NXT Energy Solutions Inc. - Annual Report: 2005 (Form 10-K)

As filed with the Securities and Exchange Commission on April 26, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10–K
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ENERGY EXPLORATION TECHNOLOGIES INC

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (403) 264-7020 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ X ] No [ ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) 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-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X]

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes [ ] No [ X ]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $16,178,968 based upon the closing price per share of the registrant's common shares of $1.10 on that date.

The number of shares outstanding of the registrant's common stock as of March 31, 2006: 22,186,532 shares.

Advisement

Our reporting currency is the United States of America dollar. All references to "dollars" in this annual report refer to United States or U.S. dollars unless specific reference is made to Canadian or CDN dollars. The rate of exchange of Canadian dollars to United States dollars as of December 31, 2005, was CDN $1.16 to U.S. $1. For information relative to the conversion of Canadian amounts into US dollars, see the section contained in explanatory Note 2 to our consolidated financial statements captioned "Foreign Currency Translation".

Special Note Regarding The Observations, Beliefs And Opinions Expressed In This Annual Report Relating To The Scientific Basis And Principles Of Our SFD Technology

The observations, beliefs and opinions we express in this annual report relating to the scientific basis and principles of our SFD technology, and the ability of our SFD Technology to detect subsurface conditions, represent those of our company and our management alone, and should not be construed as representing those of any third party, except to the extent expressly stated in this annual report.

For additional information on Energy Exploration Technologies Inc. please consult our web page www.nxtenergy.com, or the SEDAR webpage www.sedar.ca or the EDGAR webpage www.edgar.com.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

Description of Business

General Business Development.

Energy Exploration Technologies Inc. and its fully owned subsidiaries (referred to herein as the “Corporation”, NXT, “we”, “us” and “our”) is a technology company focused on using its proprietary Stress Field Detection (“SFD”) technology for oil and gas exploration. We were initially incorporated in the State of Nevada on September 27, 1994 under the name Auric Mining Corporation. In January 1996, we acquired all of the common stock of NXT Energy USA (then known as Pinnacle Oil Inc.) from its stockholders in exchange for our common stock. As a consequence of this acquisition, NXT Energy USA became our wholly-owned subsidiary and its stockholders acquired a 92% controlling interest in our common stock.

Prior to this transaction, we were a corporate shell conducting no active business, and NXT Energy USA was a development stage research and development enterprise holding world-wide rights to use the SFD technology for hydrocarbon exploration purposes.

Immediately after this transaction, we changed our name to Pinnacle Oil International, Inc, and subsequently, on June 13, 2000, we changed our name to Energy Exploration Technologies.

In January 2003, we adopted a formal plan to divest our U.S. oil and gas properties. On May 9, 2003 we closed a sale transaction with our U.S. joint venture partner to sell the properties for total consideration of $1,450,000 with proceeds of $720,000 in cash and the return to treasury of all the outstanding preferred shares.

On October 24, 2003 our shareholders, at a special shareholders’ meeting, approved the continuance of the company from the State of Nevada to the Province of Alberta, Canada. At that time we modified our name to Energy Exploration Technologies Inc.

Throughout 2005 we conducted our business activities primarily through our wholly owned subsidiaries, NXT Energy Canada Inc. and NXT Aero Canada Inc. Our fully owned subsidiaries located in the United States are currently inactive. Our business office is located in Calgary Alberta, Canada.

Financial Information About Segments.

We historically have operated in one business segment, oil and natural gas exploration and development. Within this segment we have developed with our JV partners, oil and natural gas exploration prospects some of which were identified using our SFD technology. We had a United States based oil and gas production segment that was discontinued in 2003. All historical comparative numbers have been restated and this discontinued business segment is accounted for as Income (loss) from a Discontinued Operation. Within this segment we currently own oil and gas properties in Canada including one producing well.

Our future business plan is to provide SFD services for a fee to oil and gas industry clients. The fee shall include a fixed monetary component and/or a Gross Overriding Royalty (“GORR”) or additional considerations.

For geographical segment information, see explanatory Note 17 to our annual consolidated financial statements

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Narrative Description Of Business.

Principal Product and Services Rendered

NXT utilizes an airborne SFD Survey System invented by George Liszicasz, our CEO, President and largest shareholder. The SFD Survey System is a remote-sensing airborne survey technology comprised of SFD sensors, integrated electronic data acquisition, conditioning, processing and interpretation subsystems and software.

We use the SFD Survey System to survey large tracts of land in order to identify and prioritize oil and gas prospects areas (“Prospect Areas”). A Prospect Area is defined as an area having subsurface structural anomalies with significant potential for oil and gas accumulations. Identified Prospect Areas generally require further evaluation using conventional exploration techniques, such as seismic prior to drilling. Our SFD Survey System is less expensive, quicker, less environmentally intrusive and potentially more effective than other existing reconnaissance survey systems. These advantages can reduce finding costs and time required to identify oil and gas prospects.

Status of Product and Services Rendered

The SFD system has been developed and tested, and the application of the technology has been confirmed by respected independent professionals. Our survey system has been enhanced and improved during many years of field trials. Although the SFD Survey System is fully developed for commercial use, enhancements to the SFD Survey System are ongoing. We are committed, to continuously enhance this system with the objective of maintaining our technological advantage in conducting airborne surveys for the oil and gas industry.

Through to the end of 2005, our sole source of revenue was from producing oil and gas. We invested in drilling programs through joint venture partnership agreements. Our objective had been to exploit the value of the SFD survey by participating as an exploration and production oil and gas company. During 2005, we modified our strategy to move toward a technology and service model where we would earn fees from surveys and seek to limit our participation in properties to gross overriding royalties. Seeking independent contracts became our priority. To this end our strategy was to demonstrate to the oil and gas industry, through independent review of previous survey results, the commercial value of the technology. This was accomplished through a detailed look back of our past results that culminated in the release of the GLJ Petroleum Consultants Ltd. (“GLJ”) report in December of 2005.

Our core strategy in 2006 will reflect implementation of the changes commenced in 2005. We believe that we can enhance shareholder value best by pursing contracts to provide SFD survey services to clients for a fee. This focused strategy should result in increased revenues and a better use of management and financial resources. NXT does not intend to participate either directly or as a joint venture partner in any future exploration or development wells but will retain its position in its existing production well. We will consider opportunities from third parties to develop our existing land positions through farmin agreements. Under any contemplated farmin agreement we will have no capital obligations.

The anticipated revenue sources from our new Business Strategy are:

We shall provide Prospect Areas to clients through customized surveys or from existing inventory

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identified by us in previous flights. Clients may retain exclusive rights to SFD reports obtained from customized flights for a specific period of time as defined in the service contract; thereafter the SFD reports becomes available on a fee basis to any clients. We may conduct flights over areas of interest to increase our data on lands for the purpose of identifying Prospect Areas for sale to clients.

We do not intend to invest directly or as a joint-venture partner in the exploration or development of any lands including any Prospect Area identified and presented to clients. We shall potentially incur certain exploration expenses required to verify the value (e.g. purchase or shoot 2-D and 3-D survey data) of any Prospect Area identified by SFD surveys but do not intend to become involved in the drilling of any exploration well either directly or as a joint venture partner.

We believe that we can commercialize our SFD technology on a fee for service basis in 2006. We anticipate the cash flow that we can generate in 2006 will provide the necessary capital to sustain our future growth and enhance the SFD technology in accordance with our base assumptions. We believe that our SFD Survey System, given its superior effectiveness and competitive price, has the potential to become an industry leader in locating prospect areas for the oil and gas industry.

Our objective is to establish our proprietary SFD technology as a mainstream technical tool for use in early stage exploration for oil and gas reserves. NXT completed the development and technical verification stage at the end of 2005. In the 2006 we shall continue commercializing the technology. The objectives of this stage is to:

Source and Availability of Raw Material

We do not foresee any constraints upon materials that will impede our ability to execute this plan. The primary resource required is the availability of the specific aircraft type required for us to conduct our surveys. This aircraft is readily available from alternative sources. We are not dependent upon any other third party contract manufacturers or suppliers to satisfy our technology requirements. Our SFD sensors and the SFD unit in which they are incorporated are custom designed, fabricated and assembled in-house. The customized software used in our data acquisition system are written and modified by outside consulting programmers with whom we have long-standing relationships. The hardware we use in our SFD Survey Systems (other than the SFD unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources.

Technical Service Agreement

The technology required to support this SFD system has been secured through an Amended and Restated Technical Service Agreement (“TSA”) executed on December 31, 2005 between NXT and George Liszicasz the inventor of the SFD system. This TSA supersedes the previous TSA agreement that expired on December 31, 2005. This TSA secures the services of Mr. Liszicasz for 10 additional years. The executed TSA establishes a contractual commitment for Mr. Liszicasz to provide his technical expertise and know-how to NXT.

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Backlog

As of December 31, 2005 we had no backlog of firm orders for providing SFD services for a fee.

Competition

Our SFD airborne survey service is based upon a proprietary technology. It is capable of remotely, from a survey aircraft, identifying subsurface structural anomalies associated with potential hydrocarbon traps with a resolution that to our knowledge is technically superior to other airborne survey systems. To our knowledge, there is no other company employing technology similar or comparable to our SFD Survey System for oil and natural gas exploration.

Seismic is the standard technology used by the industry to image subsurface structures. It is our view that the SFD Survey System is a complimentary rather than a competitive exploration technique to seismic. Our system is intended to focus seismic and other resources upon those areas that have the highest potential for oil and gas. Our system may reduce the need for seismic in wide-area reconnaissance but will not replace the role of seismic in defining drilling locations. The seismic industry is very competitive with many international and regional service providers.

The industry uses other technologies for wide-area oil and natural gas reconnaissance exploration, such as, aeromagnetic, gravity surveys and satellite surveys.

Research and Development

Our research and development activities have focused on developing, improving and testing our SFD Survey System and related components. In 2005 in conjunction with the execution of the TSA agreement with George Liszicasz we secured certain intellectual properties that pursuant to FASB 2 “Accounting for Research and Development Costs” have been expensed as a Research and Development expense of $ 3.0 Million. As per FASB 2, intangibles that are purchased from others for a particular research and development project and that have no alternative uses and therefore no separate economic value, such as the SFD intellectual property, are to be accounted for as research and development expense at the time the cost is incurred. Research and development expenses in 2004 and 2003 were nil. All other expenses related to research and development were disclosed under administrative expense.

Compliance with Government Environmental Provisions

The operation of our business, namely conducting aerial SFD surveys and interpreting SFD data, is not subject to material governmental or environmental regulation.

The oil and natural gas industry in general is subject to extensive controls and regulations imposed by various levels of the federal and provincial governments in Canada. In particular, oil and natural gas exploration and production is subject to laws and regulations governing environmental quality and pollution control, limits on allowable rates of production by well or proration unit, and other similar regulations. Laws and regulations are generally intended to prevent the waste of oil and natural gas, to protect rights to produce oil and natural gas between owners in a common reservoir, to control the amount of oil and natural gas produced by assigning allowable rates of production, and to minimize contamination of the environment. Environmental regulations affect our operations on a daily basis. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend to stricter environmental legislation and regulations will continue.

We do not expect that any of these government controls or regulations will affect projects in which we participate in a manner materially different than they would affect other projects of similar size or scope of operations. All current legislation is a matter of public record and we are not able to accurately predict what additional legislation or amendments may be enacted. Governmental regulations may be changed from time to time in response to economic or political conditions. Any laws enacted or other governmental

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action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and natural gas industry in general may have a material adverse effect on our business, financial condition and results of operations.

Number of Employees

We utilize specialized skill and knowledge in the identification and evaluation of prospects and in the research, development and improvement of the SFD technology. We have obtained the necessary skill and knowledge through our current employees. As of December 31, 2005, we had a staff of 11 consisting of 7 full-time employees and 4 consultants including 2 financial staff, 6 operations staff, 1 electronics engineer, a research scientist holding a Ph.D. and 1 administrative staff. We may engage other technical and administrative contract personnel on a project-by-project basis as required.

ITEM 1A. RISK FACTORS

Certain statements in this section and in other sections of this Form 10-K contain forward-looking statements that are based on current expectations, estimates and projections about the industry in which we operate, management's beliefs and assumptions. Words such as “expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from results forecast or suggested in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Such risks, uncertainties and assumptions include, among others, the following:

Our ability to continue operating is not certain and we may be forced to liquidate the Company.

We have not become a commercially viable company. Our future operation depends upon us successfully securing sufficient funds to sustain our operations. If we are unable to secure an adequate source of financing we will not be able to execute our business plan and we may be forced to cease operations. See Note 1 to Consolidated Financial Statements.

Our rights to SFD technology may be challenged and we may need to defend our rights to the technology in the courts.

Our right to the SFD technology depends on Mr. Liszicasz’s having a lawful right to execute a Technical Service Agreement (“TSA”) that provides us with a right to exploit the SFD technology for the exploration of hydrocarbons. The TSA grants NXT an exclusive world wide license to use, develop, copy and modify the Operating SFD Sensors and the SFD Theories to allow us to collect SFD Data.

Our rights to use our SFD technology initially arose from an agreement we entered into with Mr. Liszicasz on January 1, 1996. Mr. Liszicasz assigned the agreement to Momentum Resources Corporation on June 18, 1996 pursuant to a Partnership Agreement that Mr. Liszicasz had entered into with a third party partner on September 1, 1995.

Pursuant to this Partnership Agreement the Partnership became the beneficial owner of “SFD Technology” and Mr. Liszicasz obtained a 50% partnership interest. The “SFD Technology” was defined specifically as the SFD sensor devise, enhancements and Liszicasz’s know-how to locate hydrocarbons using the SFD detector. On June 18, 1996 the partnership transferred its interest in the “SFD Technology” to Momentum Resources Corporation, a Corporation registered in Nassau Bahamas. Momentum Resources was owned 50% by Mr. Liszicasz.

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An SFD technology agreement that we then entered into with Momentum contained commitments by Momentum to enhancement of the original SFD sensor as well as other obligations. Momentum did not fulfill these commitments under this agreement and the Momentum SFD Technology was never developed. All subsequent SFD developments were undertaken and financed directly by NXT.

NXT elected not to renew the agreement with Momentum Resources at the termination of the agreement on December 31, 2005. Not only had Momentum not performed under the contract but also Momentum had been inactive for many years.

We retained a Canadian national law firm to evaluate the ownership of SFD Theories, equipment and know-how based upon documentary evidence including various agreements entered into by Mr. Liszicasz, the Partnership, Momentum and NXT. The legal opinion interpreted the agreements to have the following legal affect today:

A risk does exist that the former partner of Mr. Liszicasz may claim some legal entitlement to Mr. Liszicasz’s intellectual property, NXT’s rights to commercialize this intellectual property or NXT’s right to create SFD devices and processes. However, we believe that such a claim would be without merit.

We are changing our business strategy and this new strategy may not be successful

We are embarking on a new strategic direction in 2006 arising out of activities in 2005, where in we intend to sell our SFD survey services to third parties for a fee and for royalties where they can be negotiated. There can be no assurance that the Company will be commercially successful in adopting this new strategy or any other business strategy. We have not earned any revenue from providing our services to customers for a fee. Although companies have expressed interest in this service and we anticipate that this business strategy will become profitable there is no assurance that we can secure contracts or execute them profitably. As of the date of this report we have entered into an SFD flight survey contract. The contract is subject to financing.

Failure of the Company, for technical, commercial or other reasons, to profitably execute our business plan would have a material adverse effect on the Company’s business, financial condition and results of operations.

We rely on a limited number of SFD sensors and this limitation may affect our ability to conduct business.

We have twelve functional SFD sensors to date, thereby creating a risk that we could not execute our business plan if the existing sensors are damaged, destroyed or stolen prior to us creating and testing additional sensors.

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We require ongoing technology development otherwise we may not be able to respond to changes in customer requirements or new competitive technologies.

We must continue refining and developing our SFD Survey System to make it scaleable for growth and to respond to potential future competitive pressures. These improvements require substantial time and resources. Furthermore even if resources are available there can be no assurance that the Company will be commercially or technically successful in enhancing the technology. The Company’s inability to keep pace with new technologies and evolving industry standards and demands could have a material adverse effect on the Company's business, financial condition and results of operations.

We are dependent on key personnel, the loss of any of these key persons will impact our ability to conduct business.

The Company's loss of key personnel could have a material adverse effect on its business, financial condition or results of operations. We do not have “key man” insurance on any of our personnel.

The Company's future success depends to a significant extent on the continued service of its key technical and management personnel and on its ability to continue to attract and retain qualified employees. The loss of the services of the Company's employees or the Company's failure to attract, retain and motivate qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations.

The Company has employment agreements with all of its executive officers, including George Liszicasz, its President and Chief Executive Officer.

We are dependant on Mr. Liszicasz to perform most of the interpretation of the SFD data and to enhance our technology. If Mr. Liszicasz is unable to perform these functions it may have an adverse effect on our ability to properly identify Prospect Areas or enhance our technology. We plan to hire technical staff in 2006 to ensure that we have adequate depth to minimize dependence on one individual.

Our new strategic direction of providing our services to third parties for a fee could stretch our existing human resources. Although, we have performed large scale SFD surveys in the past to third parties, we will require additional skilled personnel to successfully fulfill multiple fee-for-service contracts. Within the province of Alberta many of the skilled personnel that we require are in short supply. These key positions may be difficult to recruit into our company. If we cannot hire these key personnel our ability to accept and fulfill contracts may be adversely affected.

A single major shareholder who is also a Board member and an officer of the Company retains the ability to influence or control the Company and this influence or control may result in a conflict of interest.

Mr. George Liszicasz, our principal executive officer and largest shareholder, beneficially owns, as of March 15, 2006, approximately 23% of the common shares outstanding as of the date of this report, and therefore has a substantial influence in all shareholder matters. Additionally he owns 10,000,000 preferred shares that may be convertible into Common Shares subject to an appropriate fairness opinion, shareholder approval and certain revenue performance conditions being met. If all the Preferred Shares were converted and there was no other change in our share structure he would own 46% of common shares. See Notes To The Financial Statements or Management Discussion and Analysis for additional information relating to the Preferred Shares.

There is no certainty that an investor can trade our common shares on public markets at a stable market price

There is only a limited public market for our common shares on the OTC/Bulletin Board, and the Franklin and Berlin Exchanges and there is a risk that a broader or more active public trading market for our

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common shares will never develop or be sustained, or that current trading levels will not be sustained.

The market price for the common shares on the Exchanges where our stock is listed has been and we anticipate will continue to be extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and natural gas prices, oil and natural gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our consolidated financial condition or results of operations, would include release of reports by securities analysts and announcements we may make from time-to-time relative to our operating performance, drilling results, financing, advances in technology or other business developments.

Because we have a limited operating history and no profits to date, the market price for the common shares is more volatile than that of a seasoned issuer. Changes in the market price of the common shares, for example, may have no connection with our operating results or the quality of Prospect Areas identified for clients. No predictions or projections can be made as to what the prevailing market price for the common shares will be at any time, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

Sales of substantial amounts of the common shares on the public market, or the perception that substantial sales could occur, could adversely affect the prevailing market prices for those shares and also, to the extent the prevailing market price for the common shares is reduced, adversely impact our ability to raise additional capital in the equity markets. In addition, as of March 15, 2006, our employees, former employees, directors and consultants currently hold vested options entitling them to acquire 826,827 common shares. Should these persons exercise these options, it is likely they would sell some or all of the underlying common shares on the public markets in order to generate cash to pay taxes or for other reasons.

You will be subject to the penny stock rules to the extent our stock price on the OTC Bulletin Board is less than $5.00

Since the common shares are not listed on a national stock exchange or quoted on the NASDAQ Market within the United States, trading in the common shares on the OTC Electronic Bulletin Board is subject, to the extent the market price for the common shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules". The penny stock rules subject to certain exemptions require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker-dealers to sell the common shares.

You should not expect to receive dividends

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

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Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights

We are authorized under our Articles of Incorporation to issue an unlimited number of common shares and an unlimited number of preferred shares. Subject to compliance with applicable corporate and securities laws, we may issue these shares under such circumstances and in such manner and at such times, prices, amounts and purposes as our board of directors may, in their discretion, determine to be necessary and appropriate. Proportionate ownership and voting rights of common shareholder could be adversely affected by the issuance of additional common shares, including a substantial dilution in net tangible book value per share.

We may not be able to protect our trade secrets and intellectual property from competitors who would use this knowledge to eliminate or reduce our technological advantage.

The Company's success and future revenue growth will depend, in part, on its ability to protect its intellectual property. The inability of, or any failure by the Company to protect its intellectual property could have a material adverse effect on its business, financial condition and results of operations.

The Company's success and future revenue growth will depend, in part, on its ability to protect its intellectual property. At this stage in its development the company and Mr. Liszicasz have made a conscious decision not to seek patent protection on the SFD Survey System because of the early stage development of the technology supporting its application and the commerciality of the SFD Survey System. The Company relies on trade secret laws, as well as nondisclosure agreements and other methods to protect its proprietary technologies and processes. There can be no assurance that such measures will provide adequate protection for the Company's proprietary technologies and processes.

There can be no assurance that a patent, if applied for, can be registered to protect our intellectual property. Furthermore if registered there can be no assurance that it will be sufficiently broad to protect the Company's technology or that any potential patent will not be challenged, invalidated or circumvented or that any right granted hereunder would provide meaningful protection or a competitive advantage to the Company.

The Company also generally enters into confidentiality agreements with its employees and contractors to protect our documentation and other proprietary information.

Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technology without authorization, develop similar technology independently or design around the Company's secrets. In addition, effective protection may be unavailable or limited in certain foreign countries. There can be no assurance that the steps taken by the Company to prevent misappropriation or infringement of our intellectual property will be successful. Our inability to protect our intellectual property would make it possible for competitors to offer similar products and services.

Moreover, litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's secrets or to determine the validity and scope of the rights of others, including its competitors and customers. Such litigation could result in substantial costs to the Company and diversion of the Company's resources and could have a material adverse effect on the Company's business, financial condition and results of operations.

We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.

The flight operations of SFD surveys are subject to the hazards associated with general and low-level flight operations. An aircraft accident may cause personal injury and loss of life, as well as severe damage to and destruction of property. We minimize the financial risk to the Company by contracting third parties to provide all flight services and personnel necessary to execute our survey contracts. The contracted third

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party incurs the risk of flight operations, as we do not operate the aircraft. We only provide technical personnel required to operate our SFD Survey System. We require the flight contractor to maintain appropriate insurance coverage for the risks associated with aircraft operations. In addition, we maintain general business insurance coverage.

We operate in the oil and gas industry subjecting us to industry specific hazards that can result in unexpected costs to the Company.

The oil and natural gas exploration and development projects in which we participate will be subject to the usual hazards related to the drilling of oil and natural gas wells, including the risk of fire, explosion, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. These hazards can cause personal injuries or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations.

The project operator will, in accordance with prevailing industry practice, maintain insurance against some, but not all, of these risks. The insurance maintained by the project operator generally would not cover claims relating to failure of title to oil and natural gas leases, trespass during survey acquisition or surface damage attributable to seismic operations, or business interruption, nor would it protect against loss of revenues due to well failure. There can be no assurance that any insurance obtained by the project operator covering claims related to worker's compensation, comprehensive general liability for bodily injury and property damage, comprehensive automobile liability and pollution, cleanup, underground blowout and evacuation will be adequate to cover all losses or liabilities which may be incurred within projects in which we participate. We also cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase.

In cases where we have direct liability as a result of our participation on a working interest basis, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have a direct material, adverse effect on our business, financial condition and results of operations. In these cases, our exposure will be commensurate with our participation percentage.

While we would have no direct liability in cases where our participation is limited to an overriding royalty interest, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an indirect material, adverse effect on our business, financial condition and results of operations to the extent it adversely affects our joint venture partner's ability to complete current projects or explore for and develop additional projects.

A potential exists that superior alternative technologies may be developed that would result in our SFD system becoming uneconomic.

There is a risk that other companies or individuals may develop exploration products and services that are superior to our SFD Survey System. Increased competition could impair our ability to attract viable industry participants, and to negotiate favorable contract terms, which could materially and adversely affect our business, financial condition and results of operations.

We conduct business in foreign currencies thereby exposing us to currency exchange losses.

Our financial position will be affected by exchange rate fluctuations. We hold cash in both Canadian and United States dollars. We incur expenses in Canadian dollars yet report our financial results in United States dollars. Furthermore we intend to enter into contracts to provide services in foreign countries and may conduct business in other currencies such as the Euro. Changes in currency exchange rates could have a material adverse effect on the Company's business, financial condition and results of operations.

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We are a Canadian company and our nationality may impair the enforceability of judgment for persons resident outside Canada.

Since we are a Canadian company and most of our assets and key personnel are located in Canada, you may not be able to enforce a U.S. judgment for claims you may bring against us, our assets, our key personnel or many of the experts named in this document. This may prevent you from receiving compensation to which you may otherwise be claiming.

We have been organized under the laws of Alberta, Canada and most of our assets are located in Canada. In addition, a majority of the members of our Board of Directors and our officers are residents of Canada. As a result, it may be impossible for you to affect service of process upon us or these individuals within the U.S. or to enforce any judgments in civil and commercial matters, including judgments under U.S. federal securities laws. In addition, a Canadian court may not permit you to bring an original action in Canada or to enforce in Canada a judgment of a U.S. court based upon civil liability provisions of the U.S. federal securities laws.

We caution that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive and that new risk factors emerge from time to time in our rapidly changing business environment.

ITEM 2. PROPERTIES

Facilities

Our principal executive offices and research and development facility is located at 1400-505 3rd Street SW, Calgary, Alberta, T2P 3E6. Our sublease, consisting of approximately 4,800 square feet, expires on October 31, 2006. Our combined obligations for base lease payments and building operating cost and other pass-through items under this lease are approximately CDN $ 10,719 per month. We anticipate entering into a five-year head lease agreement on our current facility prior to the expiration of our sublease.

Petroleum Properties

Description of Properties

Alberta, Canada

British Columbia, Canada

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All of the above properties excluding “Ladyfern” are currently being held as collateral against the Convertible Debentures that we issued in the fourth quarter of 2005. Upon conversion of all of the Convertible Debentures into common shares the above properties would be free and clear of all encumbrances.

Summary of Acreage

Summarized below is the acreage of land holdings in which we hold a working interest.

Summary of Proved Reserves

We have proven producing reserves at Centrica Ardenode 11-18-27-25w4. The total net production in 2005 was 8.3 mmcf.

For a “Summary of Exploration Costs” see Item 8 of this annual report on Form 10-K (Note 4 of our consolidated financial statements).

ITEM 3. LEGAL PROCEEDINGS

On November 27, 2002, we were served a Statement of Claim, which had been filed on November 25, 2002, in the Court of Queen’s Bench of Alberta, Judicial District of Calgary (Action No. 0201-19820), naming Energy Exploration Technologies Inc. and George Liszicasz as defendants. Mr. Dirk Stinson, the plaintiff, alleges that NXT failed to pay him compensation of $74,750, plus interest, under a consulting agreement and further alleges that NXT, without lawful justification, obstructed Mr. Stinson from trading his shares of NXT. On December 10, 2002, we filed our Statement of Defense. Mr. Stinson is a past President and director of NXT.

We believe the claim against us is contentious because of the ambiguity of the arrangements and we are vigorously defending ourselves against the claim.

On March 18, 2003, we were served a Statement of Claim which had been filed on March 14, 2003, in the Court of Queen’s Bench of Alberta, Judicial District of Calgary (Action No. 0301-04309), naming Glen Coffey, Murray’s Aviation Repairs (1980) Ltd., Energy Exploration Technologies, its wholly-owned subsidiary, NXT Energy Canada, Inc., Dennis Wolsky, as Administrator of the Estate of Jerry Wolsky, deceased and Embassy Aero Group Ltd. as defendants. Tops Aviation Ltd., Spartan Aviation Inc. and John Haskakis (the “Plaintiffs”) allege that the defendants were negligent and in breach of a Ferry Flight Contract between one or some of the defendants and one or some of the Plaintiffs under which Mr. Jerry Wolsky was to deliver a Piper Twin Comanche aircraft to Athens, Greece. The aircraft crashed in Newfoundland enroute to Athens killing Mr. Wolsky. The Plaintiffs are seeking, among other things, damages in the amount of $450,000 CDN or loss and damages to the aircraft and cargo; and damages in respect to search and rescue expenses, salvage, storage, transportation expenses and pollution and contamination expenses.

NXT was not a party to the Ferry Flight Contract. We believe the claim against us is without merit and intend to vigorously defend ourselves against the claim and will seek an expeditious dismissal of the claim.

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

There have been no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON OUR COMMON SHARES AND RELATED SHAREHOLDER MATTERS

Market Information

Our common shares currently trade on the Over-the-Counter Bulletin Board under the trading symbol "ENXTF". The following table lists, by calendar quarter, the volume of trading and the high and low sales prices of our common shares for each of the periods indicated. Our common shares were also listed on the Frankfurt and Berlin Exchanges in January, 2005 under the trading symbol “EFW”.

The above information was obtained from the Finance.Yahoo.com website. The closing price for our common shares on the OTC Bulletin Board as of March 31, 2006 was $1.05. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

A shareholders' list provided by our transfer agent showed 209 registered shareholders and 22,186,532 common shares outstanding as of March 31, 2006. We estimate that there are approximately 1,700 beneficial holders of our common shares.

Dundee Securities Limited has agreed to act as the Agent for our listing application with the TSX-V Exchange.

Dividend Policy

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

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Independent Option Grants

The Stock Option Plans not approved by our shareholders, are summarized below.

On May 20, 1997, we granted stock options to Mr. Liszicasz, our Chairman and Chief Executive Officer, entitling him to purchase 45,000 common shares. The exercise price for the options was $5.25 per share, which corresponded with the trading price of the common shares as of the date of grant. The options were subject to vesting conditions based upon continued performance of services as a director, pursuant to which one-third of the granted options vested on the date of grant, and one-third of the granted options would prospectively vest on each of the first and second anniversaries of the date of grant, respectively.

On January 3, 2001, as part of a broader arrangement for all of our then serving employees, our Board approved the cancellation of the foregoing outstanding options, and the grant of new options to Mr. Liszicasz on the same terms (including number of shares, vesting, term and expiration) as the original grant, with the exception of the exercise price, which would be fixed at the closing price for our common shares as of the close of business on July 5, 2001 (subsequently fixed at $2.00) . In May of 2003, 30,000 of these options expired. The remaining 15,000 are fully vested and expired on March 31, 2006.

1999 Pinnacle Oil International, Inc. Executive Stock Option Plan

Our board of directors approved the 1999 Pinnacle Oil International, Inc. Executive Stock Option Plan on April 27, 1999. Under the plan, the plan administrator may issue up to 1,000,000 common shares to executive officers who are a natural person and an employee. As of March 15, 2006 there are 290,000 options outstanding under this plan: Mr. Liszicasz holds 70,000 options, Mr. Schrammar, the Corporate

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secretary, holds 70,000 options and Mr. Steedman, VP Operations holds 150,000 options.

The Stock Option Plan is intended to attract, compensate and motivate selected executives providing them with the opportunity to share in the potential capital appreciation in NXT’s shares. Each issuance of an award shall be deemed to vest immediately upon issuance and shall expire on the first business day prior to the tenth anniversary of the issuance, unless otherwise outlined in the agreement underlying the issuance.

The Plan Administrator fixes the exercise price at his sole discretion, except that the exercise price for an incentive stock option must be at least the fair market value per share of the common shares at the date of grant (as determined by the Plan Administrator in good faith), or in the case of greater-than ten percent shareholders, at least one hundred ten percent of the fair market value per share. The exercise price may be paid in cash or, with the approval of the Plan Administrator, by other means, including withholding of option shares or delivery of previously held shares.

All issuances under this stock option plan made to date have a termination clause for vested portions of the issuance of two years from the date of termination if that date is earlier than the expiry date, otherwise the expiry date takes precedence, unless otherwise outlined in the agreement underlying the issuance.

Should the recipient pay the exercise price of their stock options with common shares of NXT previously held by them, then, at the discretion of the Plan Administrator, replacement stock options may be issued to the recipient to purchase shares equal to the number of shares of common shares delivered to NXT as payment of the exercise price. These stock options shall vest immediately, have an exercise price equal to the fair market value of the common shares on the date of conversion and shall expire on the same date as the original stock option.

2003 Special Stock Option and Stock Award Plan

Under this plan, the plan administrator may issue up to 375,000 common shares to consultants who are a natural person. There are no options outstanding under this plan.

The purpose of this stock option plan is to maintain the ability of NXT to attract and retain highly qualified and experienced consultants to give such people a continued proprietary interest in the success of the company. Each issuance of an award shall be deemed to vest immediately upon issuance and shall expire on the first business day prior to the tenth anniversary of the issuance, unless otherwise outlined in the agreement underlying the issuance.

The Plan Administrator fixes the exercise price for issuances in the exercise of its sole discretion, except that the exercise price for an incentive stock option must be at least the fair market value per share of the common shares at the date of grant (as determined by the plan administrator in good faith), or in the case of greater-than ten percent shareholders, at least one hundred ten percent of the fair market value per share. The exercise price may be paid in cash or, with the approval of the Plan Administrator, by other means, including withholding of option shares or delivery of previously held shares.

All issuances under this stock option plan made to date have a termination clause for vested portions of the issuance of two years from the date of termination if that date is earlier than the expiry date, otherwise the expiry date takes precedence, unless otherwise outlined in the agreement underlying the issuance.

Should the recipient pay the exercise price of their stock options with common shares of NXT previously held by them, then, at the discretion of the Plan Administrator, replacement stock options may be issued to the recipient to purchase shares equal to the number of shares of common shares delivered to NXT as payment of the exercise price. These stock options shall vest immediately, have an exercise price equal to the fair market value of the common shares on the date of conversion and shall expire on the same date as the original stock option.

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Recent Sales of Unregistered Securities

NXT had four separate closing in the fourth quarter of 2005 of a convertible debenture offering. Funds were received over a period from September 7^th through to December 7^th. The gross proceeds from the offering were $1,955,342 including the conversion of Note Payable and accrued interest of $280,650. In addition, the debenture investors received 1,955,342 warrants to purchase an additional share for $1.00, within a term of two (“2”) years. No underwriters were utilized in this offering. NXT paid finders fees in connection with this offering of $24,928 and issued 33,923 finders fee warrants to purchase share for $1.00, with a term of two (“2”) years. The offering was sold to a total of 40 investors, who are employees, former employees and consultants of NXT as well as accredited investors.

On December 31, 2005 NXT completed a private placement of 147,500 units at $2.00 per unit for gross proceeds of $295,000. Each unit consisted of one (1) common share and a warrant to purchase an additional share for $2.75, with a term of one (1) year. No underwriters were utilized in this offering. This offering was sold to 2 investors, who are accredited investors introduced to NXT by its management and employees.

Of the 147,500 units sold, 125,000 were exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the United States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption there from is available and that hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.

The remaining 22,500 units sold, were exempt from registration pursuant to Rule 506 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from. Each purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. Each purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables present selected historical consolidated financial data for each of our five most recent annual fiscal periods ended December 31, derived from our consolidated financial statements prepared in accordance with United States generally accepted accounting principles.

The selected statement of loss and comprehensive loss data set forth below for our fiscal periods ended December 31, 2005, 2004 and 2003 and the selected balance sheet data set forth below as at December 31, 2005 and 2004 , have been derived from our consolidated financial statements audited by Deloitte & Touche LLP, independent registered chartered accountants, as indicated in their report contained

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in the consolidated financial statements included as part of this annual report.

The selected statements of loss and comprehensive loss data set forth below for our fiscal periods ended December 31, 2002 and 2001 and the selected balance sheet data set forth below as of December 31, 2003, 2002 and 2001 are derived from our audited consolidated financial statements not included in this annual report.

The following selected financial data should be read in conjunction with our consolidated financial statements and the explanatory notes to those statements included as part of this annual report, as well as the section of this annual report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations".

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and their explanatory notes included as part of this annual report.

Overview

We are a technology-based reconnaissance exploration company that utilizes our SFD technology to identify and prioritize oil and natural gas prospects. We conduct our activities through our wholly-owned operating subsidiary, NXT Energy Canada, Inc. which focuses on Canada-based exploration and is also investigating international opportunities. The parent company concentrates on improving the capability of our SFD Survey System and oversees the operations of and provides management, financial and administrative services to our subsidiaries.

Results Of Consolidated Operations

In 2005 the company recorded several non-cash expenses in accordance with U.S. Generally Accepted Accounting Principles that had a material impact on our reported Net Loss in the year. The most significant of these transactions are:

In aggregate these two non-cash transactions increased the Net Loss for the year ended December 31, 2005 by $4,418,557 and represented 56% of the reported Net Loss as reported for the year of $7,836,478.

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Operating Revenues 2005 compared to 2004

On February 4, 2004, a well at Entice, Alberta, in which we have a 22.5% working interest, commenced production. Our share of production averaged 23 thousand cubic feet (mcf) per day during the year ended December 31, 2005, compared to 33 thousand cubic feet (mcf) in 2004. Gross production revenue for the year was $37,458 compared to $51,453 in 2004. The average price received was $4.47 per mcf and the operating cost was $0.45 per mcf.

Total operating revenue including royalty income and net of royalty expense for 2005 was $48,686 compared to the prior year of $48,031.

Operating Revenues 2004 compared to 2003

There was no production in 2004 or 2003 in the U.S.

Our well at Entice, Alberta, production averaged 33 thousand cubic feet (mcf) per day during 2004. Gross production revenue for 2004 was $51,453. We had no producing properties in 2003.

Operating Loss from Continuing Operations – 2005 compared to 2004

We incurred an operating loss of $6,371,750 in 2005, which is 98.16% ($3,156,366) greater than the loss of $3,215,384 incurred in 2004. This increase was attributable mainly to the combination of the following:

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Operating Loss from Continuing Operations – 2004 compared to 2003

The operating loss of $3,215,384 for 2004 was $252,297 (8.5%) greater than the loss of $2,963,087 for 2003. This was primarily attributable to the following:

Other Income and Expense – 2005 compared to 2004

Other Income and Expense – 2004 compared to 2003

Income from Discontinued Operations – 2005 compared to 2004

Loss from Discontinued Operations – 2004 compared to 2003

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Relationships and Transactions on Terms That Would Not Be Available From Clearly Independent Third Parties

On November 3, 2004, we entered into a loan agreement with our CEO and largest shareholder, Mr. George Liszicasz, in which we borrowed $250,000 CDN. On November 16, 2004, we amended the loan agreement whereby we borrowed an additional $31,000. On November 17, 2004, we entered into an additional loan agreement with Mr. Liszicasz and borrowed a further $100,000 CDN. We did not utilize this loan until April 7, 2005 when $88,000 was drawn upon. These agreements provide that the loans accrue interest at the rate of 0.58% per month (7.0% per annum). On November 19, 2004, we entered into a Loan Agreement Amendment, whereby the maturity date for all three (3) loans was extended to November 17, 2005. On February 7, 2005, we entered into a Loan Agreement Amendment, whereby the maturity date for all three (3) loans was extended to April 15, 2006. On October 12, 2005 the Board of Directors of the Corporation granted the creditor an option to convert up to the total amount of the loans outstanding into 10% special notes under the bridge financing contract. This option was exercised on December 7, 2005, where the creditor converted $125,421 of his outstanding loans and accrued interest. As of December 31, 2005 the corporation still had $207,625 of principal and interest outstanding on the loan agreement with out CEO. On April 6^th, 2006 this loan was extended to a maturity of April 15^th, 2007.

On November 20, 2004 we received a subscription agreement from a former member of our Board of Directors, His Highness Sheikh Al Hassan Bin Ali Bin Rashid Al Nuaimi, to purchase 250,000 units at a price of $2.00 per unit. Each unit consists of one common share and a warrant to purchase one additional common share for $2.75 within the next year. This subscription agreement was subsequently cancelled.

On May 20, 2005, we entered into a loan agreement with a family trust of one of our directors for $175,000 CDN. The conditions of the loan agreement are as follows: principal amount $175,000 CDN ($140,500 US), 6.5% interest per annum and original maturity date on or before June 19, 2005. The loan was secured with certain assets of the Company. The Board approved the conversion of the loan, up to the total amount, into 10% convertible special notes under the bridge financing contract. This option was exercised on both November 1, 2005 and December 7, 2005 for $67,000 and $88,229 respectively of the outstanding loans and accrued interest. As of December 31, 2005 the balance on this loan agreement was nil and assets of the Company are no longer encumbered by this loan

On December 31, 2005 ten million (“10,000,000”) Preferred Shares were issued pursuant to the Amended and Restated Technical Services Agreement executed between the Company and Mr. George Liszicasz our Chief Executive Officer. See note 9 of the Consolidated Financial Statements.

Liquidity And Capital Resources
Sources of Cash

Our cash flow requirements for 2005 were funded principally by:

There are no guarantees, commitments, leases, debt agreements or other agreements which could be triggered by an adverse change in our credit rating, earnings, cash flows or stock price, including requirements to perform under standby agreements.

The company is currently negotiating a private placement. The funds will be used for marketing the SFD

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survey services, conducting surveys, increasing survey capacity, investor relations and other capital requirements. See Note 18 to our consolidated Financial Statement “Subsequent Events”.

Current Cash Position and Historical Changes in Cash Position

Our cash position as of December 31, 2005 was $1,059,277 as compared to $287,431 as of December 31, 2004.

The $771,846 increase in our cash position for 2005 compared to 2004 was attributable to:

The $736,770 decrease in our cash position for 2004 compared to 2003 was attributable to:

Operating Activities

Our operating activities required cash in the amount of $1,090,451 for 2005, as compared to cash requirements of $2,784,949 for 2004.

The reduction in the cash used in operating activities in 2005 as compared with 2004 is due to cost reduction initiatives executed throughout 2004 and 2005.

Financing Activities

Financing activities in 2005 generated cash of $1,898,473 compared to the cash of $2,783,866 generated from financing activities in 2004.

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Investing Activities

Investing activities used cash of $46,336 in 2005 compared to a $723,580 use of cash in 2004.

Tabular Disclosure of Contractual Obligations as at December 31, 2005

Please refer to “Item 7” above “Management’s Discussion and Analysis Of Financial Condition And Results of Operations” for details on loan agreements from Officer/Shareholder.

On January 3, 2005 NXT signed a contract for investor awareness and promotion services in Europe with CoMarCon Germany. Under this contract, NXT has the obligation to pay CoMarCon $25,000 in cash and to issue 50,000 shares. As of the date of this report the $25,000 cash has been paid and 25,000 shares have been paid, and 25,000 shares are held in escrow. These shares will be released if and when CoMarCon meets specific conditions of the contract.

In March 2005, NXT signed a contract with Pangaea Investments under which Pangaea will provide investor relations and public relations services for a monthly fee of $5,000 CDN ($4,160 US) plus reimbursement of certain expenses, 100,000 common shares and a grant of an option to buy 100,000 additional common shares. The 100,000 common shares have been issued as of the date of this annual report. The contract may be terminated by either party upon 30 days’ notice. NXT issued 50,000 common shares in payment of the $5,000 CDN monthly fee for the nine months of services performed in 2005.

In January 2005, a 12 month agreement was signed with Aware Capital under which Aware will provide investor relations and promotional services for a finders’ fee that will equal 3% of any financing arranged for by Aware and accepted and closed by NXT subject to certain limitations. As of the date of this annual report no fees have been paid or earned. The agreement also provides for 150,000 restricted shares of common stock to be delivered to NXT’s legal counsel and held in escrow pending Aware’s performance and completion of duties and obligations under the agreement. To the date of this annual report no shares have been earned or issued under this agreement.

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We signed a sublease for our new office space on December 1, 2005, consisting of approximately 4,800 square feet, which expires on October 31, 2006. Our combined obligations for base lease payments and building operating cost and other pass-through items under this lease are approximately CDN $ 10,719 per month.

On December 31, 2005 the Amended and Restated Technical Service Agreement was signed between NXT and George Liszicasz, its CEO. According to the terms of the agreement Mr. Liszicasz received 10,000,000 preferred shares. Of these preferred shares 2,000,000 were immediately convertible into common shares on a one-to-one basis. The remaining 8,000,000 are conditionally convertible into common shares as certain specified annual revenue objectives are met. Of the remaining 8,000,000 preferred shares 5,000,000 will also require shareholder ratification. See note 9 of the Consolidated Financial Statements.

This agreement was ratified by the Board of Directors and requires the Corporation and the Executive to obtain a fairness opinion to be presented to shareholders.

Off–Balance Sheet Arrangements

None.

Capital Requirements Going Forward

Our liquidity has improved since the year-end financial position at December 31, 2005. As of April 21, 2006 we have approximately $2,260,660 of cash on hand. Our cash increased from December 31, 2005 as a result of a Private Placement that closed on April 19, 2006.

At the end of 2005 we required additional funds to ensure that we could continue operations. We needed to raise a minimum of $1,500,000 to ensure that we had adequate working capital for us to operate for at least one more year. Consequently we actively pursued new equity investment for the company and on April 19, 2006 we closed a $1,685,000 Private Placement that we believe will ensure that we can meet our financial obligations for a minimum of one additional year. See Subsequent Event Note 18 of our consolidated financial statements.

Our ability beyond a year to continue as a going concern is dependent upon our ability to generate profitable operations and/or obtain the necessary financing to meet our obligations and repay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be

predicted with any certainty at this time.

Our consolidated financial statements included within the Form 10-K are prepared using U.S. Generally Accepted Accounting Principles that are applicable to a going concern. The going concern principle assumes a company can realize on its assets and settle its liabilities in the normal course of operations. Our consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities that may be necessary should we be unable to continue as a going concern. We can give no assurance that our business will continue as a going concern. If we cannot generate sufficient cash from operations or if we fail to find additional sources of financing, we would cease to be a going concern. Should we cease being a going concern we would be required to suspend our operations, liquidate our assets and wind-up and dissolve our company.

Other Matters
Foreign Exchange

We recorded a $3,672 foreign currency translation loss for 2005 (in 2004 we had a loss of $12,107) as a comprehensive income item on our statements of loss and comprehensive loss and shareholders' equity

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(deficit) in consolidating our accounting records for financial reporting purposes as a result of the fluctuation in United States-Canadian currency exchange rates during that period. We cannot give assurance that our future operating results will not be adversely affected by currency exchange rate fluctuations.

Effect of Inflation

We do not believe that our operating results were unduly affected by inflation during our three years ended December 31, 2005.

Critical Accounting Policies

We follow the full cost method of accounting for oil and natural gas properties and equipment whereby we capitalize all costs relating to our acquisition of, exploration for and development of oil and natural gas reserves. Our consolidated financial condition and results of operations are sensitive to, and may be adversely affected by, a number of subjective or complex judgments relating to methods, assumptions or estimates required under the full cost method of accounting concerning the effect of matters that are inherently uncertain. For example:

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Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment that revised FASB Statement No. 123, Accounting for Stock-based Compensation and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based employee transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS is effective as of the beginning of the first or annual reporting period that begins after June 15, 2005. The ultimate amount of increased compensation expense will be dependent on whether the company adopts SFAS 123R using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

The company has begun, but has not completed, evaluating the impact of adopting SFAS 123R on its results of operations. The company currently determines the fair value of stock-based compensation using a Black-Scholes option-pricing model. In connection with evaluating the impact of adopting SFAS 123R, the company is also considering the potential implementation of different valuation models to determine the fair market value of stock-base compensation, although no decision has been yet made. However, the company does believe that the adoption of SFAS 123R will have a material impact on its results of operations, regardless of the valuation technique used.

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The following standards issued by the FASB do not impact us at this time:

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Oil And Gas Price Fluctuations

Our primary market risk is market changes in oil and natural gas prices. Prospective revenues from the sale of products or properties will be impacted by oil and natural gas prices. A $1.00 per mcf change in the market price of natural gas will result in approximately an $8,000 change in our gross oil and gas production revenue. The impact on any potential sale of property cannot be readily determined.

Currency Fluctuations

We currently hold our cash in Canadian and US currency. This does expose us to exchange rate fluctuations between the Canadian and United States currencies. However, we are planning to expand our operations in the international markets and the U.S. dollar is the standard currency for international transactions in the oil and gas industry. Therefore, we intend to continue using the U.S. dollar as our reporting currency for the foreseeable future. As we become more active in international markets we will transfer cash into U.S. currency based upon expected needs at that time. We have not previously engaged in activities to mitigate the effects of foreign currency. Based on the 2005 distribution of revenue and cash flows a one percent change in the Canadian dollar rate relative to the US dollar is estimated to affect revenues by $501 and expenses by $15,032.

The following table summarizes the average, high and low US Dollar exchange rate for the past five years. The information was obtained from the Bank of Canada website.

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Interest Rate Fluctuations

We currently maintain some of our available cash and redeemable short term investments in US dollars and our reported interest income from these short term investments could be adversely affected by any material changes in US dollar interest rates. A 1% change in the interest rate would have a $450 annual impact on our short investment and would have approximately a $10,000 impact if all of our cash was invested in interest bearing notes.

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ENERGY EXPLORATION TECHNOLOGIES INC.

CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2005, 2004 And 2003

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and the Shareholders of Energy Exploration Technologies Inc.:

We have audited the consolidated balance sheet of Energy Exploration Technologies Inc. as at December 31, 2005 and 2004 and the consolidated statements of loss and comprehensive loss, cash flows and shareholders’ equity (deficit) for each of the years in the three year period ended December 31, 2005.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Energy Exploration Technologies Inc. as at December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005 in accordance with accounting principles generally accepted in the United States of America.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

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Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report to the Board of Directors and Shareholders dated April 11, 2006 is expressed in accordance with Canadian reporting standards, which do not require a reference to such conditions and events in the auditors’ report when these are adequately disclosed in the financial statements.

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1. Organization and Ability to Continue Operations

Energy Exploration Technologies Inc. ("we", "our company" or "NXT") was incorporated under the laws of the State of Nevada on September 27, 1994. The reverse takeover by Pinnacle Oil Inc. of the original company on October 20, 1995 triggered the “continuing entity” for financial accounting purposes under the US GAAP.

In March 2003 we divested all our U.S. properties. For reporting purposes, the results of operations and the cash flows of the U.S. properties have been presented as discontinued operations. For details, refer to note 16.

NXT was continued from the State of Nevada to the Province of Alberta, Canada on October 24, 2003. The shareholders voted on and approved this change, which moved the jurisdiction of incorporation from the U.S. to Canada. The tax effects are disclosed in the proxy statement circulated to shareholders for the Special Meeting on October 24, 2003. As a result of the continuance into Canada, our common and preferred shares no longer have a par value assigned, as is the practice in the United States. Therefore the amount that was disclosed as “Additional paid-in Capital” in prior years on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) has been added to the share issued amount. This is a legal jurisdiction reporting difference only.

We are a technology-based reconnaissance exploration company which utilizes our proprietary stress field detection (SFD) remote-sensing airborne survey technology to quickly and inexpensively identify and high-grade oil and natural gas prospects.

For the year ended December 31, 2005, we incurred a loss of $7,836,478 and had $33,874,636 accumulated deficit at December 31, 2005. Our working capital deficit at December 31, 2005 was $2,393,872. The net cash used in operating activities was $1,090,451 for the year ended December 31, 2005.

Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and obtain the necessary financing to meet our obligations and repay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities that may be necessary should we be unable to continue as a going concern.

We are executing a business plan to allow us to continue as a going concern. We plan to raise new capital as well as complete survey contracts for a fee in 2006 and the future. We can give no assurance that we will be successful in executing this plan. Should we fail to raise more capital or earn revenue we would be forced to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company. See Subsequent Events note 18.

These consolidated financial statements are prepared using generally accepted accounting principles that are applicable to a going concern, which assumes the realization of assets and the settlement of liabilities in the normal course of operations. Should this assumption not be appropriate, adjustments in the carrying amounts of the assets and liabilities to their realizable amounts and the classification thereof will be required and these adjustments and reclassifications may be material.

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2. Significant Accounting Policies
Basis of Presentation

We have prepared these consolidated financial statements for our years ended December 31, 2005, 2004 and 2003 and as at December 31, 2005 and 2004 in accordance with accounting principles generally accepted in the United States of America.

Consolidation

We have consolidated the accounts of our wholly-owned subsidiaries with those of NXT in the course of preparing these consolidated financial statements. All significant inter-company balances and transactions amongst NXT and its subsidiaries have been eliminated as a consequence of the consolidation process, and are therefore not reflected in these consolidated financial statements.

Estimates and Assumptions

The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires our 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 these consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Estimates include allowances for doubtful accounts, valuation of the note receivable, estimated useful lives of assets, provisions for contingent liabilities, measurement of stock based compensation, valuation of future tax assets, determination of proved reserves and reflect management's best estimate. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined necessary. Actual results may differ from those estimates.

Cash and Cash Equivalents

For purposes of preparing the consolidated balance sheets and statements of cash flows contained in these consolidated financial statements, we consider all investments with original maturities of ninety days or less to constitute "cash and cash equivalents".

Short Term Investments

Included in investments are temporary investments in term deposits with original maturities greater than 90 days and less than one year. Investments are recorded at the lower of original cost and market value.

Debt Issuance Costs

We amortize debt issuance costs on an interest rate method over the life of the related debt.

Fair Value of Financial Instruments

Our financial instruments consist of cash equivalents, notes due from officers and employees, notes receivable, accounts receivable, trade payables, accrued liabilities, notes payable, convertible debentures and subscriptions payable. The carrying value of these financial instruments approximates their fair values due to their short-term to maturity and similarity to current market rates and represent their maximum credit risk. It is the opinion of our management that we are not exposed to significant interest, currency or credit risks arising from these financial instruments.

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Oil and Natural Gas Properties

We follow the full cost method of accounting for oil and natural gas properties and equipment whereby we capitalize all costs relating to our acquisition of, exploration for and development of oil and natural gas reserves. These capitalized costs include:

• land acquisition costs;
• geological and geophysical costs;
• costs of drilling both productive and non-productive wells;
• cost of production equipment and related facilities; and
• costs associated with evaluating petroleum and natural gas properties for potential acquisition.

We only capitalize overhead that is directly identified with acquisition, exploration or development activities. All costs related to production, general corporate overhead and similar activities are expensed as incurred.

Under the full cost method of accounting, capitalized costs are accumulated into cost centers on a country-by-country basis. These costs, plus a provision for future development costs (including estimated dismantlement, restoration and abandonment costs) of proved reserves, are then depleted and depreciated using the unit-of-production method, based on estimated proved oil and gas reserves as determined by independent engineers where significant. For purposes of the depletion and depreciation calculation, proved oil and gas reserves are converted to a common unit of measure on the basis of their approximate relative energy content.

In applying the full cost method of accounting, capital costs in each cost center less accumulated depletion and depreciation and related deferred income taxes are restricted from exceeding an amount equal to the sum of the present value of their related estimated future net revenues discounted at 10% less estimated future expenditures, and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of related tax effects. Should this comparison indicate an excess carrying value, a write-down would be recorded.

The carrying values of unproved oil and natural gas properties, which are excluded from the depletion calculation, are assessed on a quarterly basis to ascertain whether any impairment in value has occurred. Impairment is recorded if this assessment indicates the future potential net cash flows are less than the capitalized costs.

All recoveries of costs through the sale or other disposition of oil and gas properties and equipment are accounted for as adjustments to capitalized costs, with no gain or loss recorded, unless the sale or disposition involves a significant change in the relationship between costs and the value of proved reserves or the underlying value of unproved property, in which case the gain or loss is computed and recognized.

We conduct oil and natural gas exploration, drilling, development and production activities through joint venture partners. These consolidated financial statements reflect only our proportionate interest in these activities.

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Other Property and Equipment

We carry our other property and equipment at cost, and depreciate or amortize them over their estimated service lives using the declining balance method as follows:

When we retire or otherwise dispose of our other capitalized property and equipment, we remove their cost and related accumulated depreciation or amortization from our accounts, and record any resulting gain or loss in the results of operations for the period. Our management periodically reviews the carrying value of our property and equipment to ensure that any permanent impairment in value is recognized and reflected in our results of operations. Refer to note 5.

Revenue Recognition

Revenue associated with sales of crude oil and natural gas is recorded when title passes to the customer and collection of the resulting receivable is deemed probable.

Research and Development Expenditures

We expense all research and development expenditures we incur to develop, improve and test our SFD Survey System and related components, including allocable salaries. Any intellectual property acquired for the purpose of enhancing research and development project, if there is no alternative use for the intellectual property, is expensed in the period acquired.

Survey Operations and Support

We expense all survey operations and support expenditures we incur and these consist primarily of the cost to:

• conduct field evaluations to evaluate the SFD Survey System;
• develop, organize, staff and train our survey and interpretation operational functions;
• aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment; and
• allocable salaries of our personnel while interpreting SFD data.

Foreign Currency Translation

Foreign currency translation adjustments resulting from the translation of the financial statements of our Canadian subsidiaries, whose functional currency is Canadian dollars, into U.S. dollar equivalents for purposes of consolidating our financial statements, are included in other comprehensive income (loss). We use the following methodology to convert Canadian dollar denominated accounts and transactions into U.S. dollars:

• all asset and liability accounts are translated into U.S. dollars at the rate of exchange in effect as of the end of the applicable fiscal period;

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• all shareholders' equity accounts are translated into U.S. dollars using historical exchange rates; and
• revenue and expense accounts are translated into U.S. dollars at the average rate of exchange for the applicable fiscal period.

We record the cumulative gain or loss arising from the conversion of the noted Canadian dollar denominated accounts and transactions into U.S. dollars as a foreign currency translation adjustment as a component of the accumulated other comprehensive loss for that period.

Income Taxes

We follow the liability method of accounting for income taxes (see Note 13). This method recognizes income tax assets and liabilities at current rates, based on temporary differences in reported amounts for financial statement and tax purposes. The effect of a change in income tax rates on future income tax assets and future income tax liabilities is recognized in income when enacted. Valuation allowances are provided when necessary to reduce future tax assets to an amount that is more likely than not to be realized.

Stock-Based Compensation for Employees and Directors

In accounting for the grant of our employee and director stock options, we have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"

("APB 25"), and related interpretations. Under APB 25, companies are not required to record any compensation expense relating to the grant of options to employees or directors where the awards are granted upon fixed terms with an exercise price equal to fair value at the date of grant and the only condition of exercise is continued employment. See note 11

Had we elected to follow the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation", we would have recorded additional compensation expense of approximately $516,525, $241,722 and $306,509 and for the years ended December 31, 2005, December 31, 2004, and December 31, 2003, respectively. These amounts are determined using an option-pricing model with the following assumptions:

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Summarized below is pro forma financial information for the three years ended December 31, 2005, 2004 and 2003, which presents the net loss for the year and loss per common share for the year calculated in accordance with SFAS No. 123:

We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

We review the terms of convertible debt and equity instruments we issue to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date, with changes in the fair value reported as charges or credits to income. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.

To the extent that the fair values of any freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that revised FASB Statement No. 123, Accounting for Stock-based Compensation and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based employee transactions. SFAS No. 123R requires a public

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entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS is effective as of the beginning of the first or annual reporting period that begins after June 15, 2005. The ultimate amount of increased compensation expense will be dependent on whether the company adopts SFAS 123R using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

The company has begun, but has not completed, evaluating the impact of adopting SFAS 123R on its results of operations. The company currently determines the fair value of stock-based compensation using a Black-Scholes option-pricing model. In connection with evaluating the impact of adopting SFAS 123R, the company is also considering the potential implementation of different valuation models to determine the fair market value of stock-base compensation, although no decision has been yet made. However, the company does believe that the adoption of SFAS 123R will have a material impact on its results of operations, regardless of the valuation technique used.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29 that amends Opinion 29 to eliminate the exception from fair market measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. The provisions of this statement are effective for all nonmonetary exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this Statement is not expected to have material effect on the results of operations or financial position of the company.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.

In February 2006, the FASB issued SFAS No. 155 Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This statement is effective for all financial instruments acquired or issued after the beginning of an entities first fiscal year that begins after September 15, 2006.

3. Note Receivable from Former Officer

In September 1998, we loaned CDN $54,756 (US $35,760 as of that date) to an officer of the company. The officer left the Company in 2002. Pursuant to a promissory note the loan had a 5½% interest rate and repayment terms consisting of monthly payments and final balloon payment on October 3, 2003. The loan is in default and we have issued a statement of claims to recover the monies owed. Although we are confident that we will obtain a judgment against the debtor in December 2005 we recorded an allowance for doubtful account for 100% of the monies owed due to uncertainty that the claim against the debtor will be collectable.

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4. Oil and Natural Gas Properties

Summarized below are the oil and natural gas property costs we capitalized for our years ended December 31, 2005, 2004 and 2003, and as of December 31, 2005 and 2004.

The property costs net of depletion, impairments and dispositions, by proved and unproved classification, are as follows at December 31, 2005 and 2004:

The company had partners farm-in on the South Adsett prospect in late 2003 and a deep well was drilled and abandoned in early 2004. The farm-in earned an interest in only a small portion of the South Adsett lands. The well was abandoned yet the drilling results confirm that the area is prospective for shallow gas opportunities. Tenaka, located near the South Adsett prospect, may have similar prospects for natural gas.

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The remaining minor properties consist of many small parcels of lands or minor interests throughout Alberta.

At the end of each quarter we assess our unproved properties for any impairment in value (see note 2). We compare the average price paid per acre for petroleum and natural gas rights in the province, after applying a discount to recognize the shorter remaining life of certain of our leases and the possible reduced economic value, to the recorded carrying cost of our leases. Based upon these evaluations, we have determined that our unproved properties continued to have prospective commercial viability as of these dates but that an impairment had occurred and it has been added to the costs to be amortized. The costs to be amortized were then measured for impairment by performing a ceiling test.

The ceiling test compares the recorded capitalized costs, less accumulated amortization and deferred taxes to the sum of (a) the present value of the estimated future net revenues computed by applying current oil and gas prices to estimated future production of oil and gas reserves less estimated future expenditures to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent; and (b) the cost of the properties not being amortized. In 2005 the ceiling test resulted in a write-down of $77,698 ($172,623 in 2004 and $945,000 in 2003), which amount is included in depletion and impairment of oil and natural gas properties on the income statement.

5. Other Property and Equipment

Summarized below are our capitalized costs for other property and equipment as of December 31, 2005 and 2004:

7. Note Payable

As of December 31, 2005 the Company has a loan outstanding in the amount of $207,625 US. This amount is comprised of $250,000 CDN borrowed from our CEO and largest shareholder, Mr. George Liszicasz on November 3, 2004. These agreements provide that the loans accrue interest at the rate of 0.58% per month

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(7.0% per annum). The maturity date for this loan is April 15, 2007.

8. Common Stock

The loss per share is presented in accordance with the provision of SFAS No. 128, Earnings Per Share (“EPS”). Basic EPS is calculated by dividing the income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Basic and diluted EPS were the same for the years ended December 31, 2005, 2004 and 2003 because the company had losses from operations and therefore, the effect of all potential common stock was anti-dilutive.

In calculating diluted earnings per common share for the years ended December 31, 2005, 2004 and 2003, we excluded all options and warrants, either because the exercise price was greater than the annual average market price of our common shares in those years or the exercise of the options and warrants would have been anti-dilutive. During these three years, outstanding stock options and warrants were the only potentially dilutive instrument.

Year Ended December 31, 2005

On January 13, 2005 we issued 125,000 common shares in full payment of a couple of invoices for $218,750 for services provided by consultants to NXT to assist us with corporate strategy and planning.

On March 17, 2005 we issued 10,000 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On March 30, 2005 we issued 23,600 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On July 31, 2005 we issued 6,000 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On December 31, 2005 we issued 147,500 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004. We also had a refund on $12,320 finder’s fees that we had outstanding, which was waived by the finder.

Year Ended December 31, 2004

On February 12, 2004, we raised $1,143,633 in gross proceeds through a private placement of 573,269 units. Each unit consisted of a common share at $2.00 ($2.60 CDN) per share and a warrant with a strike price of $2.75 and a one year life. Net proceeds to our company were $1,063,277 after deducting $80,356 in offering expenses and finders’ fees. In addition, we had also received $438,545 in gross proceeds at December 31, 2004 for which shares had not been issued at December 31, 2004 and this amount is shown as subscriptions payable on the balance sheet.

On April 18, 2004 we issued 30,000 common shares in full payment of an invoice for $54,000 for services provided by a consultant to NXT to assist us with corporate strategy and planning.

On July 22, 2004, we issued 200,000 common shares in full payment of an invoice for $400,000 for services to establish a branch office in the United Arab Emirates and market the company’s SFD Technology in the region.

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On July 22, 2004, we raised $264,245 in gross proceeds through a private placement of 133,000 units. Each unit consisted of a common share at $2.00 ($2.60 CDN) per share and a warrant with a strike price of $2.75 and a one year life. Net proceeds to our company were $255,618 after deducting $8,627 in offering expenses and finder’s fees.

On December 22, 2004, we raised $1,000,001 in gross proceeds through a private placement of 571,429 units. Each unit consisted of a common share at $1.75 ($2.10 CDN) per share and a warrant with a strike price of $2.75 ($3.30 CDN) and a one year life. Net proceeds to our company were $999,823 after deducting $178 in offering expenses.

On December 31, 2004 we raised $47,326 in gross proceeds through a private placement of 22,000 units. Each unit consisted of a common share of $2.00 ($2.60 CDN) per share.

Year Ended December 31, 2003

On September 11, 2003, we raised $750,000 in gross proceeds through a private placement of 1,875,000 common shares at $0.40 per share. Net proceeds to our company were $744,050 after deducting $5,950 in offering expenses and we also issued 124,000 shares as finders' fees.

On December 31, 2003 we closed a private placement of 101,700 flow-through common shares at $2.00 ($2.60 CAN) per share for $203,400 in gross proceeds. Net proceeds were $186,517. We issued 7,496 warrants with a strike price of $2.75 and a one year term and paid $14,992 in finders' fees.

9. Preferred Shares

On December 31, 2005 the Amended and Restated Technical Service Agreement was signed between the Company and George Liszicasz, its Chief Executive Officer. According to the terms of the agreement Mr. Liszicasz received 10,000,000 preferred shares. Of these preferred shares 2,000,000 were immediately convertible into common shares on a one-to-one basis but have not yet been converted. The remaining 8,000,000 preferred shares are conditionally convertible into common shares if specified annual revenue objectives are met. Preferred shares carry liquidation preferences over common shares.

The Preferred shares were issued in consideration for Mr. Liszicasz granting the Company an intangible asset. The asset consists of an exclusive, world-wide license to use, develop, copy and modify the Operating SFD Detectors and to the extent reasonably necessary, the SFD Theories for use in the exploration of hydrocarbon resources.

The preferred shares are progressively convertible on a one-to-one basis into common shares, at the option of the holder once annual revenue objectives are met. The following schedule outlines the number of preferred shares that become convertible at various revenue stages of the Company.

All ten million (“10,000,000) preferred shares became issued and outstanding upon execution of the agreement on December 31, 2005. A maximum of five million ("5,000,000") of the preferred shares can be converted without ratification by Shareholders of the Corporation. The remaining five million

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("5,000,000") require ratification by the Shareholders of the Corporation, but will be subject to cancellation in the event that they are not authorized at a meeting of the shareholders. Gross revenue of the Corporation is determined on a consolidated basis in accordance with Generally Accepted Account Principles and will also include the proceeds of sale of assets by the Corporation or its subsidiaries.

The preferred shares issued were valued using an option-pricing model with the following assumptions and valuations:

The value for the Preferred Shares is substantially assigned to the first two million (“2,000,000”) preferred shares that are immediately convertible into Common Shares. The remaining eight million (“8,000,000”) preferred shares have been assigned a nominal value reflecting the uncertainty that the required revenue objectives will be achieved to allow the Preferred Shares to be convertible into Common Shares.

As per FAS 2 “Accounting for Research and Development Costs” intangibles that are purchased from others for a particular research and development project and that have no alternative uses and therefore no separate economic value, such as the SFD intellectual property, are to be accounted for as research and development expense at the time the cost is incurred. Accordingly we have expensed in 2005 the full value of this intangible asset as a research and development expense.

10. Convertible Debentures

In the fourth quarter of 2005 we closed private placement bridge-financing contracts. Pursuant to these contracts the Company issued $1,955,342 of special notes and 1,989,265 Special Warrants in exchange for cash proceeds of $1,649,764 (net of commission paid of $24,928) and the conversion of Note Payable and accrued interest of $280,650 for an aggregate net value proceed of $1,930,414.

The special notes are deemed to convert into debentures four months following close. Both the special note and the debentures have substantially the same features and are herein referred to as the debenture. The debenture matures eighteen (18) months from closing and bears interest at ten percent (10%) per annum. An additional two percent (“2%”) penalty shall be paid by the Company if registration statements are not filed under appropriate legislation to ensure that shares underlying the debenture and warrant are available for resale within 90 days of closing. All debentures rank equally with all other convertible debentures. The debenture is secured by certain specified oil and gas properties.

The debenture obligation can be discharged by the Company in the following manners:

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Each Special Warrant is deemed to convert into warrants four months following close. Both the Special Warrant and the warrant have substantially the same features and are herein referred to as warrants. Each warrant has a two (2) year term and is exercisable at any time into one common share at a price of $1.00 per share. If the closing bid price of the common shares exceeds $2.00 for a period of 20 consecutive days then the Company can call the warrants upon thirty day written notice.

The Special Notes were assessed under SFAS 133 as containing an embedded derivative liability. The Company is required to bifurcate the embedded conversion option and account for it as a derivative instrument liability because the conversion price of the debt can be adjusted if we issue common stock at a lower price. This derivative instrument liability was initially recorded at its fair value and is then adjusted to fair value at the end of each subsequent period, with any changes in the fair value charged or credited to income in the period of change.. This embedded conversion option is revalued using the binomial option pricing model. The warrants issued along with the convertible debenture were classified as equity in accordance with EITF 00-19 and were valued using a Black Scholes model.

The proceeds received on issuance of the convertible debt during 2005 were first allocated to the fair value of the bifurcated embedded derivative instruments included in the convertible notes and the warrants, with the remaining proceeds allocated to the Note Payables, resulting in the Note Payables being recorded at a significant discount from their face amounts as show in the table below. This discount, together with the stated interest on the Note Payable, is being amortized using an effective interest method over the term of the Note Payable.

The conversion option was fair valued at inception ($503,564) and re-evaluated again at year end (December 31, 2005: $963,730) using an option-pricing model with the assumptions that the maximum price is set to reflect the forced conversion feature inherent in the convertible debenture. A debenture holder can choose to exercise the option at any time and convert at a conversion rate of one common share for every $0.70 of Debenture value. However, if the investor does not convert then NXT is able to force conversion (self liquidating feature of debenture). Starting in the 7th month following close NXT can convert 1/12th of the outstanding debenture to shares each month at 85% of 10 day average market value for the shares (based on the conversion rights of the shareholders). The maximum value that the share price will reach is set at $1.50. The $1.50 maximum value is based upon the estimation that once the share price reached $1.50 an investor would exercise the conversion option at $0.70 rather than being forced into a conversion at a much higher price (i.e. 85% of $1.50 or $1.28)

The carrying value of the debenture at close reflects the $1,955,342 face value of the debenture less a discount of $1,509,376. The carrying value of the debenture will accrete up to the face value over the life of the debenture. The Company recorded an accretion expense of $500,737 and interest expense on the debenture of $35,283

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The amount recorded on the balance sheet as at December 31, 2005 has been calculated as follows:

In accordance with SFAS 133 embedded derivative instrument, unless certain conditions are met, requires revaluation at the end of each reporting period. In accordance with this standard the convertible feature of the debenture, prior to discharge, must be revalued each period end. Any value change is reflected as an expense for the period. The primary factor that will impact the fair market value is the market value for Company’s common shares. In accordance with this standard the conversion feature was revalued at year-end as follows:

The fair value of the conversion feature of $1,421,384 is recorded with the convertible debentures on the balance sheet and the change of fair value of $917,820 was recognized in interest – convertible debenture on statement of loss and comprehensive income.

11. Employee and Director Options
Description of Plans

Through December 31, 2005, we have granted options to selected employees, directors, advisors and consultants of our company pursuant to the following separate arrangements or plans (the "Plans"):

• separate stand-alone directors' options which we granted to selected directors as compensation for serving on our board of directors; as these grants were not a part of an option plan there is no underlying maximum number of shares reserved and no general vesting and expiry conditions specified;
• the 1997 Pinnacle Oil International, Inc. Stock Plan (the "1997 Plan"), pursuant to which 1,500,000 common shares are reserved for issuance to employees, directors and consultants in the form of stock options or outright stock grants; unless otherwise specified in the Option Certificate, all options vest on the date of grant and the maximum expiry date is 10 years from the date of the grant; subject to this maximum expiry date, the Administrator may determine different expiry and vesting conditions;
• the 1999 Pinnacle Oil International, Inc. Executive Option Plan (the "1999 Plan"), pursuant to which 1,000,000 common shares are reserved for issuance to executive officers in the form of stock options; unless otherwise specified in the Option Certificate, all options vest on the date of grant and the maximum expiry date is 10 years from the date of the grant; subject to this maximum expiry date, the Administrator may determine different expiry and vesting conditions;
• the 2000 Pinnacle Oil International, Inc. Directors' Option Plan (the "2000 Plan"), pursuant to which 400,000 common shares are reserved for issuance to selected directors in the form of stock options; unless otherwise specified in the Option Certificate, all options vest on the date of grant and the maximum expiry date is 10 years from the date of the grant; subject to this maximum expiry date, the Administrator may determine different expiry and vesting conditions;

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• the 2003 Stock Plan under which 375,000 common shares are reserved for issuance to consultants; and the Plan Administrator has the authority to decide the vesting conditions and the expiration dates of options awarded under this plan;
• the 2004 Stock Option Plan under which 1.2 million common shares are reserved for issuance to eligible employees, directors, members of management and service providers; the maximum option period is 10 years from the grant and vesting conditions are determined by the Board of Directors and the Compensation Committee.

Vesting terms and maximum terms of options are specified in individual plans. However, the Administrator has the authority to change these terms. At present, options generally vest one-third each on the first through third anniversaries of the grant date and lapse, if unexercised, five years from the date of vesting.

Summary of Option Grants

We have summarized below all transactions involving option grants under the Plans for our three fiscal years ended December 31, 2005: