Item 1. Business

Overview

Energy Exploration Technologies ("we," "our company" or "NXT") is a technology- based reconnaissance exploration company which utilizes our proprietary, quantum physics-based, stress field detection or "SFD" remote-sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We are a publicly traded company whose common stock trades over-the-counter on the NASD Electronic Bulletin Board under the symbol "ENXT." Our principal executive offices are located at Suite 700, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403) 264-7020.

We use our SFD technology to survey or reconnoiter large exploration areas from our survey aircraft at speeds in excess of 150 mph to identify and "high-grade" leads for further evaluation and potential drilling. Our SFD technology is a recently developed technology which we adapted for airborne survey operations, and field tested for independent geologists and our joint venture partners, in 1996 and 1997. We commenced SFD survey activities on a full commercial basis for our joint venture partners in early 1998.

Our SFD technology affords us the relatively inexpensive ability to obtain near real-time analysis and interpretation of potential hydrocarbon accumulations in a matter of days or weeks, as compared to months and in some cases years in the case of the seismic methods currently employed by the oil and gas exploration industry for wide area exploration or reconnaissance. These cost and time advantages will ultimately enable us to effectuate potentially significant reductions in oil and gas exploration "finding costs." Finding costs include the cumulative costs of acquiring seismic, purchasing mineral rights, and drilling and completing exploration wells. The ability to reduce finding costs is an extremely important financial factor in the oil and gas industry, insofar as low finding costs represent a measure of an oil and gas company's ability to effectively and efficiently find new reserves, as well as generate cash flow.

Our Corporate History

We were initially incorporated in Nevada on September 27, 1994 under the name "Auric Mining Corporation." In January 1996, we acquired all of the common stock of Pinnacle Oil Inc., a Nevada corporation, from its stockholders in exchange for our common stock. As a consequence of this reverse acquisition, Pinnacle Oil Inc. 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 Pinnacle Oil Inc. was a development stage research and development enterprise holding world-wide rights to use what is now our SFD technology for hydrocarbon exploration purposes. Immediately after this transaction we changed our name to "Pinnacle Oil International, Inc.," and subsequent to that, on June 13, 2000, changed our name to Energy Exploration Technologies.

We have two wholly owned subsidiaries, NXT Energy USA Inc. (formerly known as Pinnacle Oil Inc.) which we acquired as a result of the reverse acquisition described above, and NXT Energy Canada Inc. NXT Energy USA Inc., which is referred to in this annual report as "NXT USA," was incorporated under the laws of the State of Nevada on October 20, 1995 under the name Pinnacle Oil Inc. and subsequently changed its name to that presently used on June 16, 2000. NXT Energy Canada Inc., which is referred to in this annual report as "NXT Canada," was incorporated under the federal laws of Canada on April 1, 1997 under the name "Pinnacle Oil Canada, Inc.," and subsequently changed its name to that presently used on June 16, 2000.

Status Of Our Exploration Efforts

We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two wholly-owned operating subsidiaries. Our first subsidiary, NXT USA, focuses on United States-based exploration, while our second subsidiary, NXT Canada, focuses on Canadian-based exploration. Pinnacle, in turn, concentrates on research and development efforts to improve the efficacy of our SFD Survey System.

Our United States exploration efforts to date have been focused on the Greater Green River Basin in Wyoming and the Williston Basin in North Dakota. These exploration activities have been conducted under a joint exploration and development agreement with CamWest Exploration LLC, a Colorado-based exploration company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in the United States selected by CamWest.

Our Canadian exploration efforts to date have been focused on southern Alberta, northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The majority of these exploration activities have been conducted under an exploration joint venture agreement with Encal Energy Ltd., a Calgary-based exploration and production company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in Canada selected by Encal. We have also recently commenced conducting exploration activities in western Canada for our own account. We anticipate developing these prospects through a joint venture with either Encal or another Canadian exploration company.

From the inception of our commercial airborne survey activities in mid-1997 through the date of this annual report, we have:

. flown over:

. 60,000 linear survey miles in 20 separate exploration areas in the United States and Canada for our joint venture partners, and

. 2,500 linear survey miles in an separate exploration area in Canada for our own account; and

. tendered 81 prospects which we believe to have commercial potential to our joint venture partners for further geological and geophysical evaluation as a result of our analysis and interpretation of SFD Data acquired during these flights.

Of the 81 prospects we have tendered to our joint venture partners:

. 25 prospects have been accepted by our joint venture partners for acquisition and drilling upon completion of their geological and geophysical evaluation.

. seven prospects have been designated as "key tracts" by our joint venture partners for future drilling based upon long-term considerations such as land availability;

. nine prospects have been rejected by our joint venture partners and have either reverted to NXT for our own account or will be jointly exploited by NXT and the joint venture partner pursuant to the terms of the joint venture agreement; and

. the balance of the tendered prospects remain subject to acceptance pending completion of geological and geophysical evaluation, land acquisition or other considerations.

Of the 25 prospects that have been accepted by our joint venture partners:

. One exploration well spudded in early 1999 by a third-party operator at Shoal Point, Newfoundland, was drilled directionally to an unknown bottom hole target, evaluated, and abandoned as being uneconomic. NXT Canada elected a royalty interest through Encal with respect to this prospect.

. One exploration well spudded in September 1999 by a third-party operator at our Leucite Hills South prospect in Wyoming, was drilled, cased and completed in September 1999 as a natural gas discovery. This well will not be placed into production by the operator, however, until a sufficient number of additional wells are drilled on the exploratory block and can be tied into a gathering system. NXT USA elected a combination working interest and overriding royalty interest with respect to this prospect.

. One exploration well spudded by CamWest in October 1999 at our Poblano prospect in Wyoming, was drilled, cased and completed in January 2000 as a natural gas discovery, and production will commence upon completion of a twelve-mile pipeline that will tie the well into a sales system. CamWest spudded a step-out exploratory well on this prospect in March 2000, which is still in the process of being drilled as of the date of this annual report. NXT USA elected a combination working interest and overriding royalty interest with respect to this prospect.

. One exploration well spudded by a third-party operator in October 1999 at our Poblano South prospect in Wyoming, was drilled, cased and completed in January 2000. This well has been shut-in by the operator pending further evaluation of its completion program. NXT USA elected a combination working interest and overriding royalty interest with respect to this prospect.

. One exploration well spudded in December 2000 by Encal at our Carbon prospect in southern Alberta, was drilled, cased and completed in January 2000 as a natural gas discovery. This well is currently suspended pending further completion activity by the operator. NXT Canada elected an overriding royalty interest with respect to this prospect.

. One exploration well spudded in March 2000 by Encal at our Monarch prospect in southern Alberta. This well is currently cased and awaiting completion. NXT Canada elected a combination working interest and overriding royalty interest with respect to this prospect.

. Drilling rights for the balance of the prospects have either been acquired and exploration wells are scheduled for drilling at a future date, or remain in the process of being acquired. We anticipate that two to four exploration wells will be spudded on these prospects by our joint venture partners or third-party operators by June 30, 2000. As of the date of this annual report, our joint venture partners have acquired drilling rights for fourteen of those prospects.

The joint venture agreements we have entered into with our joint venture partners generally entitle us to elect to receive one of the two following payment streams for each SFD-identified prospect accepted and drilled under the applicable agreement:

. A capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect. In any situation where we elect to receive this royalty, our joint venture partner will be responsible, at its own cost and risk, to acquire the necessary drilling rights for the prospect if it has not already done so, and to conduct all drilling, production and marketing activities necessary to exploit the prospect.

. A working interest of up to 45% of the joint venture partner's net revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of the acquisition of mineral and drilling rights (if necessary), drilling and production costs incurred with respect to the prospect based upon our working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducting and managing all drilling, production and marketing activities to exploit the prospect.

Our recent practice with our joint venture partners has been to participate in selected prospects on a combination working interest/overriding royalty interest basis, typically a 22 1/2% working interest and a 4% overriding royalty.

Our U.S. joint venture partner is also required under the terms of its joint venture agreement to reimburse us for 100% of the expenses we incur in conducting aerial surveys for that partner, while our Canadian joint venture partner is required under the terms of its joint venture agreement to reimburse us for 50% of the expenses we incur in conducting aerial surveys for that partner.

Our rights to use our SFD technology arises from an SFD technology license which we acquired from the owner and licensor of that technology, Momentum Resources Corporation, pursuant to which we received the exclusive world-wide right to use the SFD technology for hydrocarbon exploration purposes. We are obligated under the terms of that license to pay Momentum a fee equal to 1% of any "prospect profits" which we may receive on or before December 31, 2000, and 5% of any prospect profits which we may receive after December 31, 2000. Momentum is controlled and indirectly owned by two of our significant stockholders, both of whom currently serve as our directors and one of whom currently serves as one of our executive officers.

Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Although we have sufficient working capital as of December 31, 1999 to fund our current level of operations for several years assuming we make minimal investments in petroleum properties, our ability to continue as a going concern in the longer term will nevertheless be dependent upon our ability, either through our joint venture arrangements or for our own account, to successfully identify hydrocarbon bearing prospects, and to finance, develop, extract and market oil and natural gas from these prospects for a profit. We anticipate that we will continue to incur further operating losses until such time as we receive revenues from our joint venture partners with respect to prospects currently in the development stage, or through prospects we identify and exploit for our own account.

Corporate Objective

Our corporate objective is to become an industry leader in technology-driven oil and gas exploration. Utilizing our unique and exclusive SFD technology, we can provide to our joint venture partners competitive advantages not seen in the exploration business. We anticipate that we will attain our corporate objective through the following evolutionary steps:

. In the short-term we will continue to work with our joint venture partners to explore the sedimentary basins they request we survey. Our primary interest at this stage of our development is to focus on drilling results to prove our SFD technology, while participating in a sufficient number of exploratory wells on a working interest basis to demonstrate our commitment to our technology. Budgetary considerations permitting, we will participate in drilling activities on either a pure working interest basis up to our permitted 45% where we are willing to accept higher risk in order to earn higher returns, or a combination working interest/overriding royalty basis where we desire to participate on a lower percentage basis. In other circumstances we will not participate, and will instead be paid an overriding royalty on production revenue. All of these projects will allow us to not only establish a statistical drilling track record for our SFD technology, but enable us to build cash flow to further fund our exploration drilling and research & development programs.

. In the longer term once the value of our SFD technology has been demonstrated to the oil and gas industry, we will adopt a strategy to accomplish the following objectives:

. promote the expeditious acquisition and drilling of SFD Prospects;

. maximize the return on our investment while minimizing risk associated with direct investments in oil and gas drilling projects; and

. enable us to have a greater degree of control and influence over strategic project decisions, while at the same time not becoming bogged down in drilling, production and marketing operational issues.

While we anticipate that we will continue to participate in projects with third party exploration companies, we anticipate that the economics of investment or the underlying arrangements will change as follows:

. we will either invest in the same way as we currently invest--i.e., on a straight working interest or royalty participation basis or a combination of the two depending upon capital investment requirements, potential reserve size, geographic location, risk levels, project completion times and parties involved--although we would expect that our working interest and royalty percentages would be increased; or

. we will engage independent drilling, production and marketing companies on a contract basis.

We anticipate that we will be able to finance our increased land acquisition costs and working interest participations through available cash flow or financings funded, in part, through our anticipated base of proven reserves. Most importantly, we will endeavor to acquire drilling and land rights in our name in order to procure maximum leverage in negotiating transactions with drilling and production partners or contractors on terms most beneficial to our company.

While we will acquire a land department to acquire drilling rights and manage our properties, we do not intend to become a manpower- and cost-intensive drilling and production company, and will instead delegate these matters to our partners or independent contractors or service providers, although it is possible that we may establish a separate affiliated entity to manage production and marketing functions. We anticipate that we will increase our staffing levels--exclusive of any separate production and marketing entity we may establish--to approximately 50 employees in this business model, including additional administrative, research and development and SFD flight, survey and interpretive staff. Given our relatively modest projected staffing requirements, we anticipate that our annual operating expenses would be kept to relatively minimal levels.

You should note that prospects that are confirmed through exploratory drilling as containing commercial quantities of oil and gas may become immediately marketable based on the size of their estimated reserves. It is therefore not necessary to actually place production wells on-line to recognize the value of these reserves, and we may consider selling the reserves and associated drilling rights to third parties based upon a discounted cash flow formula derived from estimated reserves and other production and/or market factors. We also anticipate that we will have the similar ability, once our SFD technology is proven, to sell SFD Prospects on the market, even if exploratory wells have not been drilled. We have, in fact, set up a mechanism under our joint venture agreements with our joint venture partner to dispose of smaller SFD Prospects which may have commercial value.

Theoretical Basis Of SFD Technology

What Is Our SFD Technology

Our SFD technology allows us to measure the variations in energies relating to `stressed' subsurface structures and hydrocarbon accumulations. By analyzing these field patterns, we are able to determine the probability of locating commercially viable deposits. The principal components of our SFD technology, the SFD sensors, are `stand-alone' devices that incorporate principals of contemporary quantum theory in their operation.

What Is Quantum (Field) Theory And Its Applications

`Quantum theory' incorporates two bodies of physics--`quantum mechanics,' which deals with wave-particle duality, superposition principle, uncertainty principle, wave function and probabilities; and `special relativity' which examines the effects of space-time geometry and the relativity of motion. Traditional physics, known as `classical theory,' cannot account for the structure and behavior of elementary particles, for example, the lattice- vibration effects that arise from electrons colliding with atoms. In contrast, quantum theory is successful in dealing with these phenomena. It describes matter and energy interactions in the universe in terms of single indivisible units called `quanta,' or in the singular `quantum.'

According to the `standard model' of quantum theory, which summarizes current understanding of elementary particles and the fundamental forces of nature, `fields' are the basic make-up of the universe. Therefore, each elementary particle has an associated field with it. Little ripples in these fields carry information, energy and momentum from one area or particle to another.

Quantum theory describes matter as both waves and as particles. A direct consequence of the wave-particle duality is the `uncertainty principle' advanced by Heisenberg. According to this principle, particles do not have definite locations, speeds, and paths as usually described by classical physics. Instead, quantum theory describes positions and other properties of particles in terms of the incidental events where the property will have a certain value. The way a quantum object behaves is defined by its 'wave function' developed by Schrodinger, allowing us to compute the `probability' that certain event will be observed. Everything in quantum theory is based on probability. This simply means that one cannot predict an event definitely but can estimate the probability for the event to occur.

In spite of its success, there are situations where quantum theory is insufficient to give proper explanation. Under the umbrella of quantum theory, three fundamental forces--the `electromagnetic,' the `weak,' and the `strong' forces--are successfully unified. However, it cannot adequately incorporate the fourth, `gravitation.' None of the branches of quantum theory can account for the discrepancies in masses of elementary particles. To address this issue, Higgs proposed a mechanism--known as `massive gauge bosons'--by which particles acquire mass without breaking the symmetry laws of modern physics. Higgs bosons have no intrinsic spin or electric charge and can not be distinguished from empty space or vacuum. It is now proposed by physicists that the all-pervading Higgs scalar fields homogenize space and give rise to as many particles as there are many special scalar fields. In support, Peccei-Quinn symmetry and String theory predict the existence of `composite scalar fields' that are massless at high energies. Presently, physicists are working on proving the existence of these complex scalar fields. They forecast a number of individual and composite Higgs fields and torsion fields, the latter of which relates to the quantum spin of empty space or vacuum. These issues have ramification in our theoretical discussions with respect to the operation of our SFD technology and we interpret the role of Higgs fields as being direct and relevant.

Quantum theory has already been applied in the development of commercially available instruments and devices. Superconducting Quantum Interference Device or SQUID is a typical example. It is the most sensitive detector of magnetic fields known so far. The application of SQUID technology ranges from medical diagnostics for detecting brain damage to performing special tests in relativity. Quantum lasers are another example of the successful commercial application of quantum theory. The major advantage of these lasers is that they can be tailored to emit light over a wide range of the spectrum--something that no other laser can do. In fact, anyone who owns a compact-disc player today uses this technology. By means of Molecular-Beam Epitaxy or MBE, initially developed at Bell Labs, layers of atoms can be deposited on a heated metal surface. This technology is essential in the fabrication of advanced semiconductor devices and integrated circuits including the quantum-well lasers. Nowadays, computer scientists are moving towards embracing quantum-wire and quantum computers as the future of computing. Theoretically, quantum computers will perform calculation orders of magnitude faster than the best computers of today.

What Are Stress Fields And Their Relation To SFD Theory

On a global scale, the earth's crust is under variable stress resulting from crustal plate (tectonic) movements that produce subsurface mechanical and hydraulic interactions. Stress is manifest in the macroscopic deformation of buried sediments and rock strata, the microscopic deformation of their constituent minerals. It is well known that electrical energy balance in a crystal lattice is maintained by the alternation of equal and opposite charges. However, when the crystal lattice of a material, for example quartz, is suddenly subjected to stress, electromagnetic radiation will be emitted. Under sustained localized stress conditions, we believe that `scalar energy fields' are also generated or modified at a quantum level. The word `scalar' in its basic form means that the field carries no direction only magnitude, unlike vector fields resulting from conventional electromagnetic fields that carry both magnitude and direction. The generated or modified scalar energy fields are non- electromagnetic in nature, and we believe are related to Higgs and torsion fields.

Our SFD sensors are passive quantum transducers. The operation of these devices is based on quantum mechanical principles and involves the capture and interaction, translation and conversion of certain scalar energy fields into electrical signals. Our SFD sensors have demonstrated the ability to date to directly detect scalar energy effects generated or modified at depths in excess of 15,000 ft below the surface, and at altitudes in excess of 10,000 ft. Surface cultural phenomena, such as large body of water, do not affect the SFD sensors as long as the change in magnitude is moderate. By generating and maintaining their own quantum fields, the SFD sensors are able to interact with these energy fields via quantum particles. The resulting interactions are converted and "recorded" as electrical signals.

Our SFD sensors are also non-linear `chaotic' devices. Chaos theory characterizes chaotic devices as behaving in a complex manner, despite the fact that they can be described quite simply. By definition, these systems exhibit unpredictable dynamics that are sensitive to their initial conditions. Chaotic systems are mathematically deterministic--that is, they follow precise laws, but their irregular behavior can appear random to the casual observer. The response of our device to a phenomenon may diverge exponentially and much faster than that of a slower linear system. Once a response to a phenomenon is initiated, it will proceed until saturation or occurrence of the next phenomenon. Even though, within the confinement of the inherent restrictions of quantum mechanics, the number of possibilities of reacting to the same stimulus is deterministic, the device still behaves irregularly. Nevertheless, by cycling about an optimum function point, the behavior of a quantum device can achieve some stability in a way that never quite repeats itself.

Sustained geological stress will lead to the development of new conditions manifested in scalar energy fields of different origin that are related to Higgs and torsion fields. We postulate that the fields generated or modified are due to complex variations in quantum vibrations and vacuum interactions. These fields carry information, momentum and in some cases, substantial energy. Although these energy fields appear scalar in nature, they can in effect act as vector fields under certain conditions.

When scalar energy fields interact with existing anomalies they can create large vortices with smaller internal vortices over a given subsurface phenomenon. The vortices may dynamically increase and decrease in magnitude, and when traversed they significantly affect the quantum interactions in our SFD sensor. Based on observations we have made from several hundred surveys of known oil and gas fields, it appears that these vortices are associated with `mechanical' and `hydraulic' stresses, as explained below, in particular, geologic structures and hydrocarbon accumulations.

What Is The Practical Application Of Stress Fields to Geology and Hydrocarbon Exploration

We believe that all regional substrata exhibit their own unique stress fields, reflecting the sedimentary and burial histories of those substrata and, more importantly for the purposes of the application of our technology, the mechanical and in some cases hydraulic stresses or pressures inherent in or placed upon those substrata. This is important because it is our ability to identify the changes in subsurface stresses and pressures with our SFD technology which allows us to either inferentially or directly identify oil and gas accumulations. Through our continued research and development, a high level of correlation has been shown between the science of geology and our quantum- based SFD technology.

What Are Subsurface Mechanical Stresses

Subsurface mechanical stresses are caused by directional tectonic forces that disrupt the stress and pressure equilibrium in the underlying strata. Sedimentary basins consisting of relatively undisturbed flat-lying or gently dipping sediments generally maintain a balanced pressure equilibrium and therefore exhibit low constant stress. Where tectonic forces have compressed, folded, faulted, or fractured the sedimentary package, a balanced mechanical equilibrium is not maintained, and these areas exhibit stresses in one or more directions depending upon the geology and the geometry of the deformation. In other areas where the regional strata is characterized by non-uniform geologic layering, particularly areas containing abrupt major sedimentation changes such as buried reefs, channels, and erosional edges, these appear to exhibit higher residual stress than the adjacent regional strata.

What Are Subsurface Hydraulic Stresses

Hydraulic stresses are caused by the presence of fluids (liquids and gases), such as water, oil and natural gas, within the strata and, more particularly, the inherent and directional pressures resulting from the relative buoyancy of the fluids. A simple illustration of buoyancy is the effect of submerging a beach ball in a swimming pool. When a beach ball is submerged it attempts to rise to the top of the pool because the air in the beach ball is less dense than the surrounding water. This upward pressure, which displaces the water above the beach ball as it rises to the surface, is called buoyancy. Oil and gas exhibit the same properties when formed underground--they will percolate upwards through the strata by way of fractures or permeable strata until they either reach the surface or are stopped or "trapped" by a non-porous barrier, in which case they will continue to exert pressure against the trapping barrier.

How Does Our SFD Technology Interact with Subsurface Stress Fields

The principal components of our SFD technology are passive transducers, which we refer to as the "SFD Sensors," which create and maintain quantum fields. As we fly our SFD technology over an exploration area, the SFD Sensors interact with the varying stress fields that are generated by and within the subsurface strata. Our SFD technology interacts with these dynamic energy patterns and converts them into electrical digital signals which we record and later interpret using known geologic phenomena and oil and gas accumulations as analogies.

Operational Practices In Conducting SFD Surveys

How We Acquire SFD Data

In operational practice, our SFD Survey System is flown over pre-selected exploration areas at varying altitudes and from different directions. As the SFD Sensors interact with the fields created by stresses, they register a multitude of responses that we record in the form of digital signals, which we refer to as "SFD Signals." Our proprietary data acquisition system acquires and records these signals and marks their geographic location with global positioning satellites using "GPS" coordinates. These integrated signals are now referred to as "SFD Data." Our technical crew aboard the aircraft can also monitor these signals in real time, which allows them to immediately identify areas of particular interest for further investigation.

How We Interpret SFD Data

Once SFD Datasets acquired from our airborne survey operations are returned to our home offices, our geological and geophysical interpretive staff process the data, plot the flight lines, and produce computer-generated maps. We then commence the following screening and interpretation process:

. First, we screen the SFD Data for "anomalous" signals on the flight line, which we refer to as "SFD Anomalies." These SFD Anomalies include signals from both unknown or non-producing areas that we survey as well as signals obtained over known oil and gas pool crossings.

. Once we have identified the SFD Anomalies on a given flight line, we then isolate and distinguish SFD Anomalies which have signal characteristics indicative of subsurface mechanical conditions, which we refer to as "structural signals," and subsurface hydraulic conditions, which we refer to as "hydrocarbon signals." At this point, we will contrast these new structural and hydrocarbon signals with those signals found over known oil and gas accumulations in the area. This comparative process, which we discuss in greater detail below, is very similar to that used in seismic interpretation.

. Our geological team then puts each identified SFD Anomaly into subsurface context using our in-house geological database. The SFD Anomaly may then become a "SFD Lead," if the structural and hydrocarbon signals of the SFD Anomaly appear to coincide in proper geologic context. In other words we answer the question, does the anomaly make sense where it appears in the sedimentary basin? Where we have sufficiently qualified an SFD Lead with further SFD Data acquired from additional surveys, we reclassify the lead as a "Recommended SFD Prospect" and tender it to our joint venture partner for its further geological and geophysical evaluation.

In reaching its conclusion as to the coincidence of favorable geology and structural or hydrocarbon signals, our geological team will evaluate the following factors in the overall context of its understanding of the local geology:

. "Templating" Signals With Those Of Known Oil And Gas Accumulations

Our geological team compares or "templates" the anomalous structural and hydrocarbon signals with those of known oil and gas accumulations since oil and gas exploration is, by its inherent nature, a "comparative" process. Geologists and geophysicists constantly compare data for exploration areas to that from known producing regions that are either nearby or exhibit similar subsurface characteristics. Our process is similar in that we compare the structural or hydrocarbon signals from our anomalies to those signals from a nearby producing field or other known fields that exhibit similar patterns.

. Signals Characteristics

The most common and reliable SFD signals are structural signals, which indicate the existence of potentially seismically-identifiable subsurface mechanical conditions such as structural traps, strata types and other geologic features and characteristics that commonly trap oil and gas accumulations ("seismically-identifiable structures"). Our experience is that our SFD technology recognizes seismically-identifiable structural traps and other geologic features with a high degree of accuracy.

While the rate of corroboration is fairly high, the mere existence of seismically-identifiable structures does not mean that oil and gas is present. Rather, it merely infers that oil and gas may be present, since these geologic features and characteristics represent common trapping mechanisms. Industry experience has proven, for example, that the majority of seismically-identifiable structures do not trap commercial quantities of oil and gas. This is what makes "wildcat" exploration--where test wells are drilled in unproven areas distant from existing known pools usually based upon seismic interpretations or geological mapping--so risky. For example, the current oil industry rate of success in drilling productive wells in true wildcat exploration areas, based upon the ability of the well to produce sufficient hydrocarbons to repay its drilling costs and provide some return on equity, is only 10% to 20%, or one well out of five to ten wildcat wells drilled.

The hydrocarbon signals are less common than structural signals. However, when hydrocarbon signals are present, they are complimentary to, and in some cases more probative than, our structural signals since:

. Hydrocarbon signals directly indicate oil and gas accumulations, while the structural signals only infer oil and gas accumulations for the reasons indicated above;

. The confluence of both structural and hydrocarbon signals, when present, enhances our comfort level in a commercial trap; and

. The hydrocarbon signal alone lends itself to the potential identification of an abundant number of oil and gas accumulations that are "stratigraphically trapped" which are generally less susceptible to detection by seismic methods.

The major drawback to date of our hydrocarbon signal is its relative inability on its own to indicate the depth of hydrocarbon accumulations or the number of oil and gas bearing zones, which we attempt to address through the templating process described above.

While we believe based upon our experience that our SFD technology is fairly effective in identifying oil and gas pools, and particularly large fields, this belief will only be proven by drilling results from a representative group of stratigraphic pools that do not carry structural signals.

What Happens When We Tender Recommended SFD Prospects To Our Joint Venture Partners

Once we tender a Recommended SFD Prospect to one of our joint venture partners, they conduct whatever conventional geological, geophysical and economic evaluations of the prospect they may deem prudent in making a decision to proceed with drilling. If the joint venture partner decides to drill a Recommended SFD Prospect, the prospect is characterized as an "Accepted SFD Prospect," in which case we can elect to either receive our 5% to 8% overriding royalty or to participate in the drilling and production of the prospect through our working interest election.

How Fast Can We Acquire And Interpret SFD Data

We are able to fly our SFD Survey System at 150 to 200 mph, and can survey 600 to 800 linear miles in a four-hour day of recording. For each day of recording, it takes our staff between one to five days of data processing and interpretation--including plotting flight routes, screening and analyzing anomalies, putting the anomalies in geologic context, and ranking the anomalies--to sufficiently identify and recommend the SFD Prospects from that flight line. The actual amount of time required is ultimately determined by the following factors:

. The number and types of SFD Anomalies identified on the flight line;

. The quality of the SFD Data;

. The complexity of the subsurface geology under the flight line;

. The amount of available geological information; and

. The amount of SFD Data available from other SFD survey flights intercapting the potential prospect.

As a consequence, we are able to record and interpret 800 linear miles of SFD Data acquired in one SFD survey flight over a period of only a few days at a cost of $5 to $10 per mile. By way of comparison, traditional land-based seismic crews record up to five linear miles of 2D seismic per day, depending on acquisition parameters, at costs of approximately $5,000 to $20,000 per mile. Two or more weeks are then required to process the data, followed by another several weeks for interpretation. As a result, it can take a minimum of six months to record and interpret 1,000 linear miles of new 2D seismic data, at a total cost of $5 million to $20 million. Greatly adding to these direct seismic expenses are the obvious opportunity costs of allowing aggressive competitors with comparable seismic capabilities an equal chance to record data during the same six month interpretation period. With our SFD technology, opportunity costs due to time lag are negligible.

We identify approximately twenty SFD Leads on average for each four-hour day of surveying, and ultimately tender, on average, two or 10% of these leads to our joint venture partners as Recommended SFD Prospects for further evaluation. The SFD Prospects which we tender can be pool to field-sized targets that could require two to ten wells or more to exploit depending upon accumulation. At our current projected annual rate of six to eight survey days per month per ten months of airplane annual operational availability, we anticipate we can identify 120 to 160 Recommended SFD Prospects per year assuming no excessive downtime. We anticipate that we will increase our monthly flying rate at some future date as we increase our efficiencies, which would result in a corresponding increase in the number of Recommended SFD Prospects we identify. The actual number of these Recommended SFD Prospects that are accepted and ultimately drilled by our joint venture partners will, however, be dependent upon any number of competitive, geological and environmental variables.

Longer-Term Issues That Effect The Timing Of SFD Surveys And Interpretation

Before we tender a Recommended SFD Prospect to a joint venture partner, we will typically interpret two or more SFD Data sets for the prospect, which requires in turn a corresponding number of SFD survey

flights to acquire the data. If we are not able to acquire sufficient quality SFD Data for an SFD Lead from a single survey project, then we will be able in many instances to evaluate this information and tender the Recommended SFD Prospect to the joint venture partner in a matter of days following commencement of the interpretation process. However, in many cases we must perform additional survey flights over a target zone at a later date due to a number of factors, including delays attributable to weather, a need to acquire more definitive SFD Data, and requests by the joint venture partner to further define the Prospect or its surrounding area. Also, since we acquire SFD Data during our entire flight rather than limiting the data acquisition process to our targeted zones, we typically encounter new SFD Leads outside these zones which will require additional SFD Data for their further evaluation. It may take several weeks or even months to perform follow-up surveys on these SFD Leads due to impending survey and interpretation obligations to current joint venture partners, as well as weather conditions which may impede our ability to fly. We anticipate that a number of these timing issues will be addressed as we augment our current operational capacity with additional survey aircraft and interpretation staff.

Longer-Term Issues That Effect The Timing Of Land Acquisition And Drilling

We believe that our joint venture partners will not only be more successful in their drilling programs as a result of their reliance on our SFD technology, but also be capable of accessing superior opportunities more quickly than their competitors. However, the time it may take for a joint venture partner to get to the drilling stage of an SFD Prospect can still be lengthy depending upon any number of factors, including the following:

. Regardless of the quality of SFD Data we have to support our recommendation in tendering a Recommended SFD Prospect, it currently remains necessary for our joint venture partners to conduct further geological and geophysical evaluations, including 2D or 3D seismic surveys where warranted, of each Recommended SFD Prospect. Because our SFD technology is a reconnaissance instrument, this must be done to determine the optimum drilling location and potential pay zone depth.

. In some cases our joint venture partners may have the ability to conduct their geologic and geophysical evaluation relatively quickly, such as in circumstances where they have or can obtain sufficient quality commercial or proprietary local seismic data. However, in many cases, particularly those where we identify promising SFD Prospects outside target survey areas in which our joint venture partners already own drilling rights, local seismic data will not be existent or available. Seismic surveying, especially 3D seismic, requires governmental and environmental permits, satisfied surface land owners, and competent recording crews, among other things, and usually takes several months to acquire and process.

. If our joint venture partners do not own mineral and drilling rights to a specific prospect, they must obtain these rights in order to drill. Negotiating deals with current mineral owners can be complicated, time consuming and frustrating, particularly when the prospective mineral rights lie in a highly competitive exploration area, or are already held by an oil & gas company. Some of the factors which influence our joint venture partners' ability to acquire the mineral and drilling rights at all, or the cost they must pay to acquire these rights, include:

. whether the prospect lies in an active and competitive exploration area;

. current oil & gas prices and their perceived direction;

. the duration of the remaining term of a mineral lease;

. the size and configuration of the mineral holdings sought (contiguous land positions are more valuable and therefore more expensive to acquire than patchwork holdings); and

. the proximity of oil and gas gathering and processing infrastructure.

Also, our joint venture partners might be required, in the case of a farm-in, to first participate in the drilling of a location outside of our prospect in order to earn the right to later drill at the site of the prospect. This is done occasionally to earn valuable acreage "through the drill bit."

. When mineral rights are held by the federal or state government, or held by the Crown (Canada), these lands may be acquired by posting for sale, but remain subject to the uncertainties of the bidding or auction process, and may require a considerable lead time before being offered for bid.

Our Business And Geographic Segments

We currently operate in only one business segment, oil and natural gas exploration, insofar as we intend to develop all oil and natural gas exploration prospects identified using our proprietary "SFD" remote-sensing airborne survey technology either directly for our account or indirectly for our account through working interest or overriding royalty interests through our joint venture partners. We do not currently sell or market our SFD Data as a separate product to third parties. For geographical segment information, see note 18 to our consolidated financial statements included in Item 14 of this annual report.

Joint Venture Partners

Canadian Exploration Joint Venture With Encal Energy Ltd.

Our Canadian joint venture partner is Encal Energy Ltd., located in Calgary, Alberta, Canada. Encal is an intermediate Canadian exploration company listed on the Toronto and New York Stock Exchanges. As of December 31, 1999, Encal had total assets of Cdn. $775 million and 103,567 mboe of total proved reserves. For 1999, Encal averaged 13,862 barrels per day of oil and natural gas liquid production and 153 million cubic feet per day of natural gas production.

Our current relationship with Encal is governed by the terms of an Exploration And Joint Venture Agreement entered into in September 1997, and which expires on September 15, 2000. This agreement replaced two prior joint venture agreements entered into with Encal during 1996 and 1997. We are currently in negotiations with Encal relative to extending the term of our current joint venture agreement, and modifying some of its terms to comport with our current business practices.

The material terms of the joint venture agreement with Encal/1/ are summarized as follows:

. We are required to conduct SFD surveys on selected "exploration areas" identified by Encal of up to 2,400 square miles, and Encal is required to reimburse us for 50% of all daily aircraft rental, pilot salary, food and accommodation costs we incur to conduct these surveys. We retain the right to reject any presented exploration area for any bona fide reason, including safety or technical concerns.

. When we have completed our survey, screening and interpretation activities with respect to an exploration area, we are required to present Encal a written report listing our Recommended SFD Prospects and a summary of our interpretations for the flight lines within the exploration area, as

/1/ The terminology or defined terms we use in this section comports with our current nomenclature instead of that used in the Encal joint venture agreement in order to avoid confusion.

well as a map of flight lines and locations of all SFD Anomalies from the flight within the exploration area. We are also obligated to give Encal the opportunity to review the SFD Data in our offices.

. Once we have tendered our report to Encal, it will have 90 days to conduct conventional geological and geophysical evaluation of each Recommended SFD Prospect tendered to it in order to determine whether it will accept the prospect for potential drilling. If Encal accepts the exploratory prospect, it will become an Accepted SFD Prospect. If Encal rejects the prospect, we will attempt to agree on a procedure for its joint exploitation. If we cannot reach agreement with Encal on a mechanism to exploit the prospect, it will become our exclusive property and we may deal with it in any manner we deem appropriate, subject to a two year confidentiality restriction if the prospect is located on specified Encal lands.

. If Encal elects to drill a test well on an Accepted SFD Prospect, we will have the right, at that time, to elect to either participate in drilling the prospect on a working interest basis along the lines discussed below, or receive a sliding scale overriding royalty on Encal's share of production from the prospect on the lines discussed below. If we elect to participate on a working interest basis on any Accepted SFD Prospect, we will later be given a second election, to be exercised after Encal acquires drilling rights for the prospect but before Encal spuds its first test well on the prospect, to convert our working interest in the prospect into an overriding royalty interest.

. Should we elect to participate on a working interest basis, we will be obligated to bear 45% of Encal's land acquisition, drilling and development costs for that well (unless it is a farm-in well which is fixed at 40%), and will be entitled to receive a commensurate percentage of all revenues received by Encal after the deduction of royalties, severances taxes and production and marketing costs.

. Should we elect an overriding royalty, we will receive a minimum of 5% and a maximum 8% of Encal's net revenues for crude oil, depending on the productivity of the well, and a flat 8% of Encal's net revenues for all other petroleum substances, including natural gas.

. We are obligated, whenever the number of active Recommended SFD Prospects is less than fifteen, to devote at least 50% of our worldwide survey capacity to identify prospects for Encal, until the amount or "inventory" of active Recommended SFD Prospects reaches eighteen. For purposes of the foregoing, the following exploration prospects are not included in the "inventory" of active Recommended SFD Prospects:

. Any Recommended SFD Prospect for which Encal is unable to obtain drilling rights;

. Any Recommended SFD Prospect on which Encal drills a test well; and

. Any Recommended SFD Prospect rejected by Encal.

. We have also agreed that:

. we will have no more than two additional joint venture partners in Canada, although there are no restrictions on the number of joint venture partners we may utilize outside of Canada;

. we will not grant larger or more numerous exploration areas to any other joint venture partners than those granted to Encal;

. Encal will have the exclusive right for SFD surveys in the Province of British Columbia, and at least 50% of the aggregate area in selected regions of the Province of Alberta; and

. Encal will be afforded a first opportunity to participate in any transaction utilizing our SFD technology to explore for petroleum substances outside of Canada, where, in our sole judgment, there is an opportunity for Encal to participate as operator or a participant provided

that role is available; and also provided that we believe it is appropriate for Encal to perform that role.

. Encal will be the operator, and will make all decisions relating to and control for all prospects developed by the joint venture. In this regard, Encal will be responsible for

. conventional oil and gas exploration, operation, development and management of the joint venture and any of its oil and gas properties; and

. the production and marketing of any petroleum substances which are produced from the joint venture.

. Should production be processed through Encal's production facilities, we will pay Encal a reasonable proportional fee for the use of these facilities. If production is processed through a third-party's production facilities, we will be charged our portion of the actual costs for services performed.

It should be noted that as of the date of this annual report our company and Encal are not strictly following the prospect tendering and prospect evaluation time periods mandated in the Encal joint venture agreement insofar as we are currently working on the processes inherent in meeting these periods due to the evolving nature of the SFD identification and interpretation processes. We are also using a combination working interest/overriding royalty election in lieu of that specified in the Encal joint venture agreement.

United States Exploration Joint Venture With CamWest Exploration LLC

Our United States-based joint venture partner is CamWest Exploration LLC, a privately held oil and gas exploration company located in Denver, Colorado, and McKinney, Texas. CamWest is principally owned by Stephens Group, Inc., a private company headquartered in Little Rock, Arkansas, which invests primarily in energy, media, telecommunications and investment banking companies, and which has invested $8.5 million in our company through CamWest's affiliates.

Our current relationship with CamWest is governed by the terms of a Joint Exploration And Development Agreement which we entered into in April 1998, and which expires in March, 2003. This agreement was originally entered into with an affiliate of CamWest, CamWest Limited Partnership. However, CamWest Limited Partnership assigned its rights and obligations under the joint venture agreement to CamWest on January 29, 1999, in order to establish an entity dedicated solely to SFD exploration and drilling activities.

The material terms of the joint venture agreement with CamWest/2/ are as follows:

. We are required to conduct SFD surveys on selected "exploration areas" in the United States or internationally outside of Canada identified by CamWest of up to 2,400 square miles, and CamWest is required to reimburse us for 100% of all daily aircraft rental, pilot salary, food and accommodation costs we incur to conduct these surveys. We retain the right to reject any presented exploration area for any bona fide reason, including safety or technical concerns.

. When we have completed our survey screening and interpretation activities with respect to an exploration area, we are required to present CamWest a written report listing our Recommended SFD Prospects and a summary of our interpretations for the flight lines within the exploration area,

/2/ The terminology or defined terms we use in this section comports with our current nomenclature instead of that used in the Encal joint venture agreement in order to avoid confusion.

together with a map of flight lines and locations of all SFD Anomalies from the flight within the exploration area.

. Once we have tendered our report to CamWest, it will have 90 days, at its sole cost, to conduct conventional geological and geophysical evaluation of each Recommended SFD Prospect tendered to it in order to determine whether it will drill a test well on the prospect. If CamWest decides to drill the exploratory prospect, it will become an Accepted SFD Prospect. If CamWest declines to drill, the prospect will be deemed rejected, in which case it will be tendered to a limited liability company which will be managed by CamWest, and owned 50% by us and 50% by CamWest, for joint exploitation.

. Once CamWest elects to drill a test well on any Accepted SFD Prospect, we will be deemed to have a 45% working interest in that well along the lines discussed below; provided, however, we shall have the right, for a period of 15 days after CamWest notifies us it intends to drill, or 48 hours after notice that a drilling rig is located on the test well site if sooner, to reconsider our election. In this case we may either choose to either retain our 45% working interest, or reduce our working interest to a percentage less than 45%, or convert our entire interest to an overriding royalty along the lines discussed below.

. Should we elect to participate on a working interest basis, we will be obligated to bear our elected percentage (i.e., 45% or less) of CamWest's land acquisition, drilling and development costs for that well, and will be entitled to receive a commensurate percentage of all revenues receives by CamWest after the deduction of royalties, severances taxes and production and marketing costs.

. Should we elect an overriding royalty, we will receive a 5% royalty of CamWest net revenues if production is less than 1,000 barrels of oil or oil equivalents per month, and an 8% royalty when production equals or exceeds 1,000 barrels of oil or oil equivalents per month.

. We are obligated, whenever the "inventory" of active Recommended SFD Prospects is less than 31, to commence and continue SFD surveying until there are again 36 Recommended SFD Prospects in active inventory.

. We have also agreed that:

. whenever the number of active Recommended SFD Prospects in active inventory for CamWest is below the minimum requirement, we will dedicate at least 50% of our worldwide SFD survey capacity toward CamWest's requirements, unless we have obligations under three or more other joint venture agreements, in which case we must dedicate at least 25% of our worldwide SFD survey capacity to CamWest; and

. CamWest will have the exclusive rights for SFD surveys in 2,400 square mile "exclusive areas" selected by CamWest outside of Canada; provided, however, that these areas are limited to a total of 1,000,000 square miles within the United States and an additional 1,000,000 square miles outside of the United States and Canada.

. CamWest will be the operator, and will make all decisions relating to management and control of, all Recommended SFD Prospects developed under the joint venture. In this regard, CamWest will be responsible for

. conventional oil and gas exploration, operation, development and management of the joint venture and any of its oil and gas properties; and

. the production and marketing of any petroleum substances which are produced from the joint venture

. Should production be processed through CamWest's production facilities, we will pay CamWest a reasonable proportional fee for the use of these facilities. If production is processed through a third-party's production facilities, we will be charged our portion of the actual costs for services performed.

It should be noted that as of the date of this annual report our company and CamWest are not strictly following the prospect tendering and prospect evaluation time periods mandated in the CamWest joint venture agreement insofar as we are currently working on the processes inherent in meeting these periods due to the evolving nature of the SFD identification and interpretation processes. We are also using a combination working interest/overriding royalty election in lieu of that specified in the CamWest joint venture agreement.

Renaissance Energy Survey Agreements

We had previously entered into several short-term survey agreements with another Canadian exploration company, Renaissance Energy Ltd., whereby we survey designated exploration blocks and tendered Recommended SFD Prospects to Renaissance for drilling with specified timeframes. Although we tendered several Recommended SFD Prospects to Renaissance, they did not drill exploratory wells on these prospects principally for economic reasons given low oil and gas prices at that time, and the last of the agreements lapsed without renewal in December 1999.

Competition

Since we use our SFD technology for wide-area oil and gas reconnaissance exploration, our "competition" would generally be described as other technologies used for wide-area oil and gas reconnaissance exploration. The principal competitive technology in this regard would be seismic, which is well accepted in the industry and has, in fact, been used since 1919. While there are numerous industry competitors of all sizes which offer seismic services, the largest industry competitors to our knowledge are Baker Hughes Inc., Schlumberger Limited, Compagnie Generale de Geophysique, S.A, Seitel, Inc., Veritas DGC Inc. and Petroleum Geo-Services A.S.A.

There are also a number of other technologies used in the industry for "passive" wide-area oil and gas reconnaissance exploration, including aeromagnetic, gravity, ground or surface radar, satellite surveys, telemetrics and spectrum analyzers, however, we do not believe that any of these technologies have been accepted in the industry as a highly predictive general exploration tool.

To our knowledge there are no other companies in the oil and gas exploration industry who employ any quantum physics-based technology similar to our SFD technology.

While the technologies noted above are competitive to ours in the sense that all are used for wide-area reconnaissance exploration, you should note that there is no direct competition in the sense that we do not offer the use of our SFD technology to the industry on a fee-for-service basis as is ordinarily the case with respect to the providers of these other technologies. Consequently, we do not have any customers for our SFD technology other than our two present joint venture partners.

Employees

As of December 31, 1999, we had fifteen full time employees. None of these employees are covered by collective bargaining agreements. Of these employees, five devote their full time and one devotes one-half of his time to SFD survey operations and SFD Data interpretation, and three devote their full time and one devotes one-half of his time to research and development. The balance provide administrative, information management and accounting support for all operations. We believe we have a favorable relationship with all of our employees. We have employment contracts with our four senior executives.

Research and Development

Our research and development activities to date have focused on developing, improving and testing our SFD Survey System and related components. Our research and development expenses amounted to $272,489, $57,823 and $103,079 for our 1999, 1998 and 1997 fiscal years, respectively. Our research and development budget for fiscal 2000 is $400,000.

Manufacturing Capacity and Suppliers

All components of our SFD technology, other than readily available computer hardware and software, are fabricated at our facilities by either Momentum Resources Corporation or our company, using readily available materials, pursuant to Momentum's or our specifications. We are not dependent upon any third party contract manufacturers or suppliers to satisfy our manufacturing requirements.

Governmental And Environmental Regulation

SFD Survey Flight Operations

The operation of our business, namely, conducting aerial SFD surveys and interpreting SFD Data, is not subject to material governmental or environmental regulation with the exception of flight rules promulgated by the Federal Aviation Administration and Transport Canada governing the use of private aircraft, including rules relating to low altitude flights.

Oil And Gas Exploration And Development Projects

The oil and natural gas industry in general is subject to extensive controls and regulations imposed by various levels of the federal and state governments in the United States and federal and provincial governments in Canada. In particular, oil and 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 generally are intended to prevent waste of oil and natural gas; protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production; and control contamination of the environment. Environmental regulations affect our operations on a daily basis. Public interest in the protection of the environment has increased dramatically in recent years. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend of more expansive and 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 project 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 action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general would have a material adverse effect on our business, results of operations and financial position.

Operating Hazards

SFD Survey Flight Operations

The operation of our SFD survey aircraft is subject to the usual hazards incident to general and low level flight operations. These hazards can cause personal injury and loss of life, as well as severe damage to and destruction of property. While we maintain insurance coverage against some, but not all, operating risks associated with the operation of our aircraft, we cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase, nor can we give any assurance that any claim would not exceed our policy limits. If we were unable to procure insurance for our flight operations at an acceptable cost, the occurrence of significant adverse aircraft accident not fully insured or indemnified against could have a material, adverse effect on our business, financial condition

and operating results. Similarly, a judgment or settlement in excess of our policy limits could also have a material, adverse effect on our business, financial condition and operating results.

Oil And Gas Exploration And Development Projects

The oil and gas exploration and development projects in which we participate through our joint venture partners will also be subject to the usual hazards incident to the drilling of oil and gas wells, including the risk of fire, explosions, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. In addition to the foregoing, offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. These hazards can cause personal 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 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 operating 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 any 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.

Since we do not act as operator on any projects in which we may participate, we are dependent upon our partners to conduct operations in a manner so as to minimize these operating risks.

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 an direct material, adverse effect on our business, financial condition and operating condition. 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 operating results to the extent it adversely affects our joint venture partner's ability to complete current projects or explore for and develop additional projects.

Our SFD Technology License

We do not own our SFD technology, but instead have an exclusive world-wide license to use the SFD Data acquired by the SFD Sensor for hydrocarbon identification and exploration purposes (the "SFD Technology License") which was granted to us by Momentum Resources Corporation, which is the owner of the SFD technology. We do, however, own our data acquisition systems used with the SFD Sensor.

The terms of our license are governed by a Restated Technology Agreement which was entered into on August 1, 1996 by NXT, NXT USA and Momentum, and subsequently amended on April 3, 1998. Momentum is a Bahamas corporation which is indirectly owned and controlled by Messrs. George Liszicasz and R. Dirk Stinson, who were also parties to the SFD Technology License. Mr. Liszicasz, who is the inventor of the SFD technology, is also our largest stockholder and the Chief Executive Officer and a director of our company. Mr. Stinson is our second largest stockholder and one of our directors.

The material terms of the SFD Technology License, as amended, are summarized as follows:

. Momentum is obligated to make the SFD Sensor available to our company for use on our SFD surveys in conjunction with our data acquisition and interpretation equipment, and must also provide all SFD Data acquired from each survey to our company for our exclusive use for hydrocarbon identification and exploration purposes.

. Mr. Liszicasz is obligated to:

. provide at least 500 man-hours per year to generate SFD Data, and

. interpret and analyze all raw SFD Data.

. We will have 180 days after the designation of a "Prospect" to use our best efforts to commercially and economically exploit the Prospect for its hydrocarbon potential, subject to specified exceptions.

. We are obligated to pay Momentum certain amounts which will be contingent on the commercial exploitation of the Prospects by our company, specifically, 1% of any "prospect profits" we may actually receive on or before December 31, 2000, and 5% of any "prospect profits" we may actually receive after December 31, 2000. For purposes of the foregoing:

. the term "prospect profits" means "prospect revenues" less "prospect expenses;",

. the term "prospect revenues" means as the aggregate of all gross revenues we may receive with respect to the commercial exploitation of all Prospects under the SFD Technology License, whether through cash flows of a joint venture, sale of "leads" for Prospects, or revenues from our direct ownership and sale of hydrocarbons from Prospects; and

. the term "prospect expenses" being defined as all project expenses actually paid by our company with respect to the commercial exploitation of all SFD Prospects.

. In addition to the noted payments, commencing on January 1, 2001, we will become obligated to grant Momentum warrants to purchase 16,000 shares of our common stock for each month in which Prospect production exceeds 20,000 barrels of hydrocarbons. The exercise price for these warrants will be the "fair market value" of our common stock as determined by reference to the closing price on the last business day of the quarter of the calculation.

. Momentum is prohibited during the term of the SFD Technology License from engaging in the identification or exploitation of hydrocarbons for its own account, and cannot grant any license or sublicense to any third party to use the SFD Sensor or the SFD Data for the identification or exploitation of hydrocarbons.

. The initial term of the SFD Technology License expires on December 31, 2005, however, it will renew automatically for additional one year terms unless we give written notice to Momentum, no later than 60 days prior to the expiration of the pending term, of our election not to automatically renew the SFD Technology License.

. Momentum, in turn, reserves the right to terminate the SFD Technology License upon the occurrence of any of the following events:

. Our failure to make any payment required under the SFD Technology License.

. Our abandonment or discontinuance of the conduct of the oil and gas exploration business;

. Our dissolution or liquidation;

. Our assignment of our assets for the benefit of our creditors, or our filing bankruptcy, or the appointment of a receiver for our business or property; or

. Our failure to perform any other material covenant, agreement or term of the SFD Technology License.

. Momentum may also terminate the SFD Technology License upon the occurrence of a "Change in Control" with respect to our company. For the purposes of the foregoing, the term "Change in Control" is defined as any of the following events:

. an acquisition whereby immediately after the acquisition, a person holds beneficial ownership of more than 50% of the total combined voting power of our then outstanding voting securities; or

. if in any period of three consecutive years after the date of the SFD Technology License, our incumbent Board of Directors at the beginning of that period ceases to constitute a majority of the Board of Directors for reasons other than:

[_] voluntary resignation,

[_] refusal by one or more Board members to stand for election, or

[_] removal of one or more Board members for good cause, provided that:

. if the nomination or election of any new director was approved by a vote of at least a majority of the incumbent board, then such new director shall be deemed a member of the incumbent board, and

. no individual shall be considered a member of the incumbent board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14a-11 promulgated under the Securities Exchange Act of 1934); or

. our Board of Directors or stockholders approve:

[_] our merger, consolidation or reorganization;

[_] our complete liquidation or dissolution; or

[_] the agreement for the sale or other disposition of all or substantially all of our assets;

. provided, however, a Change in Control shall not be deemed to occur in the event of any of the following:

[_] our redemption of our stock; or

[_] a "non-control transaction" in which our stockholders immediately before a transaction, directly or indirectly own immediately after the transaction at least a majority of the total combined voting power of the outstanding voting securities of the surviving corporation, in substantially the same proportion as those stockholders' ownership of our voting securities immediately before such transaction.

We May Be Unable To Protect Our Proprietary Rights To Our SFD Data And The SFD Technology

As noted above, we have the exclusive right to utilize SFD Data for hydrocarbon exploration pursuant to the terms of our Restated Technology Agreement with Momentum Resources Corporation. While Momentum claims common law ownership of the SFD Technology, it has not obtained patent or copyright protection for the SFD Technology. Based in part on an opinion of patent counsel, Momentum and our company each believe that the disclosure risks inherent in patent or copyright registration far outweigh any legal protections which might be afforded by such registration. In the absence of significant patent or copyright protection, we may be vulnerable to competitors who attempt to imitate our SFD technology, or to develop functionally similar technologies.

Although we believe that we have all rights necessary to market our services without infringing upon any patents or copyrights held by others, we cannot give you any assurance that conflicting patents or copyrights do not exist. We rely upon trade secret protection and confidentiality and non-disclosure agreements with our employees, consultants, joint venture partners and others to protect our proprietary rights. Furthermore, we do not believe, were Momentum to apply for and receive patent protection, that patent protection would necessarily protect Momentum or our company from competition. Momentum and our company therefore anticipate continued reliance upon contractual rights and on common law to protect our trade secrets. The steps taken by our company and Momentum to protect our respective rights may not be adequate to deter misappropriation, or to preclude an independent third party from developing functionally similar technology.

We cannot give you any assurance that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Momentum's or our trade secrets, or otherwise disclose aspects of the SFD technology, or that we will be able to meaningfully protect our trade secrets. We also cannot give you any assurance that Momentum or our company will not be required to defend against litigation or to enforce or defend intellectual property rights relating to our SFD technology. Legal and accounting costs relating to prosecuting or defending intellectual property rights may be substantial.