000 - 49 - - - 49

for services

Shares issued in

settlement of

related party

liabilities - - 10,436,000 11 589 - - - 600

Shares issued

in exchange for - - 4,000,000 4 236 - - - 240

investment

Conversion of

Preferred stock (292,947) (293) 2,929,500 3 317 - - - 27

Cumulative

translation - - - - - 5 - - 5

adjustment

Net loss - - - - - - - (1,948) (1,948)

------- ------ ---------- ------ --------- ---------- --------- ---------- --------

Balance at

December 31,

2003 - $ - 95,983,716 $ 96 $ 2,429 $ - $ (127) $ 1,477 $ 3,875

Continued on Next Page

The accompanying notes are an integral part of the consolidated financial statements.

F-6

CAPCO ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

(continued)

Accumulated

Preferred Stock Common Stock Additional Cumulative Treasury Deficit/

--------------- ------------------ Paid-In Translation Stock Retained

Shares Amount Shares Amount Capital Adjustment Earnings Total

------- ------ ---------- ------ --------- ---------- --------- ---------- --------

Balance at

December 31,

2003 - $ - 95,983,716 $ 96 $ 2,429 $ - $ (127) $ 1,477 $ 3,875

Treasury stock - - - - - - (11) - (11)

(acquisitions)

Shares issued

in exchange for

cash 1,095,000 1 70 - - - 71

Shares issued in

settlement of

liability - - 300,000 - 30 - - - 30

Shares issued

for acquisition

of property - - 3,644,760 4 433 - - - 437

Discount on

convertible notes - - - - 112 - - - 112

Net income - - - - - - - 725 725

------ ------ ---------- ------ -------- -------- -------- --------- -------

Balance at

December 31,

2004 - $ - 101,023,476 $ 101 $ 3,074 $ - $ (138) $ 2,202 $ 5,239

The accompanying notes are an integral part of the consolidated financial statements.

F-7

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

2004 2003

---------- ----------

Cash Flows From Continuing Operating Activities:

Net income (loss) $ 725 $ (1,948)

Adjustments to reconcile net income (loss)

to net cash used in operating activities:

Net loss from discontinued operations -- 1,264

Loss on disposal of discontinued operations -- 730

Depreciation, depletion and amortization 809 615

Loss attributable to guarantee of

indebtedness of businesses sold under contract -- 151

Foreign currency translation adjustment 57 --

Loss on sales of investments - marketable

securities 63 7

Holding losses (gains) - marketable securities 2 (145)

Minority interest in income of

consolidated subsidiary -- 4

Compensation cost of Common Stock/Treasury

Stock issued -- 49

Increase in deferred tax asset (1,298) (379)

Increase in deferred tax liability 1,298 379

Changes in assets and liabilities:

(Increase) decrease in assets:

Accounts receivable - trade (225) (177)

Notes receivable (accrued interest) 2 (2)

Other current assets (113) 38

Other assets (5) (192)

Increase (decrease) in liabilities:

Accounts payable 937 (203)

Accrued expenses 812 (183)

------ ------

Net cash provided by continuing

operating activities 3,064 8

------ ------

Cash Flows From Discontinued Operating Activities:

Net loss -- (1,264)

Adjustments to reconcile net loss to net

cash used in operating activities:

Depreciation, depletion and amortization -- 595

Loss on sale of property, plant and equipment -- 126

Decrease in deferred tax asset -- 219

Decrease in deferred tax liability -- (219)

Continued on Next Page

The accompanying notes are an integral part of the consolidated financial statements.

F-8

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

(continued)

2004 2003

---------- ---------

Changes in assets and liabilities:

(Increase) decrease in assets:

Accounts receivable - trade -- 2,741

Inventory -- 1,653

Other current assets -- (194)

Other assets -- 5

Increase (decrease) in liabilities:

Accounts payable -- (455)

Accrued expenses -- (187)

Taxes payable -- (448)

Accrued environmental expenses-noncurrent -- (75)

------- -------

Net cash provided by discontinued

operating activities -- 2,497

------- -------

Net cash provided by all operating

activities 3,064 2,505

------- -------

Cash Flows From Continuing Investing Activities:

Acquisition of subsidiary, net of cash 4 --

Deposit on property acquisition (400) --

Equity contribution to subsidiary -- (400)

Net (advances) repayments with related parties (511) 768

Proceeds from sales of oil and gas property 1,736 816

Purchase of other assets (58) --

Capital expenditures for oil and gas property (3,960) (105)

Purchase of property and equipment (652) (2)

Proceeds from sale of marketable securities 128 563

Purchase of marketable securities -- (497)

Increase in assets attributable to businesses

under contract for sale (50) --

Issuance of notes receivable (981) --

------- -------

Net cash (used in) provided by continuing

investing activities (4,744) 1,143

------- -------

Cash Flows From Discontinued Investing Activities:

Cash applicable to assets held for sale -- 1

Net (advances) repayments with related parties -- (482)

Cash proceeds from sale of equity investment -- 766

Cash proceeds from sale of property -- 87

Cash proceeds from equity contribution -- 400

Notes receivable payments -- 35

------- -------

Net cash provided by discontinued investing activities -- 807

------- -------

Net cash (used in) provided by all

investing activities (4,744) 1,950

------- -------

Continued on Next Page

The accompanying notes are an integral part of the consolidated financial

statements.

F-9

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

(continued)

2004 2003

---------- ----------

Cash Flows From Continuing Financing Activities:

Proceeds from notes payable 752 --

Proceeds from long-term debt 1,000 --

Proceeds from convertible promissory

notes, net 1,628 --

Increase in long-term liabilities 361 --

Increase in asset retirement obligation 1,088 --

Payments on long term debt (1,438) (1,123)

Sale of Common Stock and exercise of options 71 7

Purchase of Common Stock (12) (3)

------- -------

Net cash provided by (used in) continuing

financing activities 3,450 (1,119)

------- -------

Cash Flows from Discontinued Financing Activities:

Net (payments) advances on revolver -- (3,022)

Decrease in book overdraft -- (83)

Payments on long term debt -- (639)

Decrease in restricted cash -- 441

------- -------

Net cash used in discontinued

financing activities -- (3,303)

------- -------

Net cash provided by (used in) all

financing activities 3,450 (4,422)

------- -------

Net increase in cash 1,770 33

Cash, beginning of period 35 2

------- -------

Cash, end of period $ 1,805 $ 35

======= =======

Supplemental disclosure of cash flow information

for continuing operations:

Interest paid $ 333 $ 134

======= =======

Taxes paid $ -- $ --

======= =======

Supplemental disclosure of cash flow information

for discontinued operations:

Interest paid $ -- $ 383

======= =======

Taxes paid $ -- $ --

======= =======

Continued on Next Page

The accompanying notes are an integral part of the consolidated financial

statements.

F-10

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

(continued)

2004 2003

---------- ----------

Supplemental disclosure of non-cash financing

and investing activities for continuing operations:

Common Stock issued in settlement of liability $ 30 $ --

======= =======

Paid in capital provided as equity component of

debt financing $ 112 $ --

======= =======

Acquisition cost of oil and gas property

settled with issuance of Common Stock $ 437 $ --

======= =======

Accrual for acquisition cost of oil and gas

property to be settled with issuance of

Common Stock $ 200 $ --

======= =======

Long-term debt and liabilities reduced

for property sold $ 3,297 $ --

======= =======

Note receivable issued as consideration for sale of

property interest $ -- $ 208

======= =======

Long-term liabilities assumed in connection

with acquisitions of property $ -- $ 1,334

======= =======

Long-term liability (released) assumed in

connection with guaranty of indebtedness $ (432) $ 432

======= =======

Common Stock issued for acquisitions of

subsidiary and property $ -- $ 740

======= =======

Common Stock issued for conversion of

Preferred Stock $ -- $ 320

======= =======

Long-term debt issued in connection with

acquisition of accounts receivable and property $ -- $ 4,515

======= =======

Continued on next page

The accompanying notes are an integral part of the consolidated financial

statements.

F-11

CAPCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

(Dollars in Thousands)

(continued)

2004 2003

---------- ----------

Supplemental disclosure of non-cash financing

and investing activities for discontinued operations:

Note receivable and account receivable provided

as proceeds in connection with sale of preferred

membership interests $ -- $ 349

======= =======

Long-term debt and accrued expenses reduced

for property sold/exchanged $ -- $ 975

======= =======

The accompanying notes are an integral part of the consolidated financial

statements.

F-12

CAPCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company engaged primarily in the acquisition, development, production of and the sale of oil, gas and natural gas liquids. The Company's production activities are located in the United States of America. The principal executive offices of the Company are located at 5555 San Felipe, Suite 725, Houston, TX 77056. The Company was incorporated as Alfa Resources, Inc., a Colorado corporation, on January 6, 1981. In November 1999, the Company amended its articles of incorporation to change its name from Alfa Resources, Inc. to Capco Energy, Inc.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Capco and it's wholly and majority owned subsidiaries. Accordingly, all references herein to Capco or the Company include the consolidated results. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company's significant subsidiaries in 2004 include Capco Offshore, Inc., and Packard Gas Company, and in 2003 included Capco Offshore, Inc. and Capco Resource Corporation. On September 30, 2003, the Company closed on the sale of Meteor Enterprises, Inc. ("Enterprises"), including all of that company's subsidiaries. The significant subsidiary of Enterprises at that time was Meteor Marketing, Inc. ("Marketing"). The results of operations of Enterprises are reported as discontinued operations in the year 2003 and include Marketing for the nine-month period ended September 30, 2003. Effective December 31, 2003, the Company sold Capco Resource Corporation.

The Company currently holds an 80% equity interest in Bison Energy Company that was acquired from a Director of the Company during the year 2004. Bison’s operations since date of acquisition resulted in a loss of $23,000. The entire amount of the loss has been reflected in the financial statements and no minority interest has been calculated. Until such time as operations recover the deficiency in minority interest of $4,600, 100% of results of operations will be reported by Capco with no reduction for minority interest.

RISK FACTORS RELATED TO CONCENTRATION OF SALES AND PRODUCTS

The Company's future financial condition and results of operations will depend upon prices received for its oil and natural gas and the costs of finding, acquiring, developing and producing reserves. Prices for oil and natural gas are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors beyond the Company's control. These factors include worldwide political instability (especially in the Middle East), the foreign supply of oil and natural gas, the price of foreign imports, the level of consumer product demand and the price and availability of alternative fuels.

F-13

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management used significant estimates in determining the carrying value of its oil and gas producing assets and the associated depreciation and depletion expense related to sales' volumes. The significant estimates included the use of proved oil and gas reserve volumes and the related present & nbsp;value of estimated future net revenues therefrom (See Supplemental Information About Oil and Gas Producing Activities).

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of short-term, highly liquid investments readily convertible into cash with an original maturity of three months or less. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had $1.8 million cash balances in excess of federal insured limits as of December 31, 2004.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. For certain of the Company's financial instruments, including accounts receivable (trade and related party), notes receivable and accounts payable (trade and related party), and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts owed for long-term debt also approximate fair value because interest rates and terms offered to the Company are at current market rates.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances have exceeded the FDIC insured levels at various times during the year. The Company has a diversified customer base. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for un-collectible accounts and, as a consequen ce, believes that its accounts receivable credit risk exposure beyond such allowance is limited. The Company had an allowance of $45,000 as of December 31, 2004, that was based on its evaluation of specific customers’ balances and the collectibility thereof.

INVESTMENT IN EQUITY SECURITIES

F-14

INVESTMENT IN EQUITY SECURITIES, Continued

fair values are classified as either trading or available-for-sale securities. Securities that are bought and held principally for the purpose of selling in the near term (thus held for only a short period of time) are classified as trading securities and all other securities are classified as available-for-sale. Trading and available-for-sale securities are measured at fair value in the balance sheet. For trading securities any realized gains or losses and any unrealized holding gains and losses are reported in the statement of operations. For available-for-sale securities any realized gains and losses are reported in the statement of operations and any unrealized holding gains and losses are reported & nbsp;as a separate component of stockholders' equity until realized.

OIL AND GAS PROPERTIES

The Company follows the "full-cost" method of accounting for oil and gas property and equipment costs. Under this method, all productive and nonproductive costs incurred in the acquisition, exploration, and development of oil and gas reserves are capitalized. Such costs include lease acquisitions, geological and geophysical services, drilling, completion, equipment, and certain general and administrative costs directly associated with acquisition, exploration, and development activities. General and administrative costs related to production and general overhead are expensed as incurred. No gains or losses are recognized upon the sale or disposition of oil and gas properties, except in transactions that involve a significant amount of reserves.

The provision for depreciation and depletion of oil and gas properties is computed on the unit-of-production method. Under this method, the Company computes the provision by multiplying the total unamortized costs of oil and gas properties including future development, site restoration, and dismantlement abandonment costs, but excluding costs of unproved properties by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. This calculation is done on a country-by-country basis. As of December 31, 2004, all of the Company’s oil production operations are conducted in the United States of America. The cost of unevaluated properties no t being amortized, to the extent there is such a cost, is assessed quarterly to determine whether the value has been impaired below the capitalized cost. The cost of any impaired property is transferred to the balance of oil and gas properties being depleted. The costs associated with unevaluated properties relate to projects which were undergoing exploration or development activities or in which the Company intends to commence such activities in the future. The Company will begin to amortize these costs when proved reserves are established or impairment is determined. Management believes no such impairment exists at December 31, 2004.

F-15

OIL AND GAS PROPERTIES, Continued

Following is a reconciliation of the asset retirement obligation liability for the year ended December 31, 2004 (in thousands):

Asset retirement obligation at January 1, 2004 $ 1,105

Liabilities incurred 1,088

Liabilities settled --

Accretion expense --

Revisions in estimated liabilities --

-----

Asset retirement obligation at December 31, 2004 $ 2,193

=====

OTHER PROPERTY AND EQUIPMENT

Non-oil and gas producing properties and equipment are stated at cost; major renewals and improvements are charged to the property and equipment accounts; while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed currently. At the time property an equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to operations.

Depreciation for non-oil and gas properties is recorded on the straight-line method at rates based on estimated useful lives ranging from three to fifteen years of the assets.

IMPAIRMENT OF LONG-LIVED ASSETS

F-16

IMPAIRMENT OF LONG-LIVED ASSETS, Continued

a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period or periods in which the losses are incurred rather than as of the measurement date, as presently required. The Company adopted this new statement on January 1, 2002, and concluded that the effect of adopting this statement had no material impact on the Company’s financial position, results of operations, or cash flows.

REVENUE RECOGNITION

STOCK BASED COMPENSATION

In 2002, the Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 123, which prescribes the recognition of compensation expense based on the fair value of options on the grant date, allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method, for which the Company uses the Black-Scholes option-pricing model. For non-employee stock based compensation the Company recognizes an expense in accordance with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards the value is based on the market value for the stock on the date of grant and if the stock has restrictions as to transferability a discount is provided for lack of tradability. Stock option awards are valued using the Black-Scholes option-pricing model.

Had compensation cost been determined based on the fair value at grant dates for stock option awards consistent with the SFAS No. 123, the Company's net income (loss) and earnings per share for the years ended December 31, 2004 and 2003, would have been adjusted to the pro-forma amounts indicated below:

2004 2003

-------- --------

Net income (loss) as reported (in thousands) $ 725 $ (1,948)

Compensation recognized under APB 28 -- --

Compensation recognized under SFAS 123 (218) (1,110)

Pro-forma net income (loss) $ 507 $ (3,058)

Net income (loss) per share:

Basic and diluted-as reported $ 0.01 $ (0.03)

Basic and diluted-pro-forma $ 0.01 $ (0.04)

F-17

STOCK BASED COMPENSATION, Continued

The pro forma compensation expense based on the fair value of the options is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for grants: no dividends; expected lives ranging from 3 to 5 years for 2004 and 5 years for 2003; expected volatility ranging from 0.8% to 2.2% for 2004 and 2.9% for 2003; and risk free rates of return ranging from 3.29% to 3.74% for 2004 and from 2.27% to 3.27% for 2003. The weighted average fair value of those purchase rights granted in 2004 and 2003 was $0.13 and $0.07, respectively.

INCOME TAXES

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The Company has recorded a 100% valuation allowance as of December 31, 2004.

COMPREHENSIVE INCOME

EARNINGS PER SHARE

The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the numerator is increased by the amount of interest expense attributable to the convertible promissory notes payable and the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. On a diluted basis, under the treasury method of calculating the additional shares outstanding, the Company's weighted average shares outstanding for the year ended December 31, 2004, have been increased for 5 ,192,941 shares of Common Stock as associated stock options have a dilutive effect on net income. Additionally, the number of shares outstanding for the year ended December 31, 2004, have been increased for 4,481,148 shares of Common Stock determined under the "if converted" method, due to the issuance of convertible notes payable during the year ended December 31, 2004. On a diluted basis, the Company’s weighted average shares

F-18

EARNINGS PER SHARE, Continued

outstanding for the year ended December 31, 2003, have been increased for 1,212,992 shares of Common Stock as associated stock options have a dilutive effect on income from continuing operations, which is the benchmark number for determining whether potential common stock is included in determining earnings (loss) per share. In accordance with SFAS No. 128, the stock options are also considered to be potential common stock in determining loss per share on loss from discontinued operations and net loss, even though the stock options are antidilutive.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66 and 67 (SFAS 152)”. The amendments made by Statement 152 amend FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial s tatements for fiscal years beginning after June 15, 2005, with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

F-19

NEW ACCOUNTING PRONOUNCEMENTS, Continued

exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of account ing for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after December 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In March 2005, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”). The interpretations in SAB 107 express views of the staff regarding the interaction between Statement of Financial Accounting Standards Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”) and certain SEC rules and regulations and provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of Statement 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of Statement 123(R), the modification of employee share options prior to adoption of Statement 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of Statement 123(R).

F-20

FOUR-FOR-ONE FORWARD STOCK SPLIT

Effective December 26, 2003, the Company's Board of Directors approved a four-for-one forward stock split on all outstanding shares of Common Stock. The Company's outstanding stock option awards and convertible notes were also adjusted accordingly. All share and per share amounts have been adjusted to give retroactive effect to this split for all periods presented.

RECLASSIFICATION

Certain amounts have been reclassified in the prior year to be consistent with the classification as of December 31, 2004.

2. BUSINESS COMBINATION, ACQUISITION AND DIVESTITURES:

The Company had the following acquisitions and divestments during the year ended December 31, 2004:

ACQUISITIONS

Effective July 1, 2004, the Company exercised its option to acquire a 92.8% working interest in a property located in Stephens County, Texas. In addition to the acreage, the acquisition included one producing gas well drilled by the former owners, the coal bed methane well drilled by the Company during the year and seismic and geological studies. The Company issued 3.6 million shares of Common Stock as consideration for the acquisition cost of $0.4 million. The number of shares issued was negotiated between the parties based on analysis of the value of the underlying assets. The per share price of $0.16 approximated the market price of the Company’s Common Stock at that time. Approximately 70% of the acquired working interest in the property was acquired as a result of Capco’s exchange of shares for 100% equity ownership of Packard Gas Company with individuals, or entities controlled by i ndividuals, who have either a direct, or beneficial, relationship to the Company, including the President of the Company. The negotiated acquisition price was determined in amounts prorata to all members of the selling group. Subsequent to the exercise of its option, the Company drilled and completed a gas well on the property at a cost of $0.2 million. Following a period of evaluation of the two producing gas wells the decision was made to discontinue further drilling activities on the property, and as a result, the Company only earned acreage attributable to each well location actually drilled on the property.

In September 2004, the Company acquired, from a Director of the Company, an 80% equity interest in Bison Energy Company (“Bison”), an entity organized for the purpose of owning, and operating, oil and gas properties in the state of Wyoming. The 20% minority interest is held by the Director. Bison’s operations since date of acquisition resulted in a loss of $23,000. The entire amount of the loss has been reflected in the financial statements and no minority interest has been calculated. Until such time as operations recover the deficiency in minority interest of $4,600, 100% of results of operations will be reported by Capco with no reduction for minority interest. In conjunction with the equity investment, the Director exercised options at a price of $0.0625 per share to acquire 800,000 shares of the Company’s Common Stock. The option proceeds of $50,000 were advanced to Bison to provide fu nding for the acquisition of a 33.33% working interest in an oil property in the amount of $30,000; the balance was retained by Bison for working capital. The property consists of 720 gross acres and includes nine wells, four of which are currently in production. Rework operations are in progress in an effort to restore the remaining wells to production.

F-21

2. BUSINESS COMBINATION, ACQUISITION AND DIVESTITURES, Continued

OIL AND GAS PROPERTIES

In February 2004, the Company closed on an acquisition of a production platform with nine additional well in the Brazos Field, offshore in Matagorda County, Texas. The Company owns a 90% working interest in the wells and will be operator of the property. In conjunction with the acquisition, Capco plans to acquire leases for the mineral interests at an estimated cost of $0.1 million. Such expenditure is necessary before the Company can initiate production from any of the acquired wells. Under the terms of the agreement, the seller agreed to contribute as much as $1.0 million to apply toward payment of abandonment costs when, and if, such costs are incurred by the Company. In accordance with FAS 141, contingent consideration that is not recognized at the acquisition date is recognized and measured when the contingency is resolved and consideration is issued or becomes issuable. As of December 31, 200 4, the Company has not finalized its work program for this property, and had not expended any funds for lease acquisition.

F-22

OIL AND GAS PROPERTIES, Continued

shares of the Company’s Common Stock. The per share price of $0.20 approximated the market price of Capco’s Common Stock at the time the agreement was negotiated with the seller. The Common Stock was issued to the seller in March 2005. The seller of the property retained a net profits interest in the amount of $0.3 million that is to be paid from one-third of the net production from the property until paid in full. The net profit distributions will be included with the cost of the property as they are paid by Capco. In addition, the purchase agreement stipulates that the Company expend a minimum of $0.1 million of property development costs within one year from the date of acquisition. The Company intends to monitor the operating results of the property during the year 2005, and will make a determination as to the expenditure for development costs at a later date. In accordanc e with FAS 141, the additional acquisition cost of $0.1 million will be recorded by the Company only if the decision is made to incur the expenditure.

a cash deposit in the amount of $0.7 million, assumption of debt against the properties in the amount $3.3 million and the issuance of a note payable to the Company in the amount of $0.7 million. The note was paid in full in March 2005. The disposition resulted in a significant change to the depletion rate in Company’s full cost pool cost center, which required that gain or loss recognition be given to the sale. The Company recorded a gain in the amount of $0.4 million from the sale.

LAND

The Company had the following acquisitions and divestments during the year ended December 31, 2003:

OIL AND GAS PROPERTIES

F-23

OIL AND GAS PROPERTIES, Continued

obligation is $229,000. The Company sold a portion of the total acquired property interest to other owners. Proceeds in the amount of $1.4 million received from the other owners were credited against the Company's basis in the acquired property. The Company's cost of the acquisition was approximately $4.1 million. The loan from the operator is collateralized by the Company's interest In October 2003, the Company acquired from a third party a 3% working interest in the Caplen Field in Galveston County, Texas at a recorded cost of $207,000.

In November 2003, the Company closed on the acquisition of properties in the Brazos Field, offshore in Matagorda County, Texas. The Company owns a 65% working interest in the property and is the operator of the acquired property. The acquired properties consist of 22 wells, two of which are currently in production. The Company's recorded cost of the acquisition, including a funding obligation to the seller of the property in the amount of $1.1 million, and net of fees earned from joint interest partners, was $1.2 million. In connection with the acquisition the Company and its joint interest partners were required to provide a surety bond in the amount of $1.3 million to the seller of the property. The surety company required a cash d eposit in the amount of $700,000, of which the Company's portion was $278,000. A portion of monthly net cash flow from the acquired property will be used to fund the deposit account until the bond limit of $1.3 million is fully funded. Effective February 2005, this requirement was amended to provide for a series of twenty-four (24) monthly payments of $24,000 ($12,000 net to Capco’s interest) to fully fund the deposit account. The surety company was given a security interest in the Company's working interests in the Brazos Field and the Caplen Field as collateral for this obligation. The Company's Chief Executive Officer also provided his personal guarantee to the surety company. An additional portion of the monthly net cash flow from the property will be used to fund another deposit account to the seller. When this account balance reaches $1.7 milli on the $1.3 million bond will be released. The Company's portion of this obligation, $1.1 million, in included in the Company's recorded cost of the acquisition.

OTHER

In January 2003, Marketing closed on the sale of its preferred membership interests ("interests") in Propane. Total consideration of $1.1 million consisted of (1) a cash payment in the amount of $766,000, (2) an 8% promissory note in the amount of $199,000 due January 2006, and (3) a cash retention in the amount of $150,000 to be paid upon the delivery of asset title transfer documents resulting from Marketing's sale of Propane in April 2002. The carrying value of the interests at December 31, 2002, had been adjusted to equal the anticipated proceeds.

Effective September 30, 2003, the Company recorded the sale of Enterprises to Sedco, Inc., a private company owned by Ilyas Chaudhary, the Company's Chief Executive Officer. The operations of Enterprises for the nine month period ended September 30, 2003, are reported as discontinued operations in the financial statements. The Company reported a loss of $730,000 for the disposal of the discontinued business interests (see Note 6).

Effective September 30, 2003, the Company restored assets and liabilities attributable to business interests that had previously been reported as sold as of December 31, 2002. A gain resulting from the sale had been deferred by the Company due to debt guarantees provided by the Company on a significant level of debt that was included in the sales transaction (see Note 7).

Effective December 31, 2003, the Company sold its equity ownership in Resource and Limited to the Company's Chief Executive Officer for the assumption of certain liabilities.

F-24

3. INVESTMENTS IN EQUITY SECURITIES-MARKETABLE SECURITIES

As of December 31, 2004, the Company had disposed of its portfolio of marketable securities in common stock, realizing total losses in the amount of $65,000.

In January and February 2003, the Company sold the remaining shares of its equity interests in Chaparral Resources, Inc., realizing a loss of $10,000 from the sales. During the year 2003, the Company reported unrealized holding gains in the amount of $145,000 due to increases in the carrying value of marketable securities.

4. NOTES RECEIVABLE

Notes receivable consisted of the following as of December 31, 2004 (in thousands):

Note receivable, interest at 6% per annum,

due May 1, 2005, collateralized by land $ 295

Note receivable, interest at 6% per annum,

due March 31, 2005, from a related party,

collateralized by Common Stock of the Company 686

-----

Total $ 981

=====

The notes were paid in full in March 2005.

5. OIL AND GAS PROPERTIES

Oil and gas properties consisted of the following as of December 31, 2004 (in thousands):

Properties being amortized $ 10,713

Properties not subject to amortization 211

Accumulated depreciation and depletion (1,727)

------

Oil and gas properties, net $ 9,197

======

At December 31, 2004, certain of these assets collateralized a portion of the Company's long-term debt (see Note 9). Certain other oil and gas producing properties collateralized the Company's obligation to a surety company (see Note 2).

Depreciation and depletion expense totaled $0.8 million and $0.6 million for the years ended December 31, 2004 and 2003, respectively.

6. DISCONTINUED OPERATIONS

In October 2002, the Company's Board of Directors directed management to sell all assets and liabilities of the petroleum marketing operations, including the convenience stores operations. In December 2002, the Company closed on the sale of assets located in the state of New Mexico (see Note 7).

In March 2003, the Company received a proposal from Sedco, Inc. ("Sedco"), a private company owned by Ilyas Chaudhary, the Company's Chief Executive Officer, to acquire Enterprises, except for 4.0 million shares of Enterprises' equity ownership in Network Fueling Corp., at a cash price of $2.5 million, effective

F-25

6. DISCONTINUED OPERATIONS, Continued

January 1, 2003. The Company's Board of Directors accepted the proposal, subject to the receipt of a fairness opinion that was received in August 2003. At that time the Company had received a nonrefundable deposit in the amount of $300,000, a 7% promissory note in the amount of $1.0 million due October 31, 2003, and a second 7% promissory note in the amount of $1.2 million due April 30, 2004. In addition, Sedco provided 12,000,000 shares of the Company's Common Stock as security for payment of the two promissory notes. In September 2003, the transaction was amended for the following: the cash purchase price was reduced to $1.75 million and the 4,000,000 shares of NFC common stock were returned to Enterprises. In addition, Sedco assumed an obligation in the amount of $1.45 million that the Company owed to Enter prises. This amount, combined with the nonrefundable deposit in the amount of $300,000, constituted full payment of the amended purchase price of $1.75 million. The Company recorded the sale of the business interests, effective September 30, 2003, recording a loss of $730,000 for the disposal of the discontinued business interests.

The historical operations of the business interests subject to the disposition have been presented in the statements of operations and statements of cash flows as discontinued operations. Year 2003 includes the historical operations for the nine-month period ended September 30, 2003, that preceded the recorded sale. The Company is guarantor of certain obligations of Enterprises and its subsidiaries in the aggregate amount of $1.1 million at December 31, 2004. The obligations consist of vendor trade accounts, and real estate and equipment purchases and leases. Management believes that there is sufficient underlying collateral value in the related assets to significantly reduce the potential loss, if any, to the Company.

Summarized below are the results of discontinued operations for 2003, consisting of the nine-month period from January 1 to September 30, 2003, the date of sale by Capco (in thousands):

Sales $ 49,082

Gross profit $ 8,860

Loss from operations $ (841)

Net loss from operations $ (1,264)

7. BUSINESSES UNDER CONTRACT FOR SALE

Effective December 31, 2002, the Company entered into an agreement to sell Graves and Monument, subsidiaries whose assets, consisting principally of land, buildings and equipment, were primarily located in the state of New Mexico, at a sales price of $10,000 cash. The assets of Graves were utilized in the distribution of refined petroleum products. The convenience store business consisted of two store locations that were in operation in Albuquerque and Farmington, New Mexico.

The Company agreed to continue to operate the businesses for a period of time subsequent to the date of sale to allow the buyer time to make separate credit arrangements with lenders and suppliers, and to negotiate for the removal of the Company as the guarantor of a significant portion of the indebtedness assumed by the buyer. The sales transaction resulted in a gain to the Company in the amount of $0.2 million; however, due to the significant risk still assumed by the Company in the form of the loan guarantees, the gain is deferred until such time that the risk had either been significantly reduced or eliminated.

F-26

7. BUSINESSES UNDER CONTRACT FOR SALE, Continued

At December 31, 2003, approximately $3.8 million of indebtedness, including accrued interest, was owed to one lender, and Graves was in default on the indebtedness. Remedies available to the lender include declaring the entire note balances, including accrued and unpaid interest, immediately due and payable, foreclosing on the pledged security, which includes land, buildings, and equipment, and collecting on any guarantees. Discussions have been held with the lender, but no settlement has been reached at this time.

During the year 2003, the buyer marketed the real estate for sale, and certain properties were contracted for sale. The sale of one property closed in September 2003, resulting in a reduction in the amount of $0.6 million to the total debt assumed by the buyer. Effective September 30, 2003, the Company re-evaluated the exposure relating to the debt guarantees. While management believed that there was sufficient value in the underlying assets such that the Company would not incur a loss from this disposal, the Company believed that the disposal no longer met the criteria to be recorded as a divestiture of a subsidiary for accounting purposes. Accordingly, the decision was made at September 30, 2003, to restore the assets and liabilities attributable to the b usinesses that were sold to the Balance Sheet to be reported as "Assets attributable to businesses under contract for sale" and "Liabilities attributable to businesses under contract for sale".

The Company further evaluated the exposure relating to the debt guarantees as of December 31, 2003, and determined that there was not sufficient value in the underlying assets such that the Company would, in all likelihood, incur a loss from this disposal. It was estimated that the liabilities which are guaranteed by the Company exceeded the underlying net assets by approximately $0.3 million. The Company accounted for this deficit by eliminating the deferred gain of $0.2 million that was recorded at the end of year 2002, and by recording a charge to year 2003 operations in the amount of $0.2 million.

Discussions between the parties continued throughout year 2004, and in December 2004, the parties entered into a Pay-Off Agreement (“Agreement”), which provided for the following: the outstanding amount of debt owed was reduced from $3.9 million to $2.7 million by application of proceeds from properties sold and a discount given by the lender, scheduled monthly payments were to be made for the period February 15, 2005, to June 15, 2005, with the balance owing at June 30, 2005, $2.6 million, to be paid at that date (“Date of Closing”). Alternatively, by making a payment of $1.0 million on or before May 31, 2005, the Date of Closing would be extended for a period of ninety (90) days. As a further condition of the Agreement, the buyer deposited into an escrow account ten million shares of the Company’s $0.001 par value Common Stock. In the event that debt payments are not made in ac cordance with the terms of the Agreement, the lender has the right to proceed to collect the unpaid indebtedness based on the original amount owed and has the right to liquidate the Common Stock in escrow in addition to seeking other remedies available to it to collect the outstanding balance.

8. NOTES PAYABLE

Notes payable consisted of the following at December 31, 2004 (in thousands):

Note payable, interest at 20% per annum, due upon

closing of the acquisition of a certain producing oil

and gas property, collateralized by substantially all

of the Company’s assets $ 400

F-27

8. NOTES PAYABLE, Continued

Note payable, interest at 6% per annum, payable in

monthly installments of $19, which includes principal

and interest, due November 2005, collateralized by

equipment 198

Note payable, interest at 8% per annum, payable in

one installment of $80 and ten monthly installments

of $10, which includes principal and interest, to

November 2005, collateralized by oil and gas leases 164

-----

Total $ 762

=====

9. LONG TERM DEBT

Long-term debt consisted of the following as of December 31, 2004 (in thousands):

Note payable to an individual, interest at 9% per annum,

plus an incremental interest rate of 1% for every $1 that

West Texas Intermediate Crude exceeds $21 per barrel

payable quarterly, convertible into Common Stock of the

Company at the option of the holder at a conversion rate

of $0.38, with the unpaid principal due in May 2003 $ 25

Note payable to a related party, interest at 7%, payable

in monthly installments of $4, due on June 30, 2006 127

Note payable to an individual, interest at 12.0% per annum,

payable in monthly installments of $60, which includes

principal and interest, due in August 2006, collateralized

by producing oil and gas properties and by the guarantee

of the Company's Chief Executive Officer 1,000

-----

Total debt 1,152

Less current maturities 637

-----

Long term debt $ 515

=====

The following is a summary of the principal amounts payable over the next two years (in thousands):

Year ending December 31,

2005 $ 637

2006 515

-----

$ 1,152

=====

Interest expense for all corporate borrowings totaled $399,000 and $153,000 for the years ended December 31, 2004 and 2003, respectively.

F-28

10. CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes consisted of the following as of December 31, 2004 (in thousands):

Notes payable to individuals, interest at 12% per

annum, payable quarterly, convertible into Common

Stock at the option of the holders at a conversion

rate of $0.20, with the unpaid principal due at

various times during the period February to June

2007 (net of unamortized discounts of $22) $ 998

Note payable to an individual, interest at 9% per

annum, payable quarterly, convertible into Common

Stock at the option of the holder at a conversion

rate of $0.16, with the unpaid principal due in

September 2007 (net of unamortized discount of $75) 585

-----

$ 1,583

=====

At the option of the holders, the notes can be converted into as many as 9.2 million shares of the Company’s Common Stock. Notes not converted during the three-year period from date of sale are to be redeemed for their face amount on the third anniversary from the subscription date. Pursuant to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, discounts of approximately $0.1 million attributable to the beneficial conversion feature were recorded as additional paid in capital. The discounts are being amortized using the effective interest rate method over the terms of the indebtedness.

11. COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

Capco, as owner and operator of oil and gas properties, is subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the owner of real property and the lessee under oil and gas leases for the cost of pollution clean-up resulting from operations, subject the owner/lessee to liability for pollution damages and impose restrictions on the injection of liquids into subsurface strata.

Although Company environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasing stringent regulations could require the Company to make additional unforeseen environmental expenditures

The Company maintains insurance coverage that it believes is customary in the industry, although it is not fully insured against all environmental risks.

The Company is not aware of any environmental claims existing as of December 31, 2004, that would have a material impact on its consolidated financial position or results of operations. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental laws will not be discovered on the Company's properties.

F-29

11. COMMITMENTS AND CONTINGENCIES, Continued

LAND RENTALS AND OPERATING LEASES

The Company leases office facilities and equipment under operating leases expiring through October 31, 2007, and is obligated to pay land rentals on oil and gas properties through December 31, 2012. As of December 31, 2004, future minimum rental payments required under operating leases are as follows (in thousands):

Year ending December 31,

2005 $ 114

2006 92

2007 78

2008 24

2009 24

Thereafter 71

----

$ 403

====

Rental expense charged to continuing operations totaled $64,000 and $70,000 for the years ended December 31, 2004 and 2003, respectively. Rental expense included in discontinued operations totaled $554,000 for the year ended December 31, 2003.

LEGAL PROCEEDINGS

OTHER

In connection with the acquisitions of producing oil and gas properties that closed during the year ended December 31, 2004, Capco is committed to make development expenditures of $0.6 million during the year 2005 to earn the entire working interests stipulated in the purchase agreements.

Capco is obligated to a surety company to make monthly cash collateral deposits of $12,000 over a period of twenty-four months, beginning February 2005.

Various purchase agreements require that funding obligations of $1.1 million and $0.3 million be paid from the net profits, if any, derived from the respective operations of the properties.

12. EQUITY

COMMON STOCK

For the year ended December 31, 2004, the Company had the following significant equity transactions:

The Company issued 300,000 shares of Common Stock in settlement of a liability with a recorded cost of $30,000, which represented the fair market value of the Common Stock when the settlement was agreed to by both parties.

F-30

12. EQUITY, Continued

COMMON STOCK, continued

The Company issued 1,095,000 shares of Common Stock upon the exercise of options, realizing proceeds of $70,500.

The Company issued 3,644,760 shares of Common Stock for the acquisition of an oil and gas property at a cost of $437,000, which represented the fair market value of the Common Stock when the acquisition closed.

For the year ended December 31, 2003, the Company had the following significant equity transactions:

The Company issued 120,000 shares upon the exercise of a stock option by a Director, realizing proceeds of $7,000.

The Company issued 200,000 shares as compensation to the employees of a former subsidiary at a cost of $11,000.

The Company issued 4,000,000 shares to acquire the equity ownership of Capco Offshore, Inc. at a cost of $240,000.

The Company issued 10,436,000 shares in settlement of amounts due to the Chief Executive Officer at a cost of $600,000.

The Company issued 2,929,500 shares in exchange for the issued and outstanding Preferred Stock at a cost of $320,000.

TREASURY STOCK

In 2004, the Company acquired 60,600 shares of Common Stock at a cost of $11,000 to be held as Treasury Stock.

In 2003, the Company acquired 40,000 shares of Common Stock at a cost of $5,000 to be held as Treasury Stock, and sold 28,600 shares of Common Stock from treasury, realizing proceeds of $2,000.

STOCK OPTIONS

The Company has a Stock Option Plan providing for the issuance of incentive stock options and non-qualified stock options to the Company's key employees.

Incentive stock options may be granted at prices not less than 100% of the fair market value at the date of the grant. Non-qualified stock options may be granted at prices not less than 75% of the fair market value at the date of the grant.

The Company's common stock options were granted at exercise prices equal to, or in excess of, market prices on the grant dates, and therefore no compensation cost was recognized. The options were granted with maximum terms between one and five years.

F-31

12. EQUITY Continued

STOCK OPTIONS, Continued

A summary of the status of the Company's stock option plan as of December 31, 2004 and 2003 is presented below:

2004 2003

------------------ -------------------

Weighted Weighted

average average

exercise exercise

Shares price Shares price

--------- ---------- --------- ---------

Outstanding

at beginning of year 15,880,000 $ 0.13 11,141,604 $ 0.23

Granted at market -- -- -- --

Granted exceeding

market 1,700,000 $ 0.18 16,000,000 $ 0.13

Exercised (1,080,000) $ 0.06 (120,000) $ 0.06

Canceled (500,000) $ 0.20 (10,861,604) $ 0.24

Forfeited -- -- (280,000) $ 0.23

--------- ----- --------- -----

Outstanding at end

of year 16,000,000 $ 0.14 15,880,000 $ 0.13

========== ===== ========== =====

Options exercisable

at end of year 16,000,000 $ 0.14 15,880,000 $ 0.13

========== ===== ========== =====

Options Outstanding Options Exercisable

-------------------------------------------------------- ---------------------

Weighted

average Weighted Weighted

Year Range of Number remaining average average

options exercise outstand- contractual exercise Number exercise

granted prices ing life price exercisable price

------- -------- --------- ----------- -------- ----------- --------

2003 $0.06 to $0.25 14,800,000 3.75 years $0.13 14,800,000 $0.13

2004 $0.17 1,200,000 4.75 years $0.17 1,200,000 $0.17

---------- ----------

$0.06 to $0.25 16,000,000 3.82 years $0.14 16,000,000 $0.14

Non-employee options

The Company did not issue options to acquire the Company’s Common Stock to any non-employee during the year ended December 31, 2004.

In January 2003, the Company issued an option to an individual to acquire 600,000 shares of the Company's Common Stock at an exercise price of $0.20, exercisable for a period of three years. The option was issued in exchange for market consulting services. Using the Black-Scholes option-pricing model, the Company recorded an increase to paid-in capital, and a charge to operations, in the amount of $38,000 for the value of the option grant. Options to acquire 15,000 shares of the Company’s Common Stock were exercised during the year ended December 31, 2004, leaving a balance of unexercised options of 585,000 at December 31, 2004.

F-32

13. INCOME TAXES

Components of the provision for income taxes for the years ended December 31, 2004 and 2003, are as follows:

2004 2003

---- ----

Current $ -- $ --

Deferred -- --

---- ----

Total provision $ -- $ --

==== ====

Following is a reconciliation of the Federal statutory rate to the effective income tax rate for the years ended December 31, 2004 and 2003:

2004 2003

---- ----

Federal income tax rate 34.0% (34.0)%

State income taxes, net of

federal benefit 6.0% (6.0)%

Utilization of NOL carry forward -- --

Effect of valuation allowance (40.0)% 40.0%

---- ----

Effective income tax rate 0.0% 0.0%

==== ====

At December 31, 2004, the Company had net operating loss carry forwards of approximately $10.0 million. The Company anticipates that it will be able to utilize only a portion of the net operating loss carry forwards during the year 2004. Therefore, the Company has established a valuation allowance for the remaining net operating loss carry forwards. The Company realized as a tax benefit in the year 2004 only that amount applicable to the net operating loss carry forwards that were utilized in the year 2004. The valuation allowance for the year ended December 31, 2004, decreased by approximately $62,000. The net operating loss carry forwards expire at various dates through the year 2021.

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows at December 31 (in thousands):

2004 2003

---- ----

Deferred tax asset:

Marketable securities, receivables and

liabilities $ 27 $ --

Loss carry forward 3,973 2,631

Less: valuation allowance (2,149) (2,078)

----- -----

$ 1,851 $ 553

===== =====

Deferred tax liability:

Property and equipment and investments $ 1,851 $ 553

===== =====

F-33

14. RELATED PARTY TRANSACTIONS

Year Ended December 31, 2004

The Company had several transactions with its Chief Executive Officer, Ilyas Chaudhary, and Sedco, Inc. and Meteor Enterprises, Inc., private companies controlled by Mr. Chaudhary ("affiliates"). The Company received cash advances in the total amount of $350,000 from affiliates. The Company paid expenses in the amount of $93,000 in behalf of affiliates, and was charged a total of $67,000 for expenditures made by affiliates in behalf of the Company. The Company accrued, and paid, compensation expense in the amount of $175,000 due to affiliates in accordance with the Chief Executive Officer's employment. The Company made cash advances in the total amount of $766,000 to affiliates that included repayment of balance s owed to affiliates at the beginning of the year, repayment of cash advances received during the year and settlement of expenditures made by the respective parties during the year in behalf of each other. Of such advances, $108,000 was considered to be advance payments of Mr. Chaudhary’s compensation for the year 2005, and has been reclassified as a prepaid expense in the accompanying financial statements as of December 31, 2004. No amount was due to, or due from, affiliates at December 31, 2004, except as discussed below.

Effective September 30, 2004, the Company sold its interests in non-operated producing properties located in Alabama and Louisiana to a company owned by the Company’s Chief Executive Officer. Sales proceeds in the amount of $0.4 million were received by the Company in October 2004 and were used for working capital. If it is determined through due diligence by the Company that the properties could have been sold for an amount greater than $0.4 million, then the related party has the obligation to pay such excess to the Company, or the Company, at its option, may repurchase the properties at the original sales price.

In September 2004, the Company acquired from a Director of the Company an 80% equity interest in a start-up company formed for the purpose of acquiring producing oil and gas properties. Subsequent to the incorporation of the company, Capco advanced $50,000 to the company to provide funding for the cost of an acquisition and for working capital.

In October 2004, the Company issued 3.6 million shares of Common Stock as consideration for the acquisition cost of an oil and gas property. The number of shares issued was negotiated between the parties based on analysis of the value of the underlying assets. The per share price of $0.16 approximated the market price of the Company’s Common Stock at that time. Approximately 70% of the acquired working interest in the property was acquired as a result of Capco’s exchange of shares for 100% equity ownership of Packard Gas Company with individuals, or entities controlled by individuals, who have either a direct, or beneficial, relationship to the Company, including the President of the Company. The negotiated acquisition price was determined in amounts prorata to all members of the selling group.

The Company incurred interest expense in the amount of $11,000 on a note payable to a Director of the Company that was outstanding during the year ended December 31, 2004.

F-34

14. RELATED PARTY TRANSACTIONS, Continued

Year Ended December 31, 2003

The Company had several transactions with its Chief Executive Officer, Ilyas Chaudhary, and Sedco, Inc., a private company controlled by Mr. Chaudhary ("affiliates"). The Company received cash advances in the total amount of $298,000 from affiliates. The Company paid expenses in the amount of $27,000 in behalf of affiliates, and was charged a total of $114,000 for expenditures made by affiliates in behalf of the Company. The Company accrued, and paid, compensation expense in the amount of $175,000 due to affiliates in accordance with the Chief Executive Officer's employment. The Company made cash advances in the total amount of $291,000 to affiliates that included repayment of cash advances received during the year and settlement of expenditures made by the respective parties during the year in behalf of each other.

The Company charged affiliates $43,000 for interest due on the notes receivable issued in connection with the acquisition of Enterprises by Sedco. The Company issued 8,696,000 shares of Common Stock to affiliates at a cost of $500,000 to acquire an additional interest in a producing oil and gas property, and 1,740,000 shares of Common Stock to affiliates at a cost of $100,000 in settlement of amounts due affiliates. Effective December 31, 2003, the Company sold its equity interests in Resource and Limited to Sedco for consideration consisting of the assumption of certain liabilities in the amount of $238,000 and the minority interest of Limited in the amount of $364,000. At December 31, 2003, the Company owed $530,000 to affiliates.

In addition, the Company had several transactions with Enterprises, a former subsidiary of the Company that was acquired by Sedco effective January 1, 2003. Although the operations of Enterprises for the nine-month period ended September 30, 2003, are reported by the Company as discontinued operations, the following discussion includes transactions for the entire year 2003. At January 1, 2003, the Company owed $978,000 to Enterprises. During the year 2003, the Company was charged a total of $264,000 for expenditures made by Enterprises in behalf of the Company. The Company received cash advances in the total amount of $373,000 from Enterprises, and remitted cash advances to Enterprises in the total amount of $175,000. Effective September 30, 2003, Sedco assumed $1.45 million of the account balance owed to Enterprise s by the Company in payment of the balance owed to the Company in connection with the sale of Enterprises to Sedco. At December 31, 2003, the Company was owed $10,000 by Enterprises.

The Company received a cash advance from the President of the Company in the amount of $11,000, and paid $5,000 for expenses in behalf of a company owned by the President. At December 31, 2003, the Company owed $6,000 to this individual.

15. PROFIT SHARING PLAN

The Company maintains a defined contribution profit sharing plan ("401 (k) Plan") covering all eligible employees. Profit sharing contributions are made (i) at the discretion of the Board of Directors; and (ii) on the employee's behalf from salary deferrals. Eligible employees may contribute on a pre-tax basis up to 100% of their qualifying annual compensation, to a maximum of $40,000. Employer discretionary contributions are not to exceed 50% of the first six percent of each employee's compensation. The Company did not incur any expense for employer matching contributions for either of the years ended December 31, 2004 and 2003.

F-35

16. BUSINESS SEGMENTS

For the years ended December 31, 2004 and 2003, the Company operated in one industry segment: acquisition, exploration, development, and production of oil and gas reserves, including investments in the equity securities of other public companies involved in similar activities. The Company's headquarters and all of its operations are located in the United States of America. Effective December 31, 2003, the Company disposed of its oil and gas property interests in Canada. A summary of the Company's revenues and long-lived assets by geographic area is as follows (in thousands):

Canada United States Total

-------- ------------- -------

Sales:

Year ended December 31, 2004 $ -- $ 5,255 $ 5,255

====== ====== ======

Year ended December 31, 2003 $ 13 $ 3,135 $ 3,148

====== ====== ======

At December 31, 2004:

Oil and gas properties (net) $ -- $ 9,197 $ 9,197

====== ====== ======

Other property and equipment (net) $ -- $ 649 $ 649

====== ====== ======

17. MAJOR CUSTOMERS

For the year ended December 31, 2004, the Company had sales to two customers that accounted for approximately 52.3% and 33.0%, respectively, of total sales. One customer accounted for 49.6% of accounts receivable as of December 31, 2004.

For the year ended December 31, 2003, the Company had sales to two customers that accounted for approximately 75.7% and 10.7%, respectively, of total sales.

18. SUBSEQUENT EVENTS

On February 3, 2005, the Company announced that drilling had commenced on an exploratory well at Outer Continental Shelf (“OCS”) Galveston Block 297. Capco is the operator of the well which is targeted for a total drilled depth of 13,500 feet. The Company’s initial working interest ownership in the property was 60%; however, portions of that interest were subsequently sold to private investors. On April 12, 2005, the Company announced that due to encountering excessive gas pressures at a depth of approximately 13,350 feet, the decision was made to sidetrack from the existing well bore and re-drill the well from a depth of approximately 8,500 feet to a depth in excess of 14,000 feet. As a result of the difficulties encountered in drilling this well, the cost has substantially exceeded the Company's planned expenditures in this regard and is increasing as the drilling continues. Significant capital resources of the Co mpany have been and will continue to be utilized to pay the ongoing costs associated with the well. While the Company believes that it has sufficient capital resources to complete the drilling as currently planned, any further delays or complications may result in additional costs for which the Company will need to make financial arrangements. The Company anticipates that it will recover certain of the drilling costs from participants in the well if and when the drilling reaches the targeted depth. Additionally, the Company intends to pursue a

F-36

18. SUBSEQUENT EVENTS, Continued

claim on the insurance covering the drilling of the well based upon the consequences of encountering the excessive gas pressures in the initial well bore, and any insurance proceeds would also assist in recovering a portion of the drilling costs. The Company cannot make any assurances concerning the potential completion of or production from this well.

On February 7, 2005, the Company executed an Amended Memorandum of Terms with an unrelated private investor (the “Investor”) that provided the terms whereby the Investor would invest up to $7.5 million in oil and gas property interests owned by the Company. The properties effected by the transaction included three wells in the Company-operated Brazos Field in the Texas Gulf Coast, the exploratory well at OCS Galveston Block 297 and a pending acquisition of producing properties in OCS High Island Block 196. In addition, the Investor holds an option to participate in a planned workover on a well in the Brazos Field, and agreed to fund future capital requirements for the applicable properties in amounts and at times determined by mutual agreement of Capco and the Investor. Closing of the transaction is scheduled to occur at the time that the Investor receives approval to own offshore leases from the Min erals Management Service (“MMS”). In addition to the acquired property interests, the Investor is to receive warrants to purchase shares of Capco’s Common Stock. The number of warrants will be determined based on the trading price of the Common Stock at the date of closing.

The Investor paid $1.5 million to the Company for a portion of Capco’s interests in the wells in the Brazos Field and the exploratory well being drilled at OCS Galveston Block 297.

On February 10, 2005, Capco announced the purchase of producing properties in OCS High Island Block 196 at a cost of $2.5 million. Additionally, bonds in the total amount of $3.5 million were posted with the MMS. Funding for the acquisition, including bond deposits, was provided by the Investor, who will initially own the entire acquired interest. Capco will operate the property.

In addition to the fundings described above the Investor had previously advanced $0.4 million to Capco in December 2004 for a deposit that was made in connection with the acquisition of the OCS High Island Block 196 property. In total the fundings amounted to $6.4 million. This amount is documented as a bridge loan that is to remain in effect until the Investor receives owner approval from the MMS and the property interests are assigned by Capco to the Investor. In addition to the Investor’s acquired interests in several of Capco’s properties, the Company has provided the Investor with additional security interests in a majority of the Company’s unencumbered assets. The security will be released when the assignments become effective.

All of the operating cash flow attributable to the acquired property interests will accrue to the Investor, until such time that the Investor has received reimbursement of all invested funds, plus a stated return on the invested funds (“Payout”). At Payout, Capco will earn a two-thirds interest in the future net operating cash flow to be derived from the property interests.

On March 10, 2005, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain accredited investors with respect to a private placement under Regulation D of 10 million shares of the Company's Common Stock and common stock purchase warrants for 5 million shares of the Company's Common Stock (the "Warrants"), for a total purchase price of $3.0 million. The transaction closed on March 11, 2005. No underwriter discounts or commissions were paid in connection with this transaction. Capco intends to use the net proceeds from this issuance and sale of securities in the acquisition and development of oil and gas properties and for general corporate purposes.

F-37

18. SUBSEQUENT EVENTS, Continued

The Warrants are exercisable into a total of 5,000,000 shares of the Company's Common Stock at an initial exercise price of $0.45 per share, subject to adjustment pursuant to the anti-dilution provisions set forth in the Warrants, and expire five (5) years from the date of issuance.

On March 11, 2005, Capco issued 1 million shares of the Company’s Common Stock to an individual, realizing proceeds of $0.2 million. Capco intends to use the proceeds for working capital.

F-38

SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

Independent engineers prepared reserve estimates. Management cautions that there are many inherent uncertainties in estimating proved reserve quantities and related revenues and expenses, and in projecting future production rates and the timing and amount of development expenditures. Accordingly, these estimates will change, as future information becomes available.

Proved oil and gas reserves are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved developed reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods.

As reported in the Company's Form 10-QSB/A for the quarterly period ended March 31, 2003, a review by the Securities and Exchange Commission of the Company's engineered proved reserves as previously reported resulted in the exclusion of certain proved undeveloped reserves. The excluded reserves consisted of 10,005 mmcf of gas and 297,000 barrels or oil at December 31, 2002. The following information has been revised to include these changes.

ANALYSIS OF CHANGES IN PROVED RESERVES

Estimated quantities of proved reserves and proved developed reserves of crude oil and natural gas, the majority of which are located within the United States, as well as changes in proved reserves during the past two years are indicated below:

Oil (Bbls) Natural Gas (MCF)

--------- ----------------

United States

-------------

Proved reserves at December 31, 2002 537,792 2,861,743

Purchases of minerals in place 95,573 15,453,989

Extensions and discoveries -- --

Sales of minerals in place (68,325) (184,611)

Production (38,613) (408,747)

Revisions of previous estimates 34,788 (108,111)

-------- ----------

Proved reserves at December 31, 2003 561,215 17,614,263

Purchases of minerals in place 240,212 83,231

Extensions and discoveries -- --

Sales of minerals in place (190,355) (6,262,191)

Production (22,087) (727,336)

Revisions of previous estimates (202,305) (7,591,696)

-------- ----------

Proved reserves at December 31, 2004 386,680 3,116,271

======== ==========

Proved developed reserves, December 31, 2004 307,818 1,458,287

======== ==========

F-39

ANALYSIS OF CHANGES IN PROVED RESERVES, Continued

Oil (Bbls) Natural Gas (MCF)

--------- ----------------

Canada

------

Proved reserves at December 31, 2002 -- --

Production -- (7,584)

Revisions of previous estimates -- 7,584

------ ------

Proved reserves at December 31, 2003 -- --

====== ======

Proved developed reserves, December 31, 2003 -- --

====== ======

Effective December 31, 2003, the Company disposed of its interest in producing properties in Canada.

There are no reserves attributable to partnership or minority interests at December 31, 2004.

The Company incurred the following capitalized costs related to oil and gas activities during the year ended December 31, 2004 (in thousands):

Properties being amortized $ 4,029

Properties not subject to amortization 211

-----

$ 4,240

=====

OIL AND GAS OPERATIONS

Depletion, depreciation and amortization per equivalent unit of production for the years ended December 31, 2004 and 2003, was $5.55 and $5.72, respectively.

Costs incurred by the Company during the year 2004 for acquisition, exploration and development activities are as follows (in thousands):

Acquisition of producing properties $ 681

Exploration and development 3,559

-----

$ 4,240

=====

STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOWS AND CHANGES THEREIN

The following information at December 31, 2004, and for the years ended December 31, 2003 and 2004, sets forth standardized measures of the discounted future net cash flows attributable to the Company's proved oil and gas reserves.

Future cash inflows were computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) and using the estimated future expenditures to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions.

Future income tax expenses were computed by applying statutory income tax rates to the difference between pretax net cash flows relating to the Company's proven oil and gas reserves and the tax basis of proved oil and gas properties and

F-40

STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOWS AND CHANGES THEREIN, Continued

available operating loss and excess statutory depletion carryovers reduced by investment tax credits. Discounting the annual net cash flows at 10% illustrates the impact of timing on these future cash flows.

The following table presents the standardized measure of discounted net cash flows at December 31, 2004 (in thousands):

United States

-------------

Future cash inflows $ 34,039

Future cash outflows:

Production costs (10,418)

Development costs (1) (5,787)

-------

Future net cash flows before

future income taxes 17,834

Future income taxes (4,586)

------

Future net cash flows 13,248

Adjustment to discount future

annual net cash flows at 10% (3,683)

------

Standardized measure of discounted

future net cash flows $ 9,565

======

(1) Includes estimated expenditures in each of the next three years to develop proved undeveloped reserves as follows (in thousands): $1,919 (2005), $894 (2006), and $-0- (2007).

The following tables summarize the principal factors comprising the changes in the standardized measures of discounted net cash flows during the years 2004 and 2003 (in thousands):

United States Canada

Year 2004 ------------- ----------

---------

Standardized measure, beginning of

period $ 32,442 $ --

Sales of oil and gas, net of

production costs (2,264) --

Net change in sales prices, net of

production costs 9,279 --

Changes in estimated future

development costs (1,658) --

Purchases of minerals in place 2,956 --

Sales of minerals in place (11,841) --

Revisions of quantity estimates (30,488) --

Accretion of discount 3,244 --

Other, including changes in production

rates (timing) (2,845) --

Change in income taxes 10,740 --

------ ------

Standardized measure, end of period $ 9,565 $ --

====== ======

F-41

STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOWS AND CHANGES THEREIN, Continued

United States Canada

Year 2003 ------------- ----------

---------

Standardized measure, beginning of

period $ 8,101 $ --

Sales of oil and gas, net of

production costs (1,587) (5)

Net change in sales prices, net of

production costs 1,906 --

Changes in estimated future

development costs (149) --

Purchases of minerals in place 35,386 --

Sales of minerals in place (705) --

Revisions of quantity estimates 202 5

Accretion of discount 810 --

Other, including changes in production

rates (timing) 472 --

Change in income taxes (11,994) --

------ ------

Standardized measure, end of period $ 32,442 $ --

====== ======

Effective December 31, 2003, the Company disposed of its interest in producing properties in Canada.

F-42

EX-10.11 2 ex1011.htm LETTER AGREEMENT DATED SEPTEMBER 29, 2004, BY AND BETWEEN PACKARD GAS COMPANY AND MIDWEST EOR, INC. Exhibit 10.11

MIDWEST EOR, INC.

2409 EAST SKELLY DRIVE, SUITE 103

TULSA, OK 74105-6083

Exhibit 10.11

September 29, 2004

Packard Gas Company

7867 S. 95^th E. Ave.

Tulsa, OK 74133-4947

Re:

SUDS East & West Units

Creek County, Oklahoma

Gentlemen:

This letter shall confirm our verbal agreement wherein Midwest EOR, Inc., a wholly owned subsidiary of Pertusa Energy, Inc. (MEOR) will agree to sell Packard Gas Company, a wholly owned subsidiary of Capco Energy, Inc.. (PGC) and immediately assign up to a fifty percent (50%) interest in and to the captioned unit for a consideration of $US 660,000.00 to be invested in the captioned unit in ten (10) installments, as follows:

October, 2004

$ 30,000.00

November, 2004

$ 40,000.00

December, 2004

$ 50,000.00

January, 2005

$ 60,000.00

February, 2005

$ 70,000.00

March, 2005

$ 80,000.00

April, 2005

$ 90,000.00

May, 2005

$100,000.00

June, 2005

$110,000.00

July, 2005

$ 30,000.00

In the event that PGC

does not make an installment as set forth above, the interest to be earned by PGC will be three-fourths (3/4) of the proportion of the total payments actually paid by PGC of the total agreed amount of $660,000.00 multiplied times the agreed interest of 50%. In this event, PGC agrees to immediately reassign to MEOR the difference between the assigned 50% interest and the interest actually earned hereunder.

As additional consideration, PGC agrees to pay directly to MEOR an amount equal to 10 percent (10%) of each monthly funding starting with the January, 2005 installment above with final payments of $29,000.00 in June, 2005 and $30,000.00 in July, 2005 with the result being MEOR receiving a total reimbursement of $99,000.00. It is understood that the additional payments will come out of the monthly installments and are not in addition to said installments.

In addition, PGC will become Operator of the captioned unit and will direct the investment therein and the restoration thereof. In this regard, PGC agrees to abide by all the rules and regulations as deemed appropriate by the Oklahoma Corporation Commission. In addition, all parties hereto agree to execute, and encourage all other working interest owners to execute, a new Operating Agreement providing for PGC to be Operator and among other terms, to have a single expenditure limit of $20,000.00 with out an AFE and a non-consent provision of 500%.

PGC agrees to employ James L. Alexander, presently employed by MEOR, under the same terms and salary as with his employment with MEOR.

The effective date for all purposes shall be October 1, 2004.

If this letter accurately sets forth the terms of an acceptable agreement, please evidence the same by having the appropriate authority sign both copies of this letter in the space provided below and returning one fully executed copy to this office.

Sincerely,

Martin A. Vaughan

ACCEPTED AND AGREED TO THIS THE _______ DAY OF ___________________. 2004.

PACKARD GAS COMPANY

BY:___________________________________

Larry R. Burroughs, President

EX-10.12 3 ex1012.htm AGREEMENT DATED NOVEMBER 23, 2004, BY AND AMONG CAPCO ENERGY, INC. AND ILYAS CHAUDHARY Exhibit 10.12 - Agreement

Exhibit 10.12

AGREEMENT

THIS AGREEMENT is entered into this 23^rd day of November 2004 by and among Capco Energy, Inc., a Colorado Corporation ("Seller"), and Ilyas Chaudhary, an individual (“The Buyer”).

Whereas, Capco has ownership interests and rights (“Ownership Rights”) in certain oil and gas properties, lands, pipelines and other miscellaneous equipment, all located in the states of Michigan and Montana.

Whereas Capco received the Ownership Rights by way of consideration paid by Capco and as described in agreements dated February 4, 2002, and March 22, 2004, between Capco and Omimex Energy, Inc. and Omimex Resources, Inc, respectively (“Omimex”), and attached herein as Exhibit “A”.

Whereas the Ownership Rights are burdened by certain debt by Guaranty Bank as described in the agreements attached herein as Exhibit “A”.

Whereas Capco desires to sell and transfer the Ownership Rights and all associated obligations to Ilyas Chaudhary.

Now, therefore it is agreed that:

The purchase price agreed between the parties for such Ownership Rights is $4.7 million USD, to be paid as follows:

$700,000 paid in cash on or before December 1st 2004.

$700,000 by January 31^st 2005. Buyer shall make such payment in cash. Buyer shall retain the option to pay all or part of this payment by delivering common shares of Capco Energy, Inc. The amount of shares to be delivered shall be based upon an average of the closing bid price of Capco Energy, Inc shares for the immediate 5 days preceding the due date.

Approximately $3,300,000 by assumption of the outstanding debt on the property.

The Effective and Closing date of the sale shall be December 31^st 2004. On the Closing date, Buyer shall wire $700,000 and Capco shall assign the Ownership Rights.

Capco shall, prior to the due date of the next payment of $700,000 provide schedules for the debt and other production adjustments to the Buyer. Such amount shall be adjusted and the Buyer shall be responsible to make the payment based upon the adjustment provided.

Upon execution of this agreement, Capco shall obtain consent from Omimex and Guaranty Bank, if required, to assign the Ownership Rights.

The Assets are being sold without warranty of any kind and on an “As Is Where Is” basis.

As this is a related party transaction, and the Buyer is also the CEO of Capco, Capco shall obtain Board of Director approval for this transaction.

IN WITNESS WHEREOF, this Agreement has been executed as of the date first set forth above.

SELLER: BUYER:

Capco Energy, Inc.

/s/ Mike Myers

/s/ Ilyas Chaudhary

By: its President

By: Ilyas Chaudhary

/s/ W C Vance

By: Walton C. Vance (witness)

EX-10.13 4 ex1013.htm LETTER OF INTENT DATED NOVEMBER 24, 2004, BETWEEN PACKARD GAS COMPANY AND MIDWEST EOR, INC. Exhibit 10.13

Packard Gas Company

Exhibit 10.13

November 24, 2004

Mr. Martin A. Vaughan

Midwest EOR, Inc.

2409 East Skelly Drive, Suite 103

Tulsa, OK 74105-6083

RE: Letter of Intent to acquire Bandwheel Waterflood:

Dear Mr. Vaughan:

Pursuant to our previous communications, Packard Gas Company (“Packard”) hereby presents the following proposal:

Purchase of Assets. Packard will purchase, effective December 1^st 2004, (the “Effective Date”), Midwest EOR, Inc.’s (“Seller”) rights and obligations to the Bandweel waterflood property(“Property”) including all the tangible and intangible equipment associated with the production of the Property as scheduled in Exhibit “A” attached. Packard shall also purchase certain other assets (“Assets’) which shall include pulling units, storage warehouse, tools and other miscellaneous equipment all scheduled in Exhibit “B” attached.

Purchase Price. The aggregate consideration for this purchase, (“the Purchase Price”) will be Five hundred and twelve thousand dollars ($512,000) paid by Packard under the following schedule:

$12,000 paid in cash on the closing date. The closing is scheduled for 7th of December 04. Upon receipt of the payment, Seller shall convey by an assignment 100% working Interest ( 82.33% NRI oil – 81.25% NRI gas) to the Property as scheduled in Exhibit “A” and deliver a bill of sale for Assets as scheduled in exhibit “B”. The property and the Assets shall be free of any liens and encumbrances other than those described herein.

$200,000 will be paid with one million (1,000,000) Capco Energy, Inc. free trading common stock to be issued and free trading prior to June 30^th, 2005.

$300,000 shall be paid as net profit interest (“NPI”) from one third (1/3^rd) of the production from the property. The NPI shall be paid monthly by 30^th of the month from the production of the preceding month’s production. NPI shall be calculated by deducting the royalties and operating costs from the revenues. If in any month the costs are higher than the revenues, then such costs shall be accrued and shall be recovered in subsequent periods from Seller’s share of NPI. Seller shall retain a security interest in the Property and the Assets until Seller has received the full payment as described further herinbelow.

Packard Gas Company shall invest a minimum of $100,000 within one year from the effective date of this purchase. None of this $100,000 may be utilized as expenses in calculating the above NPI.

Partial Release Sellers security interest shall be on the Property and the assets however upon receipt of the one million shares of Capco Energy, Inc. free trading common stock, Seller shall provide a release for the Assets but shall continue to retain the security on the Property until full payment has been received.

Osage County Bond. Within 90 days of closing, Packard shall release any Bonds held by the Seller for the sole purpose of the property.

Confidentiality. All information related to all parties involved with this transaction shall be kept strictly confidential and not disclosed without the permission of all parties unless otherwise required by law. Notwithstanding the foregoing, Packard may disclose confidential information to its partners, employees, lenders and professional advisors as necessary to complete the transaction.

If this proposal meets with your approval, then please so indicate by signing in the space provided below and returning to Packard. If a signed copy of this proposal is not returned to Packard within 3 business days upon receipt of this proposal we will consider our proposal to be rejected unless the parties agree to extend.

Packard Gas Company

BY: __________________________

Larry Burroughs, President

Accepted this ____ day of November 2004

Midwest EOR, Inc.

BY____________________________

Martin A. Vaughan, President

EX-10.15 5 ex1015.htm ASSET PURCHASE AGREEMENT DATED MARCH 15, 2005, BY AND AMONG MANTI RESOURCES INC., ET AL AND CAPCO OFFSHORE, INC. EXHIBIT 10.15 - Asset Purchase Agreement

Exhibit 10.15

ASSET PURCHASE AGREEMENT

BY AND AMONG

MANTI RESOURCES, INC.,

MANTI OPERATING COMPANY, MANTI JAMBA, LTD., TRI-C RESOURCES, INC., SUNBELT ENERGY, LTD., SUNBELT ENERGY PROPERTIES I, L.L.C., SUNBELT ENERGY PROPERTIES –ST. BERNARD, L.L.C., SUNBELT ENERGY PROPERTIES- LAKE BORGNE, L.L.C., SUNBELT ENERGY PROPERTIES – BLUEBELL, L.L.C., SUNBELT ENERGY PROPERTIES-GUMBO, L.L.C. , SUNBELT ENERGY PROPERTIES-JAMBALAYA, L.L.C., SUNBELT ENERGY PROPERTIES – MODEL T, L.L.C.

AND

CAPCO OFFSHORE, INC.
BUYER

TABLE OF CONTENTS

Closing Obligations.

2.05.

Allocations and Adjustments.

Organization and Good Standing.

3.02.

Authority; No Conflict.

Legal Proceedings; Orders.

3.06.

Environmental.

3.07.

Personal Property.

3.08.

Title to Properties.

3.09.

Brokers.

3.10.

Tax Sharing Agreements.

3.11.

Consents.

3.12.

Gas Imbalances, Prepayment Arrangements; Take-or-Pay.

3.13.

Status of Leases.

Organization and Good Standing.

4.02.

Authority; No Conflict.

4.03.

Certain Proceedings.

4.04.

Knowledgeable Investor.

Basis of Buyer's Decision

Access and Investigation.

5.02.

Operation of the Assets.

5.03.

Insurance.

5.04.

Consent and Waivers.

5.05.

Notification.

5.06.

Satisfaction of Conditions.

Satisfaction of Conditions.

ARTICLE 7

7.01.

Accuracy of Representations.

7.02.

Seller’s Performance.

Accuracy of Representations.

8.02.

Buyer’s Performance.

Termination Events.

9.02.

Effect of Termination.

Indemnification and Payment of Damages by Seller.

10.03.

Indemnification and Payment of Damages by Buyer.

10.04.

Time Limitations.

10.05.

Limitations on Amount--Seller.

10.06.

Limitations on Amount--Buyer.

10.07.

Procedure for Indemnification--Third Party Claims.

10.08.

Procedure for Indemnification--Other Claims.

10.09.

Extent of Representations and Warranties.

10.10.

Compliance With Express Negligence Test.

10.11.

Limitations of Liability.

ARTICLE 11

11.01.

Title Examination and Access.

11.02.

Defensible Title.

Environmental Audit

11.06.

Remedies For Violations Of Environmental Laws

11.07.

Right of Termination.

11.08.

Disputes.

11.09.

Casualty Loss and Condemnation.

Jurisdiction; Service of Process.

12.04.

Further Assurances.

12.05.

Waiver.

12.06.

Entire Agreement and Modification.

12.07.

Assignments, Successors, and No Third-Party Rights.

12.08.

Severability.

12.09.

Section Headings, Construction.

Waiver Of Texas Deceptive Trade Practices - Consumer Protection Act.

12.14.

Arbitration.

12.15.

Tax Deferred Exchange.

12.16.

Press Release.

iii

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement ("Agreement") is made as of March 15, 2005, by and among Manti Resources, Inc., a Texas corporation, Manti Operating Company, a Texas Corporation, Manti Jamba, LTD., a Texas Limited Partnership, Tri-C Resources, Inc., a Texas Corporation, Sunbelt Energy, Ltd., a Louisiana Corporation, Sunbelt Energy Properties I, L.L.C., a Louisiana Limited Liability Company, Sunbelt Energy Properties - St. Bernard, L.L.C., a Louisiana Limited Liability Company, Sunbelt Energy Properties - Lake Borgne, L.L.C., a Louisiana Limited Liability Company, Sunbelt Energy Properties-Bluebell, L.L.C., a Louisiana Limited Liability Company, Sunbelt Energy Properties-Jambalaya, L.L.C., a Louisiana Limited Liability Company, Sunbelt Energy Properties - Model T, L.L.C., a Louisiana Limited Liability Com pany and Sunbelt Energy Properties-Gumbo, L.L.C., a Louisiana Limited Liability Company (collectively "Sellers" and individually, a “Seller”) and Capco Offshore, Inc., a Texas Corporation (“Buyer”).

RECITALS

Seller desires to sell, in the proportions set forth herein, and Buyer desires to purchase, undivided interests in certain oil, gas, and mineral properties and related assets and contracts, for the consideration and on the terms set forth in this Agreement.

AGREEMENT

The parties, intending to be legally bound, agree as follows:

ARTICLE 1

DEFINITIONS

For purposes of this Agreement, in addition to the other capitalized terms defined in this agreement, the following terms have the meanings specified or referred to in this Article 1 when capitalized:

“Affiliate” -- any Person directly or indirectly controlled by, controlling, or under common control with, Buyer or Seller, including any subsidiary of Buyer or Seller and any “affiliate” of Buyer or Seller within the meaning of Reg. §240.12b-2 of the Securities Exchange Act of 1934, as amended, with “control,” as used in this definition, meaning possession, directly or indirectly, of the power to direct or cause the direction of management, policies or action through ownership of voting securities, contract, voting trust, or membership in management or in the group appointing or electing management or otherwise through formal or informal arrangements or business relationships.

“Allocated Values” --the values assigned among the Asset categories set forth on Schedule 2.02.

“Assets” –the Subject Leases, Wells, and Contracts.

"Assignment Proportions" – the varying ownership percentages of the Sellers in the Assets as described in Section 2.01.

“Breach”--a “Breach” of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision.

“Buyer’s Closing Documents”--as defined in Section 4.02.

“Closing”--as defined in Section 2.03.

“Closing Date”--the date and time as of which the Closing actually takes place.

“Consent”--any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization) relating to the conveyance of the Assets or a portion thereof.

“Contemplated Transactions”--all of the transactions contemplated by this Agreement, including, but not limited to:

(a)

the sale of the Assets by Seller to Buyer;

(b)

the execution, delivery, and performance of the Instruments of Conveyance and all other instruments and documents required under this Agreement;

(c)

the performance by Buyer and Seller of their respective covenants and obligations under this Agreement; and

(d)

Buyer’s acquisition, ownership, and exercise of control over the Assets.

“Contract”--any written agreement or contract that is legally binding relating to the Subject Leases or Wells, including without limitation, those listed on Exhibit B.

“Damages”--as defined in Section 9.02.

“Defensible Title”--as defined in Section 11.02.

“Disclosure Schedule”--the disclosure schedule attached as Exhibit D.

“Effective Time”—January 1, 2005, at 7:00 a.m., Central Daylight Time.

“Encumbrance”--any charge, equitable interest, privilege, lien, option, pledge, security interest, right of first refusal, or restriction of any kind.

“Environment”--soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource.

“Environmental Law”--any Legal Requirement that requires or relates to:

(a)

advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials that could have significant impact on the Environment;

(b)

preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the Environment;

(c)

reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated;

(d)

protecting resources, species, or ecological amenities;

(e)

reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances;

(f)

cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention; or

(g)

making responsible parties pay private parties, or groups of them, for damages done to their health or the Environment, or permitting self-appointed representatives of the public interest to recover for injuries done to public assets.

“Environmental Liabilities”--any cost, damage, expense, liability, obligation, or other responsibility arising from or under either an Environmental Law or third party claims relating to the Environment which relates to the Assets.

“Existing Burdens” -- the total of Lessor Royalty Burdens and Override Burdens attributable to the Subject Leases, determined on a lease by lease basis.

“Governmental Authorization”--any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

“Governmental Body”--any:

(a)

nation, state, county, city, town, village, district, or other jurisdiction of any nature;

(b)

federal, state, local, municipal, foreign, or other government;

(c)

governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal);

(d)

multi-national organization or body; or

(e)

body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.

“Hydrocarbons”--oil, gas, minerals, and other gaseous and liquid hydrocarbons or any combination of the foregoing.

“Instrument of Conveyance”--the instruments of conveyance transferring title to the Assets in the form of Exhibit C provided, that with respect to any of the Subject Leases issued by a Governmental Body, Sellers shall execute and deliver counterpart instruments prepared on the form promulgated by the Governmental Body.

“IRC”--the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law.

“IRS”--the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury.

“Knowledge”--an individual will be deemed to have "Knowledge" of a particular fact or other matter if such individual is actually aware of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving as an officer or director of such Person has, or at any relevant time had, Knowledge of such fact or other matter.

“Legal Requirement”--any federal, state, local, municipal, foreign, international, or multinational law, administrative order, constitution, ordinance, principle of common law, regulation, statute, or treaty.

“Lessor Royalty Burdens”-- as to each Subject Lease, all reserved royalties arising under the terms thereof and payable to the mineral owners in, on and under the lands covered thereby.

“Order”--any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator.

“Ordinary Course of Business”--an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" if such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person.

“Organizational Documents”--(a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the articles of organization and regulations of a limited liability company; (c) the certificate of limited partnership and limited partnership agreement of a limited partnership; and (d) any amendment to any of the foregoing.

“Override Burdens”--overriding royalty interests burdening the Subject Leases (a) which are presently of record in the Parishes in which they are located, or (b) otherwise arise pursuant to a Contract.

“Permitted Encumbrance”--any of the following: (a) any obligations or duties reserved to or vested in any municipality or other Governmental Body to regulate any Asset in any manner including all applicable Legal Requirements; (b) the terms and conditions of all leases, options, servitudes, contracts for sale, purchase, exchange, refining or processing of Hydrocarbons, operating agreements, construction agreements, construction and operation agreements, participation agreements, shoot-to-earn agreements, exploration agreements, partnership agreements, processing agreements, plant agreements, pipeline, gathering, exchange and transportation agreements, disposal agreements, permits, licenses and any other agreements affecting the Assets, including those set forth as Contracts on Exhibit B attached hereto; (c) the Cons ents identified in Part 3.11 of the Disclosure Schedule with respect to which prior to Closing (i) waivers or consents have been obtained from the appropriate Person, (ii) the applicable period of time for asserting such rights has expired without any exercise of such rights, or (iii) mutually agreed upon arrangements have been made by the parties to allow Buyer to receive substantially the same economic benefits as if all such waivers and consents had been obtained; (d) easements, rights-of-way, servitudes, permits, surface leases and other similar rights on, over or in respect of any of the Assets, as long as any such encumbrance does not serve to diminish Buyer’s right to ingress and egress below that enjoyed by Seller and were in effect as of the Effective Time; (e) lessor’s royalties, overriding royalties, production payments, net profits interests, reversionary interests, and similar burdens if the net cumulative effect of such burdens does not operate to reduce Seller’s entitlement to p roduction from the Wells below the net revenue interests set forth in Exhibit A, (f) such other defects or irregularities of title or Encumbrances as Buyer may have waived in writing or which Buyer shall be deemed to have waived pursuant to the provisions of Section 10.3 hereof; (g) conventional rights of reassignment obligating Sellers to reassign their interests in any portion of the Leases to a third party in the event Buyer intends to release or abandon such interest prior to the expiration of the primary term or other termination of such interest; and (h) after consummation of the Closing, defects and irregularities of title which existed on the date Sellers acquired the affected Asset, unless Buyer and Sellers agree otherwise in writing at or before Closing..

“Person”--any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body.

“Preliminary Amount”—as defined in Section 2.05(a).

“Proceeding”--any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

“Production Payment” – shall mean a sum equal to one million ($1,000,000) dollars to be paid from and after the occurrence of Payout and payable solely out of 25% of the interest acquired by Buyer in the hydrocarbons produced from the Wells. For purposes of the Production Payment only, “Payout” shall be the first day of the month immediately following that point in time when Buyer has received from the sale of hydrocarbons produced, saved and sold from the Assets, a sum equal to the Purchase Price plus (i) the reasonable costs of operating for, producing and marketing hydrocarbons from the Assets, and (ii) all severance taxes on production and ad valorem taxes, if any, assessed against the Assets after the Effective Date.

“Property Costs”--as defined in Section 2.05(a).

“Purchase Price”--as defined in Section 2.02.

“Representative”--with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.

“Seller’s Closing Documents”--as defined in Section 3.02.

“Subject Leases”--the oil, gas, and mineral leases described on Exhibit A.

“Tax”--any tax (including any income tax, capital gains tax, value-added tax, sales tax, property tax, severance tax, gift tax, or estate tax), levy, assessment, tariff, duty (including any customs duty), deficiency, or other fee, and any related charge or amount (including any fine, penalty, interest, or addition to tax), imposed, assessed, or collected by or under the authority of any Governmental Body or payable pursuant to any tax-sharing agreement or any other Contract relating to the sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency, or fee.

“Tax Return”--any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax.

“Threatened”--a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) to a party or any of its officers, directors, or employees that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future.

“Title Defect”--as defined in Section 11.03.

“Violation of Environmental Laws” -- a violation of, or the failure to perform any obligation imposed by, an Environmental Law.

“Wells”—oil and gas wells located on the Subject Leases and Prospects, and more particularly described on Exhibit A.

ARTICLE 2

SALE AND TRANSFER OF ASSETS; CLOSING

2.01.

Assets.

Subject to the terms and conditions of this Agreement, at the Closing, Sellers shall sell and transfer the Assets, in the Assignment Proportions, to Buyer as follows:

Seller	All Assets except PXP SL 17656 #2 & BMLC #1-2	PXP SL 17656 #2	BMLC #1-2
Manti Jamba, LTD.	60.75%	60.75%	50.625%
Tri-C Resources, Inc.	22.5%	22.5%	22.5%
Sunbelt Energy Properties- Gumbo, L.L.C.	16.75%	0	0
Sunbelt Energy Properties- Jambalaya, L.L.C.	0	16.75%	0
Sunbelt Energy Properties- Model T, L.L.C.	0		26.875%

All other individual Sellers not listed immediately above shall sell and transfer all of their right, title and interest in and to the Assets, if any and of whatsoever nature, to Buyer at Closing.

2.02.

Purchase Price.

Subject to any adjustments that may be made under Section 2.5, the purchase price (the "Purchase Price") for the Assets will be Twenty Million Dollars ($20,000,000.00) plus the Production Payment. The Purchase Price for the Assets, exclusive of the Production Payment, will be allocated among each of the Assets as set forth in Schedule 2.02 hereto. The amount so allocated to a part of the Assets will constitute the Allocated Values for such part of the Assets. Seller and Buyer agree to be bound by the allocation set forth in Schedule 2.02 for purposes of Article 11 hereof. Contemporaneously herewith, Buyer has paid Seller the sum of $1,000,000.00 (the "Deposit Amount"). If Closing timely occurs, the Deposit Amount will be applied as a credit toward the Purchase Price. If Closing does not timely occur, and Buyer is not obligated un der the terms of this Agreement to close, the Deposit Amount will be returned to Buyer. If Closing does not timely occur, and Buyer is obligated under the terms of this Agreement to close, the Deposit Amount will be retained by Seller as its sole and exclusive remedy and as liquidated damages (and not as a penalty).

2.03.

Closing.

The purchase and sale (the "Closing") provided for in this Agreement will take place at the offices of Seller’s counsel, at 10:00 a.m. (local time) on or before April 29, 2005, or at such other time and place as the parties may agree. Buyer shall have a one-time option to extend the time for Closing until May 31, 2005 by tendering to Seller the sum of $2,000,000.00 to be added to and included in the Deposit Amount; provided that, the Purchase Price shall not be increased as a result of such tender. Subject to the provisions of Articles 9, 10 and 11, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 2.03 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement.

2.04.

Closing Obligations.

At the Closing:

(a)

Seller will deliver, or cause to be delivered, to Buyer:

(i)

the Instruments of Conveyance executed by Seller;

(ii)

possession of the Assets;

(iii)

a certificate executed by Seller representing and warranting to Buyer that each of Seller’s representations and warranties in this Agreement is accurate in all material respects as of the Closing Date as if made on the Closing Date;

(iv)

such documents as Buyer or counsel for Buyer may reasonably request, including but not limited to letters-in-lieu of transfer order to purchasers of production from the Wells, and releases of all recorded Encumbrances (other than Permitted Encumbrances) affecting the Assets.

(b)

Buyer will deliver to Seller:

(i)

the Preliminary Amount, by wire transfer to the account(s) specified by Seller;

(ii)

the Instruments of Conveyance executed by Buyer;

(iii)

a certificate executed by Buyer representing and warranting to Seller that each of Buyer’s representations and warranties in this Agreement is accurate in all material respects as of the Closing Date as if made on the Closing Date; and

(iv)

such other documents as Seller or counsel for Seller may reasonably request.

2.05.

Allocations and Adjustments.

If Closing occurs:

(a)

Buyer will be entitled to all revenues, production, proceeds, income, and products from or attributable to each Asset on and after the relevant Effective Time, and will be responsible for (and entitled to any refunds with respect to) all Property Costs attributable to the Assets and incurred on and after the Effective Time. Seller will be entitled to all revenues, production, proceeds, income, and products from or attributable to each Asset prior to the Effective Time, and will be responsible for (and entitled to any refunds with respect to) all Property Costs attributable to each Asset and incurred prior to the Effective Time. “Property Costs” will mean all amounts attributable to the operation and ownership of the Assets incurred and paid in the Ordinary Course of Business. For purposes of allocating production, products, acc ounts receivable and proceeds under this Section, (i) liquid hydrocarbons will be deemed to be “from or attributable to” the Wells when they pass through the pipeline connecting into the storage facilities into which they are run and (ii) gaseous hydrocarbons will be deemed to be “from or attributable to” Wells when they pass through the delivery point sales meters on the pipelines through which they are transported. In order to accomplish the foregoing allocation of production the parties will rely upon gauging, metering and strapping procedures conducted by Seller on or about the Effective Time to the extent possible and unless demonstrated to be inaccurate will utilize reasonable interpolating procedures to arrive at an allocation of production when exact gauging, metering and strapping data is not available on hand as of the Effective Time. Seller will provide to Buyer evidence of all gauging, metering and strapping procedures conducted hereunder in connection with the Wells, together with all data necessary to support any estimated allocation, for purposes of establishing the adjustment to the Purchase Price. Ad valorem taxes for 2005 will be prorated on a daily basis, with Buyer liable for the portion allocated to the period on and after the Effective Time and Seller liable for the portion allocated to the period before the Effective Time. If the amount of such taxes for part, or all, of the Assets is not available on the Closing Date, proration of taxes shall be made on the basis of taxes assessed in the previous year, with a subsequent cash adjustment of such proration to be made between Seller and Buyer, when actual tax figures are available. The "Preliminary Amount" will be the Purchase Price, adjusted as provided below, based upon the best information available at time of Closing.

(b)

The Purchase Price will be, without duplication,

(i)

increased by the following amounts:

(A)

the aggregate amount of all non-reimbursed Property Costs which are attributable to the period from the Effective Time to the Closing Date and which are incurred and paid by Seller with respect to the Wells and Subject Leases;

(B)

an amount equal to the agreed value of all Hydrocarbons in storage above the pipeline connection at the Effective Time

that is credited to the Wells and which stored Hydrocarbons have not been sold by Seller or for which Seller has not been paid;

(C)

the amount of any upward adjustment pursuant to Section 11.04;

(D)

any other upward adjustment mutually agreed upon by the parties;

(ii)

decreased by the following amounts:

(A)

the aggregate amount of proceeds received by Seller from the sale of Hydrocarbons produced from and attributable to the Wells between the Effective Time and the Closing Date;

(B)

the amount of any downward adjustment relating to Title Defects as set forth in Article 11;

(C)

the amount of any adjustment relating to an uninsured casualty as required by Section 11.09;

(D)

Seller’ s share of estimated ad valorem taxes through the Effective Time; and

(E)

the amount of any downward adjustment mutually agreed upon by the parties.

(c)

Subject to the arbitration provisions of Article 12.14 as to adjustments under Section 2.05(b)(ii)(b), as soon as practicable after Closing, but no later than ninety (90) days following the Closing Date, Seller will prepare and submit to Buyer, a statement (the “Final Settlement Statement”) setting forth each adjustment or payment which was not finally determined as of the Closing Date and showing the values used to determine such adjustments to reflect the final adjusted Purchase Price (the “Final Amount”). On or before thirty (30) days after receipt of the Final Settlement Statement, Buyer will deliver to Seller a written report containing any changes which Buyer proposes be made to the Final Settlement Statement. Seller and Buyer shall undertake to agree with respect to the amounts due pursuant to the post-closin g adjustment no later than one hundred fifty (150) days from the Closing Date. If Seller and Buyer are unable to agree within one hundred fifty (150) days after the Closing Date as to adjustment matters not subject to arbitration in accordance with this Agreement, Seller will select an independent accounting firm in Corpus Christi, Texas, from a list of three such firms provided by Buyer (none of which will be the independent accounting firm regularly used by Buyer or Seller), which firm will audit the Final Settlement Statement and determine the Purchase Price adjustment or payment amount in accordance with the terms and conditions set forth in this Agreement. The decision of such independent accounting firm will be binding on Seller and Buyer, and the fees and expenses of such independent accounting firm will be borne one-half by Seller and one-half by Buyer. The date upon which such agreement is reached or upon which the Purchase Price is otherwise established, as provided in the precedi ng

sentence, will be called the “Settlement Date.” In the event that (a) the Final Amount is more than the Preliminary Amount, Buyer will pay to Seller the amount of the difference; or (b) the Final Amount is less than the Preliminary Amount, Seller will pay to Buyer the amount of the difference. Such payment will be made within five (5) business days of the Settlement Date via wire transfer to accounts specified by Seller or Buyer as appropriate.

2.06.

Assumption.

If the Closing occurs, from and after the Closing Date, Buyer will assume, pay, and discharge the following liabilities (“Assumed Liabilities”):

Any and all duties, claims, damages, expenses, fines, penalties, costs (including attorneys’ fees and expenses), liabilities, and obligations (i) arising from or relating to the ownership or operation of the Assets from and after the Effective Time under any Contract, Governmental Authorization, or Subject Lease relating to the Assets, (ii) imposed by any Legal Requirement relating to the Assets, (iii) for plugging, abandonment, and surface restoration of the oil, gas, injection, water, or other wells located on the lands covered by the Subject Leases, (iv) from any act, omission, event, condition, or occurrence subsequent to the Effective Time relating to the Assets, and (v) attributable to all Environmental Liabilities relating to the Assets; provided, however, the provisions of this Section 2.06 will not relieve Seller from liability resulting from a Breach, if any, of its represe ntations, warranties or covenants under this Agreement.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF SELLER

Each Seller, severally as to its respective interest and not jointly, represents and warrants to Buyer as follows:

3.01.

Organization and Good Standing.

Manti Resources, Inc, and Manti Operating Company are Texas corporations, Manti Jamba, LTD., is a Texas Limited Partnership, Tri-C Resources, Inc., is a Texas Corporation, Sunbelt Energy, Ltd., is a Louisiana Corporation, Sunbelt Energy Properties I, L.L.C., Sunbelt Energy Properties-Jambalaya, L.L.C., Sunbelt Energy Properties - Model T, L.L.C., Sunbelt Energy Properties-Gumbo, L.L.C., and Sunbelt Energy Properties - St. Bernard, L.L.C., Sunbelt Energy Properties - Lake Borgne, L.L.C., and Sunbelt Energy Properties-Bluebell, L.L.C., are Louisiana Limited Liability Companies, duly organized, validly existing, and in good standing under the laws of its state of organization and every state in which it is qualified to do business, with full corporate power and authority to conduct its business as it is now being conducted, and to own or use the properties and assets that it purpor ts to own or use. Seller is not a “foreign person” for purposes of Section 1445 or Section 7701 of the IRC.

3.02.

Authority; No Conflict.

(a)

This Agreement constitutes the legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms. Upon the execution and delivery by Seller of the Instruments of Conveyance and any other documents executed and delivered by Seller at the Closing (collectively, the "Seller’s Closing Documents"), Seller’s Closing Documents will constitute the legal, valid, and binding obligations of Seller, enforceable against Seller in accordance with their respective terms. Except as set forth in Part 3.02 of the Disclosure Schedule, Seller has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and Seller’s Closing Documents, and to perform its obligations under this Agreement and Seller’s Closing Documents.

(b)

Except as set forth in Part 3.02 of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time):

(i)

contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of Seller, or (B) any resolution adopted by the board of directors or the stockholders of Seller;

(ii)

contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any contract or agreement or any Legal Requirement or Order to which Seller, or any of the Assets, may be subject;

(iii)

contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization that relates to the Assets;

(iv)

contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Contract; or

(v)

result in the imposition or creation of any Encumbrance upon or with respect to any of the Assets.

(c)

Except as set forth in Part 3.02 of the Disclosure Schedule, Seller is not nor will be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. If any such consent is required, such consent shall be given in writing not less than three (3) business days prior to Closing.

3.03.

Bankruptcy.

There are no bankruptcy, reorganization, or arrangement proceedings being contemplated by Seller or pending or Threatened against Seller.

3.04.

Taxes.

Seller has filed or caused to be filed all Tax Returns that it has been or was required to file, either separately or as a member of a consolidated group, pursuant to applicable Legal Requirements. All Tax Returns filed by (or that include on a consolidated basis) Seller are true, correct, and complete. Seller has paid all Taxes that have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by Seller, to the extent not being contested in good faith. Seller does not have any Knowledge of any Threatened Tax assessment against it except as disclosed in Part 3.05 of the Disclosure Schedule.

3.05.

Legal Proceedings; Orders.

(a)

Except as set forth in Part 3.05 of the Disclosure Schedule, there is no pending Proceeding:

(i)

that relates to or may affect any of the Assets; or

(ii)

that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions.

(b)

Except as set forth in Part 3.05 of the Disclosure Schedule, to Seller’s Knowledge (1) no Proceeding of the type referenced in Section 3.05 (a) has been Threatened, (2) no event has occurred nor does any circumstance exist that may give rise to or serve as a basis for the commencement of any such Proceeding, and (3) no basis exists for any claim by any employee of Seller under any Legal Requirement for which Buyer could become liable as a successor or otherwise.

(c)

Except as set forth in Part 3.05 of the Disclosure Schedule, there is no Order relating to the use or ownership of the Assets to which Seller, or any of the Assets, is subject.

3.06.

Environmental.

To the Knowledge of Seller, there are no Violations of Environmental Laws that arise from events occurring during the period Seller owned the affected Assets , which have not been corrected or remediated under the requirements of any Governmental Body having jurisdiction, and to the Knowledge of Seller, there are no Environmental Liabilities that arise from events occurring prior to Seller’s ownership of the Assets.

There are no environmental investigations, studies or audits with respect to any of the Assets owned or commissioned by, or in the possession of, Seller or Affiliates which have not been disclosed in writing to Buyer.

3.07.

Personal Property.

To the extent the Assets constitute personal property or fixtures, Seller EXPRESSLY DISCLAIMS AND NEGATES (A) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (B) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (C) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, AND (D) ANY OTHER WARRANTY OF ANY NATURE, EXPRESS OR IMPLIED, EXCEPT AS EXPRESSLY PROVIDED HEREIN, AND ARE TO BE CONVEYED "AS IS" AND "WHERE IS", WITH ALL FAULTS.

3.08.

Title to Properties.

On the Closing Date, Seller will convey to Buyer Defensible Title to the Assets. Seller has delivered or made available to Buyer all items in its possession which would be relevant in the determination as to whether Seller has the ability to convey Defensible Title to the Assets.

3.09.

Brokers.

Seller has not incurred any obligation or liability, contingent or otherwise, for broker’s or finder’s fees with respect to the transactions contemplated by this Agreement other than obligations which are the sole responsibility of Seller.

3.10.

Tax Sharing Agreements.

There are no tax sharing agreements or any other contract relating to the sharing or payment of any Tax.

3.11.

Consents.

Part 3.11 of the Disclosure Schedule sets forth all consents and approvals which are required in order to consummate the transactions contemplated hereunder.

3.12.

Gas Imbalances, Prepayment Arrangements; Take-or-Pay.

There are no gas imbalances between Seller and any third party working interest owners or gatherers or transporters relative to the Assets, and Seller is not obligated by any gas prepayment arrangement or by any take-or-pay requirement or by any other financial penalty or payback obligation to deliver any gas at a future time without then or thereafter receiving payment therefore.

3.13.

Status of Leases.

With respect to the oil, gas and/or mineral leases comprising part of the Assets (i) to Seller’s Knowledge, such leases have been maintained according to their terms, in compliance with the agreements to which such leases are subject; (ii) to Seller’s Knowledge all royalties (other than

royalties held in suspense), delay rentals and other payments due under such leases have been properly and timely paid and all conditions necessary to keep such leases in force have been fully performed; (iii) to Seller’s Knowledge, except as shown on the Exhibits hereto, and without expanding or enlarging any warranty of title given elsewhere herein, such leases are presently in force and effect; and (iv) neither Seller nor, to Seller’s Knowledge, any other party to any such lease has received notice of any claim or action seeking to terminate, cancel, rescind or procure a judicial reformation of any such lease or any provisions thereof or seeking the release of any such lease (or portion thereof) comprising any part of the Assets.

3.14.

Contracts.

Exhibit B contains a list of certain material Contracts comprising a part of the Assets. Seller has made available to Buyer complete and correct copies of all Contracts listed on Exhibit B. Except as set forth on Parts 3.02 and 3.14 of the Disclosure Schedule, Seller has received no written notice of any threatened cancellation of any Contract nor any outstanding disputes thereunder, and, assuming all required consents are received, Seller has not and will not have breached any provision of, nor, to Seller’s Knowledge, does there exist any default under, or event, that is, or with the giving of notice or the passage of time or both would become a breach or default in respect under the terms of any Contract. The Contracts have been duly executed by Seller, constitute valid and enforceable obligations of Seller, and are freely assignable without the consent of third parties. &nb sp;Except as set forth on Part 3.14 of the Disclosure Schedule, there are no gas purchase Contracts which may not be canceled by Seller upon ninety (90) days notice to the other party.

3.15.

Laws and Regulations. To Seller’s Knowledge, Seller is not in violation of any law or regulation relating to the Assets that could, if left unremedied, result in imposition of a fine, administrative penalty, show cause order, reduction in allowable, or pipeline severance.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller as follows:

4.01.

Organization and Good Standing.

Buyer is duly organized, validly existing, and in good standing under the laws of the State of Colorado and in each jurisdiction in which it conducts business, including Texas and Louisiana.

4.02.

Authority; No Conflict.

(a)

This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Upon the execution and delivery by Buyer of the Instruments of Conveyance and any other documents executed and delivered by Buyer at the Closing (collectively, the "Buyer’s Closing Documents"), the Buyer’s Closing Documents will constitute the legal, valid, and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms. Buyer has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and the Buyer’s Closing Documents, and to perform its obligations under this Agreement and the Buyer’s Closing Documents.

(b)

Except as disclosed to Buyer on Part 4.2 on the Disclosure Schedule, neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions.

(c)

Except as disclosed to Buyer on Part 4.2 on the Disclosure Schedule, Buyer is not and will not be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions.

4.03.

Certain Proceedings.

There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Buyer’s Knowledge, no such Proceeding has been Threatened.

4.04.

Knowledgeable Investor.

Buyer is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Buyer was advised by its own legal, tax, and other professional counsel concerning this Agreement, the Contemplated Transactions, the Assets and their value, and it has relied solely thereon and the representations and obligations of Sellers in this Agreement and the documents to be executed by Sellers in connection with this Agreement at Closing. Buyer is acquiring the Assets for its own account and not for distribution.

4.05.

Securities Laws.

The solicitation of offers and the sale of the Assets by Sellers have not been registered under any securities laws. Buyer represents that at no time has it been presented with or solicited by or through any public promotion or any form of advertising in connection with this transaction. Buyer represents that it intends to acquire the Assets for its own benefit and account and that it is not acquiring the Assets with the intent of distributing fractional, undivided interests that would be subject to regulation by federal or state securities laws, and that if it sells, transfers, or otherwise disposes of the Assets or

fractional undivided interest therein, it will do so in compliance with applicable federal and state securities laws.

4.06.

Due Diligence

Buyer represents that it has performed, or will perform, before closing, sufficient review and due diligence with respect to the Assets, which includes reviewing well data and other files in performing necessary evaluations, assessments, and other tasks involved in evaluating the Assets to satisfy its requirements completely and to enable it to make an informed decision to acquire the Assets under the terms of this Agreement.

4.07.

Basis of Buyer's Decision

Buyer represents that by reason of its knowledge and experience in the evaluation, acquisition and operation of oil and gas properties, Buyer has evaluated the merits and the risks of purchasing the Assets from Sellers and has formed an opinion based solely on Buyer's knowledge and experience and not on any representations or warranties by Sellers. Buyer represents that it has not relied and will not rely on any statements by Sellers or their representatives in making its decision to enter into this Agreement or to close this transaction.

4.08.

Material Factor

Buyer acknowledges that Buyer's representations under this Article are a material inducement to Sellers to enter into this Agreement with, and close the Contemplated Transactions with Buyer.

ARTICLE 5

COVENANTS OF SELLER

5.01.

Access and Investigation.

Between the date of this Agreement and the Closing Date, Seller will (a) afford Buyer and its Representatives (collectively, "Buyer’s Advisors") reasonable access to Seller’s personnel, properties, contracts, books and records, and other documents and data, (b) furnish Buyer and Buyer’s Advisors with copies of all such contracts, books and records, and other existing documents and data as Buyer may reasonably request, and (c) furnish Buyer and Buyer’s Advisors with such additional financial, operating, and other data and information as Buyer may reasonably request; PROVIDED THAT, EXCEPT AS EXPRESSLY PROVIDED HEREIN, SELLER MAKES NO WARRANTY, AND EXPRESSLY DISCLAIMS ALL WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF THE DOCUMENTS, INFORMATION, BOOKS, RECORDS, FILES AND OTHER PERTINENT DATA THAT IT MAY PROVIDE TO BUYER.

5.02.

Operation of the Assets.

Between the date of this Agreement and the Closing Date, Seller will conduct the business relating to the Assets only in the Ordinary Course of Business. By way of example, and not as a limitation, during such period, Sellers will use commercially reasonable efforts to:

(a)

maintain the Assets and operate the Assets or cause the Assets to be operated in the Ordinary Course of Business;

(b)

pay or cause to be paid all bonuses and rentals, royalties, overriding royalties, shut-in royalties, and minimum royalties and development and operating expenses, current taxes and other payments incurred with respect to the Assets except royalties held in suspense as a result of title issues and that do not give any third party a right to cancel an interest in an Asset and except for expenses being contested in good faith and for which adequate reserves have been provided;

(c)

maintain the personal property comprising part of the Assets in at least as good a condition as it is on the date hereof, subject to ordinary wear and tear; and,

(d)

safeguard and maintain confidential all records of a nonpublic nature (including without limitation geological and geophysical data and maps and interpretations thereof) that relate to the Assets.

Similarly, between the date of this Agreement and Closing, Seller will not:

(a)

take any action that would cause its representations or warranties to be materially incorrect as of the Closing Date, except in the ordinary course of business.

(b)

abandon any Asset (except the abandonment of producing leases not capable of producing in paying quantities after the expiration of their primary terms and having secured consent to such abandonment from Buyer), without Buyer’s consent.

(c)

commence, propose, or agree to participate in any single operation with respect to the Wells or Subject Leases with an anticipated cost in excess of $50,000 without Buyer’s consent, except for emergency operations;

(d)

elect to participate in any single operation proposed by a third party with respect to the Wells or Subject Leases with an anticipated cost in excess of $50,000 without Buyer’s consent, except for emergency operations;

(e)

terminate or materially amend or modify any Contract set forth on the Disclosure Schedule without Buyer’s consent;

(f)

waive any right of material value under any Contract set forth on the Exhibit B or relating to the Wells without Buyer’s consent;

(g)

sell, lease, encumber or otherwise dispose of all or any portion of any Assets except sales of Hydrocarbons in the Ordinary Course of Business without Buyer’s consent; or

(h)

enter into any new production sales, processing, gathering or transportation agreement with respect to the Wells not terminable at will without penalty by Buyer after Closing on thirty (30) days notice or less.

5.03.

Insurance.

Sellers will maintain in force until the Closing all of Sellers’ general liability, workers compensation, auto liability and well control insurance policies covering the Assets (provided that the costs of such insurance will constitute Property Costs.)

5.04.

Consent and Waivers.

Sellers agree to use commercially reasonable efforts to obtain prior to Closing written waivers of all preferential rights to purchase and all waivers and Consents necessary for the transfer of the Assets to Buyer; provided that in the event Sellers are unable to obtain all such waivers and Consents after using such reasonable efforts, such failure to satisfy will not constitute a Breach of this Agreement.

5.05.

Notification.

Between the date of this Agreement and the Closing Date, Sellers will promptly notify Buyer in writing if Sellers become aware of any fact or condition that causes or constitutes a Breach of any of Seller’s representations and warranties as of the date of this Agreement, or if Seller becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. Should any such fact or condition require any change in the Disclosure Schedule if the Disclosure Schedule were dated the date of the occurrence or discovery of any such fact or condition, Sellers will promptly deliver to Buyer a supplement to the Disclosure Schedule specifying such c hange. During the same period, Sellers will promptly notify Buyer of the occurrence of any Breach of any covenant of Sellers in this Article 5 or of the occurrence of any event that may make the satisfaction of the conditions in Article 7 impossible or unlikely.

5.06.

Satisfaction of Conditions.

Between the date of this Agreement and the Closing Date, Seller swill use commercially reasonable efforts to cause the conditions in Article 7 to be satisfied; provided that in the event Sellers are unable to satisfy such conditions after using such reasonable efforts such failure to satisfy shall not constitute a Breach of this Agreement; provided further, however, the foregoing will not constitute a waiver of Sellers’ Breach of any of the provisions of Article 5 or any other Breach of this Agreement.

5.07.

Change of Operator. If Closing occurs, Seller agrees to use commercially reasonable efforts to assist Buyer in becoming the successor operator of those properties operated by Seller at the Effective Time.

ARTICLE 6

COVENANTS OF BUYER

6.01.

Notification.

Between the date of this Agreement and the Closing Date, Buyer will promptly notify Sellers in writing if Buyer becomes aware of any fact or condition that causes or constitutes a Breach of any of Buyer's representations and warranties as of the date of this Agreement, or if such Buyer becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. Should any such fact or condition require any change in the Disclosure Schedule if the Disclosure Schedule were dated the date of the occurrence or discovery of any such fact or condition, Buyer will promptly deliver to Sellers a supplement to the Disclosure Schedule specifying such change. Du ring the same period, Buyer will promptly notify Sellers of the occurrence of any Breach of any covenant of Buyer in this Article 6 or of the occurrence of any event that may make the satisfaction of the conditions in Article 8 impossible or unlikely.

6.02.

Satisfaction of Conditions.

Between the date of this Agreement and the Closing Date, Buyer will use commercially reasonable efforts to cause the conditions in Article 8 to be satisfied; provided that in the event Buyer is unable to satisfy such conditions after using such reasonable efforts such failure to satisfy shall not constitute a Breach of this Agreement; provided further, however, the foregoing will not constitute a waiver of Buyer's Breach of any of the provisions of Article 6 or any other Breach of this Agreement.

6.03

Post-Closing Call on Production.

For a period of one (1) year from and after the Closing Date, Buyer will grant Manti Resources, Inc., or its Affiliate, a continuing right of first refusal to purchase all Hydrocarbons produced and saved from the Subject Leases or allocated thereto. Buyer shall promptly give written notice ("Offer Notice") to Manti, with full information concerning all terms of any third party offer Buyer has received in respect of the sale of such production (including, without limitation, the name and address of the prospective purchaser, the price offered, volume, term, title transfer point, penalties, reservation fees, take information, connection terms, redetermination provisions, quality specifications and processing provisions) which Buyer would otherwise consider accepting for the purchase and sale of the production. Manti, or its Affiliate, shall then have an optional pri or right, for a period of ten (10) days after receipt of the Offer Notice, to exercise its right to purchase such production by matching the terms and conditions contained in the Offer Notice. Failure to notify Buyer of its election within such ten (10) day period will be deemed an election by Manti not to exercise its preferential purchase right, solely with respect to the offer contained in such Offer Notice. Notwithstanding the foregoing, to the extent the Hydrocarbon production offered for sale is subsequently purchased by a third party on terms and

conditions that are materially different than those contained in the Offer Notice, pursuant to which Manti, or its Affiliate, has elected, or is deemed to have elected, not to purchase, Manti's preferential right to purchase will be reinstated, with a shortened time period of five business days for exercise, which will commence upon Manti's receipt of full details of the terms and conditions under which such production is being sold.

ARTICLE 7

CONDITIONS PRECEDENT TO
BUYER’S OBLIGATION TO CLOSE

Buyer's obligation to purchase the Assets and to take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):

7.01.

Accuracy of Representations.

All of Sellers' representations and warranties in this Agreement (considered collectively) must have been accurate in all material respects as of the date of this Agreement, and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, without giving effect to any supplement to the Disclosure Schedule.

7.02.

Seller’s Performance.

(a)

All of the covenants and obligations that Seller is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively) must have been duly performed and complied with in all material respects.

(b)

Seller must deliver, or be prepared to deliver, each document required to be delivered by it pursuant to Section 2.04.

7.03.

No Proceedings.

Since the date of this Agreement, there must not have been commenced or Threatened against Sellers, or against any Affiliates thereof, any Proceeding (a) involving any challenge to, or seeking damages or other relief in connection with, any of the Contemplated Transactions, or (b) that may have the effect of preventing, delaying, making illegal, or otherwise interfering with any of the Contemplated Transactions.

7.04.

Production Volumes.

The actual volume or quantity of both hydrocarbons and water produced from the Wells for a specific period of time must be substantially consistent with the volumes appearing in Seller’s records and reports furnished to Buyer and reflected in state regulatory agency reports for that same period of time.

ARTICLE 8

CONDITIONS PRECEDENT TO SELLER’S OBLIGATION TO CLOSE

Seller’s obligation to sell the assets and to take the other actions required to be taken by Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller, in whole or in part):

8.01.

Accuracy of Representations.

All of Buyer’s representations and warranties in this Agreement (considered collectively) must have been accurate in all material respects as of the date of this Agreement, and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, without giving effect to any supplement to the Disclosure Schedule.

8.02.

Buyer’s Performance.

(a)

All of the covenants and obligations that Buyers are required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively) must have been duly performed and complied with in all material respects.

(b)

Buyer must deliver, or be prepared to deliver, each document required to be delivered by it pursuant to Section 2.04.

8.03.

No Proceedings.

Since the date of this Agreement, there must not have been commenced or Threatened against Buyer, or against any Affiliates thereof, any Proceeding (a) involving any challenge to, or seeking damages or other relief in connection with, any of the Contemplated Transactions, or (b) that may have the effect of preventing, delaying, making illegal, or otherwise interfering with any of the Contemplated Transactions.

ARTICLE 9

TERMINATION

9.01.

Termination Events.

This Agreement may, by written notice given prior to or at the Closing, be terminated:

(a)

by either Buyer or Seller if a material Breach of any provision of this Agreement has been committed by the other party and such Breach has not been waived or cured;

(b)

by mutual consent of Buyer and Seller;

(c)

by either Buyer or Seller if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before the date scheduled for Closing in paragraph 2.03, or such later date as the parties may agree upon in writing;

(d)

by Buyer if the conditions in Article 7 have not been satisfied on or before Closing;

(e)

by a Seller if the conditions in Article 8 have not been satisfied on or before Closing; or

(f)

as provided in Article 11.

9.02.

Effect of Termination.

Each party's rights of termination under Article 11 are in addition to the rights it may have under this Article 9. If this Agreement is terminated pursuant to Section 9.01, all further obligations of the parties under this Agreement will terminate, but such termination will not impair nor restrict the rights of either party against the other under Article 10.

ARTICLE 10

INDEMNIFICATION; REMEDIES

10.01.

Survival.

Subject to Section 10.04, all representations, warranties, covenants, and obligations in this Agreement, the Disclosure Schedule, the certificates delivered pursuant to Section 2.04, and any other certificate or document delivered pursuant to this Agreement will survive the Closing, except to the extent of any written waiver signed by the waiving party.

10.02.

Indemnification and Payment of Damages by Seller.

Except as otherwise limited in this Article 10, each Seller, severally as its interest may appear and not jointly, will indemnify and hold harmless Buyer and its respective Representatives, stockholders, controlling persons, directors, officers, and affiliates (collectively, the "Buyer Indemnified Persons") for, and will pay to the Buyer Indemnified Persons the amount of, any loss, liability, claim, or damage, whether or not involving a third-party claim (collectively, "Damages"), arising from:

(a)

any Breach of any representation or warranty made by Seller in this Agreement, or in any certificate delivered by such Seller pursuant to this Agreement;

(b)

any Breach by Seller of any covenant or obligation of Seller in this Agreement;

(c)

any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with Seller (or any Person acting on its behalf) in connection with any of the Contemplated Transactions; or

(d)

if Closing occurs, the use, ownership or operation of the Assets by Seller prior to the Effective Time, except to the extent assumed by Buyer as Assumed Liabilities.

Except for Buyer's termination rights under Articles 9 and 11 of this Agreement, the remedies provided in this Article 10 (if Closing occurs) and Section 2.02 (if Closing does not occur) are Buyer's and Buyer Indemnified Persons' exclusive remedies for Seller's Breaches.

10.03.

Indemnification and Payment of Damages by Buyer.

Except as otherwise limited in this Article 10, Buyer will indemnify and hold harmless Seller and its Representatives, stockholders, controlling persons, directors, officers, and affiliates (collectively, the "Seller Indemnified Persons"), and will pay to Seller Indemnified Persons the amount of any Damages arising from:

(a)

any Breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement;

(b)

any Breach by Buyer of any covenant or obligation of Buyer in this Agreement;

(C)

ANY LOSS, LIABILITY, CLAIM, DAMAGE OR SUIT WHICH ANY OF BUYER'S EMPLOYEES OR AGENTS OR THEIR HEIRS, EXECUTORS, OR ASSIGNS MAY ASSERT AGAINST SELLER, BASED UPON INJURY TO PERSON, INCLUDING DEATH OR TO PROPERTY, ARISING IN ANY MANNER WHATSOEVER FROM ANY INSPECTIONS OF SELLER’S PROPERTY PRIOR TO CLOSING, WHETHER OR NOT BASED UPON STRICT LIABILITY OR CAUSED BY THE SOLE OR CONCURRENT NEGLIGENCE (WHETHER ACTIVE OR PASSIVE) OF SELLER,

OR ANY PERSON OR ENTITY, UNLESS SUCH INJURY WAS OCCASIONED SOLELY BY THE GROSS NEGLIGENCE OR INTENTIONAL TORT OF SELLER OR ANY OFFICER, DIRECTOR, OR EMPLOYEE OR AGENT THEREOF; PROVIDED THAT SELLER AGREES TO INDEMNIFY, RELEASE AND HOLD BUYER HARMLESS FOR ANY DAMAGE TO THE FACILITIES AND/OR EQUIPMENT OF SELLER THAT OCCURS DURING SUCH INSPECTION SO LONG AS SUCH INSPECTION IS MADE UNDER THE SUPERVISION OF A SELLER’S EMPLOYEE OR AGENT PHYSICALLY AT THE LOCATION WHEN AND WHERE THE DAMAGE OCCURS;

(d)

if Closing occurs and subject to the provisions of paragraph 5.02, the use, ownership, or operation of the Assets after the Effective Time;

(e)

if Closing occurs, the Assumed Liabilities.

Except for Sellers’ termination rights under Article 9 and Article 11 of this Agreement, the remedies provided in this Article 10 (if Closing occurs) and Section 2.02 (if Closing does not occur) are Seller's and Seller's Indemnified Persons' exclusive remedies for Buyer's Breaches.

10.04.

Time Limitations.

Seller will have no liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with prior to the Closing Date, unless on or before one (1) year from the Closing Date, Buyer notifies Seller of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer.

10.05.

Limitations on Amount--Seller.

If the Closing occurs, Seller will have no liability under Section 10.02 until the total of all Damages indemnified thereunder exceeds $100,000, and then Seller will be liable for the entire amount of such Damages.

10.06.

Limitations on Amount--Buyer.

If the Closing occurs, Buyer will have no liability under Section 10.03 until the total of all Damages indemnified thereunder exceeds $100,000, and then Buyer will be liable for the entire amount of such Damages.

10.07.

Procedure for Indemnification--Third Party Claims.

(a)

Promptly after receipt by an indemnified party under Section 10.02 or 10.03 of a claim for Damages or notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim.

(b)

If any Proceeding referred to in Section 10.07(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Procee ding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding. If the indemnifying party assumes the defense of a Proceeding, no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (C) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent.

(c)

Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld).

10.08.

Procedure for Indemnification--Other Claims.

A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.

10.09.

Extent of Representations and Warranties.

(A)

EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, AND DISCLAIM ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER (INCLUDING ANY OPINION, INFORMATION OR ADVICE WHICH MAY HAVE BEEN PROVIDED TO BUYER BY ANY AFFILIATE, OFFICER, DIRECTOR, STOCKHOLDER, PARTNER, EMPLOYEE, AGENT, CONSULTANT OR REPRESENTATIVE OF SELLER OR BY ANY INVESTMENT BANK OR INVESTMENT BANKING FIRM, ANY PETROLEUM ENGINEER OR ENGINEERING FIRM, SELLER’S COUNSEL OR ANY OTHER AGENT, CONSULTANT OR REPRESENTATIVE). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER EXPRESSLY DISCLAIM AND NEGATE ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LA W, BY STATUTE, OR OTHERWISE RELATING TO (A) THE TITLE TO ANY OF THE ASSETS EXCEPT THAT SELLER EXPRESSLY WARRANT THAT THE SUBJECT LEASES ARE FREE AND CLEAR OF ALL LIENS, SECURITY INTERESTS, ENCUMBRANCES OR DEFECTS IN TITLE, EXCEPT PERMITTED ENCUMBRANCES, (B) THE CONDITION OF THE ASSETS (INCLUDING WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS), IT BEING DISTINCTLY UNDERSTOOD THE ASSETS ARE BEING SOLD “AS IS”, “WHERE IS” AND “WITH ALL FAULTS AS TO ALL MATTERS”, (C) ANY INFRINGEMENT BY SELLER OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY (D) ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER BY OR ON BEHALF OF SELLER (INCLUDING WITHOUT LIMITATION, IN RESPECT OF GEOLOGICAL AND ENGINEERING DATA, THE EXISTENCE OR EXTENT OF OIL, GAS OR THE MINERAL RESERVES, THE RECOVERABILITY OF SUCH RESERVES, ANY PRODUCT PRICING ASSUMPTIONS, AND THE ABILIT Y TO SELL OIL OR GAS PRODUCTION AFTER CLOSING), AND (E) THE ENVIRONMENTAL CONDITION AND OTHER CONDITION OF THE ASSETS AND ANY POTENTIAL LIABILITY ARISING FROM OR RELATED TO THE ASSETS.

(b)

Buyer acknowledges and affirms that it has had full access to information with respect to the Assets, and that Buyer has made its own independent investigation, analysis and evaluation of the Contemplated Transactions (including Buyer’s own estimate and appraisal of the extent and value of Seller’s Hydrocarbon reserves attributable to the Assets and an independent assessment and appraisal of the environmental risks associated with the acquisition of the Assets). Buyer hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim, or commencing, instituting or causing to be commenced, any Proceeding of any kind against a Seller,

or Affiliate thereof, alleging facts contrary to the foregoing acknowledgement and affirmation.

10.10.

Compliance With Express Negligence Test.

THE PARTIES AGREE THAT THE OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED PARTY WILL BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE INDEMNIFIED PARTY, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE. The foregoing is a specifically bargained for allocation of risk among the parties, which the parties agree and acknowledge satisfies the express negligence rule and conspicuousness requirement under Texas law.

10.11.

Limitations of Liability.

In no event will Seller or Buyer ever be liable to the other for any consequential, special, indirect, exemplary or punitive damages relating to or arising out of the Contemplated Transactions or the Assets, except as expressly provided in this Article.

ARTICLE 11

TITLE MATTERS AND ENVIRONMENTAL MATTERS

11.01.

Title Examination and Access.

Buyer may make or cause to be made at its expense such examination as it may desire of the title of Seller to the Assets. For such purposes, Seller will (a) give to Buyer and to the employees, consultants, independent contractors, attorneys and other advisers of Buyer full access at any reasonable time to all of the files, records, contracts, correspondence, computer output and data files, maps, data, reports, plats, abstracts of title, lease files, well files, unit files, division order files, production marketing files, title opinions, title files and title records, title insurance policies, ownership maps, surveys and any other information, data, records and files which Seller may have (or have access to) relating in any way to the title to the Assets, the past or present operation thereof and the marketing of production therefrom; (b) furnish to Buyer all other information in the possessio n of or available to Seller with respect to the title to the Assets as Buyer may from time to time reasonably request, except to the extent that (i) Seller is prohibited therefrom by any agreement or contract to which they are a party or of which they are a beneficiary, and (ii) the same constitute interpretations made by Seller which they deem confidential or proprietary and which relate to other properties owned by Seller; and (c) authorize Buyer and its representatives to consult with attorneys, abstract companies and other consultants or independent contractors of Seller, whether utilized in the past or presently, concerning title-related matters with respect to the Assets. Seller will advise Buyer of any restrictions or constraints on the right of Seller to provide and disclose to Buyer all data and information herein provided, and Buyer will have the right and power to attempt to remove such restrictions and constraints.

11.02.

Defensible Title.

On the Closing Date, each Seller will convey to Buyer Defensible Title to such Seller's interest in the Assets. As used herein the term “Defensible Title” will mean, as to such Seller's interest in the Assets, that title which:

Entitles Seller, as to the Wells described on Exhibit A to receive not less than the interests set forth in such Exhibit as the respective “Net Revenue Interests”, of all Hydrocarbons produced, saved and marketed therefrom, through the plugging, abandonment and salvage of such Wells, except for any decrease (i) caused by orders of the appropriate regulatory body having jurisdiction over the Wells that are promulgated after the Effective Time that concern pooling, unitization, communization or spacing matters, (ii) caused by Buyer, its successors or assigns; or (iii) arising from operation of any Contract proportionately assigned to Buyer hereby.

Obligates Seller, as to the Wells described on Exhibit A to bear not more than the respective percentages designated as the “Working Interests” set forth in such Exhibits of the costs and expenses relating to the maintenance, development and operation of the said Wells, through the plugging, abandonment and salvage of such Wells, except for any increase (i) caused by Buyer, its successors and assigns, (ii) that also results in the Net Revenue Interest associated with the Well being proportionately increased, or (iii) caused by orders of the appropriate regulatory agency having jurisdiction over the Wells that are promulgated after the Effective Time that concern pooling, unitization, communization or spacing matters;

Constitutes all of Seller’s right, title and interest in and to leasehold estate and working interest in and to all of the Assets; and

Is free and clear of all Encumbrances except for Permitted Encumbrances.

11.03.

Title Defects.

On or before five (5) days before Closing, Buyer will notify Seller in writing of any matter affecting the Assets which in the opinion of Buyer would not give Buyer Defensible Title, in accordance with Section 11.02 hereof, and the Allocated Value of each such title defect (all of which are herein called the “Title Defects”). Seller will thereupon have the right but not the obligation to attempt to cure the Title Defects at their expense on or before the Closing Date. If Seller elects not to cure the Title Defects or the Title Defects cannot be cured or removed to the satisfaction of Buyer on or before the Closing Date, Buyer may elect in writing (a) to waive the uncured Title Defects or (b) to eliminate that portion of the Assets affected by the Title Defects from the purchase and sale hereunder, in which event the Purchase Price specified in Section 2.02 will be reduce d by the Allocated Value of the portion thereof so excluded; provided, however, that the Purchase Price will not be adjusted pursuant to this Section 11.03(b) until the aggregate amount of the value of the Title Defects exceeds $10,000 and then to the full extent of such value. Any Title Defects which are not objected to by Buyer on or before five (5) days before Closing will be deemed waived by the Buyer and to be Permitted Encumbrances.

11.04.

Adjustments.

If only a portion of any of the Assets is affected by Title Defects, Buyer may elect to accept said Assets and pay a reduced Purchase Price based upon the percentage loss of the affected Assets and the Purchase Price will be adjusted by deducting the value of such Title Defect from the Allocated Value of such Asset. If it is determined prior to Closing, by the Seller or Buyer, that Seller’s net revenue interest in any of the Wells is greater than represented herein, the Wells will be increased by a proportionate adjustment based upon the Allocated Value of such Producing Properties, taking into account the relative increase in the expense bearing working interest, if any, associated with the increased net revenue interest.

11.05.

Environmental Audit

. Buyer may, at its option, cause an environmental audit of the Assets to be conducted until five (5) days prior to Closing ("Examination Period"). PROVIDED THAT, BUYER WILL REPAIR ANY DAMAGE TO THE PROPERTIES OF SELLERS RESULTING FROM ITS INSPECTION OF SUCH PROPERTIES, AND BUYER WILL INDEMNIFY, DEFEND (INCLUDING REASONABLE ATTORNEYS’ FEES) AND HOLD SELLERS HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES, OBLIGATIONS, CLAIMS, LIABILITIES, EXPENSES OR CAUSES OF ACTION (COLLECTIVELY THE “CLAIMS”) ARISING FROM SUCH INSPECTIONS, INCLUDING WITHOUT LIMITATION CLAIMS FOR PERSONAL INJURY, DEATH, PROPERTY DAMAGE AND LIENS FOR SERVICES PROVIDED, IN EACH INSTANCE, EXCLUDING CLAIMS RESULTING FROM THE NEGLIGENCE OR STRICT LIABILITY OF SELLERS OR THEIR RESPECTIVE OFFICERS, EMPLOYEES, AND AGENTS. ;Buyer will notify Sellers in writing (the "Environmental Notice") on or before 5:00 p.m. (Central Standard Time) not later than the end of the Examination Period of any environmental matters disclosed by such audit or with respect to which Buyer otherwise has knowledge, that Buyer reasonably believes in good faith may constitute a Violation of Environmental Laws, including with such notice a reasonably detailed description of the specific matter that is an alleged Violation of Environmental Laws. Upon receipt of the Environmental Notice, Seller will have the right, but not the obligation, to attempt to cure the applicable environmental liabilities attributable to the Violations of Environmental Laws prior to Closing. Seller's consideration of, or election to proceed with, any of the remedies hereunder will not be deemed to be an admission by any Person with respect to the occurrence of any Violation of Environmental Law or any violation of any other Legal Requirement.

11.06.

Remedies For Violations Of Environmental Laws

. In the event that any Violation of Environmental Law is not expressly waived by Buyer or cured by Seller on or before the Closing, the following provisions will apply:

(a)

If, in Buyer’s reasonable good faith estimate, the aggregate amount to cure all Violations of Environmental Law described in the Environmental Notice (collectively, the "Defect Amount") is $100,000 or less, Buyer will proceed to Closing in accordance with the remaining provisions hereby and such Violations of Environmental Law will be deemed waived.

(b)

If, in Buyer’s reasonable good faith estimate, the Defect Amount is more than $100,000 but less than five percent (5%) of the Purchase Price, Buyer will reduce the

Purchase Price by an amount equal to the cost to cure the Violations of Environmental Law and proceed to Closing.

(c)

If, in Buyer’s reasonable good faith estimate, the Defect Amount is more than five percent (5%) of the Purchase Price, then either Buyer or Seller may elect to terminate this Agreement.

11.07.

Right of Termination.

If the adjustments to the Purchase Price pursuant to Sections 11.03, 11.04 and 11.06 exceed ten percent (10%) of the Purchase Price, either party may terminate this Agreement by written notice to the other prior to the Closing Date, in which case neither party will have any liability to the other except as otherwise set forth in this Agreement.

11.08.

Disputes.

If the parties are unable to agree as to (a) whether a particular matter constitutes a Title Defect or Violation of Environmental Law; (b) the portion of the Assets affected by the Title Defect or Defect Amount; or (c) the appropriate reduction in the Purchase Price to be made upon elimination from this transaction of the portion of the Assets affected by the Title Defect or Defect Amount; then in those events if Closing occurs the average of Sellers’ and Buyer’s estimate of the value of asserted Title Defects and Defect Amount will be used to adjust the Purchase Price in accordance with Article 2 for purposes of Closing, provided, that Sellers’ and Buyer’s estimate will be consistent with the Allocated Values set forth on the Exhibits attached hereto. It is further provided that, if the difference between Buyer’s and Sellers’ estimates as to such amo unts exceeds $200,000, Sellers may elect to terminate this Agreement. If Closing occurs, such disagreement will be resolved after Closing by arbitration in accordance with Section 12.14. In the event the values of Title Defects and Defect Amount as estimated by Buyer are such that Buyer believes it is entitled to refuse to close and Buyer elects to refuse to close, such disagreement will be resolved by arbitration in accordance with Section 12.14.

11.09.

Casualty Loss and Condemnation.

(a)

If after the date of execution of this Agreement and prior to the Closing any part of the Assets is destroyed by fire or other casualty or if any part of the Assets is taken in condemnation or under the right of eminent domain or if proceedings for such purposes are pending or Threatened, this Agreement will remain in full force and effect notwithstanding any such destruction, taking, proceeding, or threat.

(b)

Except to the extent permitted or required pursuant to this Agreement, after the date of execution of this Agreement, without Buyer’s prior consent, no insurance or condemnation proceeds will be committed or applied by Seller prior to the Closing Date to repair, restore, or replace a damaged or taken

portion of the Assets if the cost to repair, restore, or replace a damaged or taken portion of the Assets is projected to exceed $25,000. To the extent such proceeds are not committed or applied by Seller prior to the Closing Date in accordance with this Section 11.07(b), Seller will at the Closing pay to Buyer all sums paid to Seller by reason of such destruction or taking, less any reasonable costs and expenses incurred by Seller in collecting such proceeds. In addition and to the extent such proceeds have not been committed or applied by Seller in accordance with this Section 11.07(b), in such repair, restoration, or replacement, Seller will transfer to Buyer, at Closing, without recourse against Seller, all of the right, title, and interest of Seller in and to any unpaid insurance or condemnation proceeds arising out of such dest ruction or taking, less any reasonable costs and expenses incurred by Seller in collecting such proceeds. Any such funds which have been committed by Seller for repair, restoration, or replacement as aforesaid will be paid by Seller for such purposes or, at Seller’s option, delivered to Buyer upon Seller’s receipt from Buyer of adequate assurance and indemnity that Seller will incur no liability or expense as a result of such commitment.

(c)

If and to the extent a casualty occurring after the date of execution of this Agreement and before Closing is not covered by insurance, Buyer and Seller will attempt to agree on the value of the uninsured casualty on or before the date five (5) days after Buyer receives written notice of the casualty. If the parties are not able to agree on such value within such 5-day period, the value will be determined by an independent casualty adjuster, experienced in determining casualty losses in matters similar to the disputed casualty loss, who will be selected by Seller from a list of three (3) such independent casualty adjusters that is provided to Seller by the Buyer. Said independent casualty adjuster will be selected by Seller within five (5) days of the written receipt by Seller of Buyer’s written listing of independent casualty adjusters and will provide b oth Seller and Buyer with a complete and documented report as to his findings within ten (10) business days of being selected by Seller.

For purposes of this Section, the value of the uninsured casualty will be equal to the lesser of (i) the aggregate reduction in Allocated Value of the affected portion of the Assets resulting from the uninsured casualty, or (ii) the amount required to repair the affected portion of the Assets to its condition immediately preceding the occurrence of the casualty. The Purchase Price will be reduced by the amount of the value of such an uninsured casualty as finally determined pursuant to this Section, and if such final determination is not available on the scheduled Closing Date, Closing will not be delayed, but rather, such Purchase Price reduction will be a part of the final adjustments to be made after Closing as contemplated by Section 2.05.

ARTICLE 12

GENERAL PROVISIONS

12.01.

Expenses.

Except as otherwise expressly provided in this Agreement each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants.

12.02.

Notices.

All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

Buyer:

Capco Offshore, Inc.

5555 San Felipe, Suite 725

Houston, Texas 77056

with a copy to:

Michel E. Curry

Cotton, Bledsoe, Tighe & Dawson, P.C.

500 W. Illinois, Suite 300

Midland, Texas 79701

Seller:

Manti Resources, Inc.

Manti Operating Company

Manti Jamba, LTD.

Suite 2300 South Tower

800 North Shoreline Blvd.

Corpus Christi, Texas 78401

Tri-C Resources, Inc.

909 Wirt Road

Houston, Texas 77024

Sunbelt Energy, Ltd.,

Sunbelt Energy Properties I, L.L.C.

Sunbelt Energy Properties - St. Bernard, L.L.C.

Sunbelt Energy Properties - Lake Borgne, L.L.C.

Sunbelt Energy Properties - Bluebell, L.L.C.

Sunbelt Energy Properties - Jambalaya, L.L.C.

Sunbelt Energy Properties - Model T, L.L.C.

Sunbelt Energy Properties-Gumbo, L.L.C.,

309 La Rue France, Suite 104

Lafayette, LA 70508

with a copy to:

Gerald E. Thornton, Jr.

Matthews & Branscomb, P.C.

802 N. Carancahua, Ste. 1900

Corpus Christi, Texas 78470-0700

12.03.

Jurisdiction; Service of Process.

ANY ACTION OR PROCEEDING SEEKING TO ENFORCE ANY PROVISION OF, OR BASED ON ANY RIGHT ARISING OUT OF, THIS AGREEMENT OR THE CONTEMPLATED TRANSACTIONS MUST BE BROUGHT AGAINST ANY OF THE PARTIES IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF NUECES, OR, IF IT HAS OR CAN ACQUIRE JURISDICTION, IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS (CORPUS CHRISTI DIVISION), AND EACH OF THE PARTIES CONSENTS TO THE JURISDICTION OF SUCH COURTS (AND OF THE APPROPRIATE APPELLATE COURTS) IN ANY SUCH ACTION OR PROCEEDING AND WAIVES ANY OBJECTION TO VENUE LAID THEREIN. PROCESS IN ANY ACTION OR PROCEEDING REFERRED TO IN THE PRECEDING SENTENCE MAY BE SERVED ON ANY PARTY ANYWHERE IN THE WORLD.

12.04.

Further Assurances.

The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

12.05.

Waiver.

The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable e xcept in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

12.06.

Entire Agreement and Modification.

This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. No representation, promise, inducement or statement of intention with respect to the subject matter of this Agreement has been made by any party which is not embodied in this Agreement together with the documents, instruments and writings that are delivered pursuant hereto, and none of the parties shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth.

12.07.

Assignments, Successors, and No Third-Party Rights.

Any party may assign any of its rights under this Agreement provided that any such assignment will not relieve such party of any of its obligations under this Agreement without the prior consent of any other party. Subject to the preceding sentences, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement or any other agreement contemplated herein, any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement, any other agreement contemplated herein, and all provisions and conditions hereof and thereof are for the sole and exclusive benefit of the parties to this Agreement and such other agreem ents, and their respective successors and assigns.

12.08.

Severability.

If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

12.09.

Section Headings, Construction.

The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms.

12.10.

Time of Essence.

With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

12.11.

Governing Law.

This Agreement and the relationship of the parties with respect to the Contemplated Transaction will be governed by the laws of the State of Texas without regard to conflicts of laws principles.

12.12.

Counterparts.

This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

12.13.

Waiver Of Texas Deceptive Trade Practices - Consumer Protection Act.

Buyer’s rights and remedies with respect to this transaction and with respect to all acts or practices of Seller, past, present, or future, in connection with this transaction will be governed by legal principles other than the Texas Deceptive Trade Practices - Consumer Protection Act, V.C.T.A. BUS & COMM Ann. § 17.41 et seq. (the “DTPA”), or any similar statute of any jurisdiction that may be applicable to the transactions contemplated hereby. Buyer hereby unconditionally waives the applicability of the DTPA, or any similar statute, to this transaction and any and all rights, duties, or remedies that might be imposed by the DTPA, or any similar statute, provided, however, Buyer does not waive Section 17.555 of the DTPA. Buyer represents, warrants, and acknowledges that it is purchasing the Assets for commercial or business use. Buyer further acknowledges, represents, an d warrants that Buyer has knowledge and experience in financial and business matters that enables it to evaluate the merits and the risks of a transaction such as this and that Buyer is not in a significantly disparate bargaining position with Seller. Buyer expressly acknowledges and recognizes that the price for which Seller has agreed to sell the Assets and perform its obligations under the terms of this Agreement has been predicated upon the inapplicability of the DTPA, or any similar statute, and this waiver of the DTPA, and any similar statute, by the Buyer. BUYER FURTHER RECOGNIZES THAT SELLER, IN DETERMINING TO PROCEED WITH ENTERING INTO THIS AGREEMENT, HAS EXPRESSLY RELIED ON THE PROVISIONS OF THIS SECTION 12.13.

12.14.

Arbitration.

All disputes, controversies, or claims that may arise among the parties relating to this Agreement will be submitted to, and determined by, binding arbitration. The arbitration will be conducted before a single arbitrator pursuant to the Commercial Arbitration Rules then in effect of the American Arbitration Association. The arbitrator will apply the laws of the State of Texas (without regard to conflict of law rules) to the dispute, controversy, or claim. Evidentiary questions will be governed by the Texas Rules of Evidence. The arbitrator’s award will be in writing and shall set forth findings and conclusions upon which the arbitrator based the award. The prevailing party in the arbitration will be entitled to recover its reasonable attorneys’ fees, costs, and expenses incurred in connection with the arbitration, as determined by the arbitrator. Any aw ard pursuant to the arbitration will be final and binding upon the parties and judgment on the award may be entered in any federal or state court having jurisdiction. The provisions of this Section will survive the termination of this Agreement. Notwithstanding the foregoing, this Section will not prevent any party from seeking

injunctive relief from a court of competent jurisdiction under appropriate circumstances, provided, however, such action will not constitute a waiver of the provisions of this Section.

12.15.

Tax Deferred Exchange.

If Seller so requests, Buyer agrees to cooperate with Seller in a tax-deferred exchange described in Section 1031 of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, Buyer shall not be obligated to enter into any agreement or to consent to an assignment of Seller’s rights or obligations hereunder which may have the effect of (i) impairing the title to the Assets, (ii) increasing Buyer’s obligations or liability hereunder or resulting in any additional cost, expense or liability to Buyer; or (iii) requiring Buyer to execute a purchase agreement for the purchase of the exchange property or to take record title to the exchange property. Seller hereby agrees to indemnify, defend and hold Buyer harmless from and against any and all costs, expenses, claims, damages, losses or liabilities (including, without limitation, reasonable attorney fees and costs) incurred by Buyer in connection with any exchange transaction or transactions or the performance by Buyer of its obligations pursuant to this Section.

12.16.

Press Release.

Except as may be required by applicable law, neither Buyer nor Seller will issue at or prior to Closing any publicity or other press release without the prior written consent of the other party. After Closing of the Contemplated Transactions, it is agreed that Buyer will issue any and all such releases, and Seller will not do so without Buyer’s prior written consent.

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

SELLER:

MANTI RESOURCES, INC.

By: __________________________________