UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1 )

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

OR

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number 001-32145

CANARGO ENERGY CORPORATION

Delaware		91-0881481
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

P.O. Box 291, St Peter Port, Guernsey, British Isles GY1 3RR
(Address of principal executive offices)

Registrant’s telephone number, including area code:
+(44) 1481 729 980

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.10 per share		American Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

     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 o NO þ

     Indicate by check mark whether the registrant: (1) 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 þ NO o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

     The aggregate market value of the voting and non voting common equity held by-non-affiliates was approximately $248 million as of 10 March 2006, based upon the last reported sales price of such stock on The American Stock Exchange on that date. For this purpose, the Registrant considers Dr. David Robson, Vincent McDonnell, Michael Ayre, Russ Hammond and Nils Trulsvik to be its only affiliates.

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, $0.10 par value, 224,108,606 shares outstanding as of 10 March, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement issued in connection with its 2006 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report. Other documents incorporated by reference in this Report are listed in the Exhibit Index.

 

 

CANARGO ENERGY CORPORATION

FORM 10-K/A
TABLE OF CONTENTS

		Page
PART II
Item 6.    Selected Financial Data			4
Item 8.    Financial Statements and Supplementary Data			4
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			5
Item 9A. Control and Procedures			5
Item 9B. Other Information			11
PART IV
Item 15.   Exhibits, Financial Statement Schedules			11
Signatures			13
Exhibit Index			14
Certifications			15
EX-23.1: CONSENT OF L J SOLDINGER ASSOCIATES LLC
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

EXPLANATORY NOTE

     CanArgo Energy Corporation (the “Company”) is hereby amending this Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “Report”), solely to revise Items 6, 8, 9 and 15 of Part II of the Report as hereinafter set forth. The revisions are intended to respond to the comments of the staff of the Securities and Exchange Commission resulting from their recent review of the Company’s Annual Report on Form 10-K. This Amendment No. 1 to the Report continues to speak as of the date of the Report, and we have not updated the disclosures contained in this Amendment No. 1 to the Report to reflect any events that occurred at a date subsequent to the filing of the Report. The filing of this Amendment No. 1 to the Report is not a representation that any statements contained in items of the Report other than that information being amended are true or complete as of any date subsequent to the date of the Report. The revision does not affect the remaining information set forth in the Report, the remaining portions of which have not been amended.

ITEM 6. SELECTED FINANCIAL DATA.

     Reference is hereby made to the Section entitled “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” with respect to certain qualifications regarding the following information.

     The following data reflect the historical results of operations and selected balance sheet items of CanArgo and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” herein.

		Year Ended December 31,
Reported in $000’s Except for per Common Share Amounts		2005				2004				2003				2002				2001
Financial Performance
Operating revenues from continuing operations			7,582				9,574				8,105				5,486				4,575
Operating loss from continuing operations			(11,009	)			(2,954	)			(159	)			(4,902	)			(11,838	)
Other income (expense) and Minority Interest in income (loss) of consolidated subsidiaries			(1,327	)			(2,346	)			(597	)			(576	)			525
Net loss from continuing operations			(12,335	)			(5,300	)			(756	)			(5,478	)			(11.313	)
Net income (loss) from discontinued operations, net of taxes and minority interest(1)			—				542				(6,608	)			150				(1,905	)
Cumulative effect of change in accounting policy			—				—				41				—				—
Net loss			(12,335	)			(4,758	)			(7,323	)			(5,328	)			(13,218	)
Net loss per common share — basic and diluted before cumulative effect of change in accounting principle from continuing operations			(0.06	)			(0.04	)			(0.01	)			(0.06	)			(0.14	)
Net loss per common share — basic and diluted before cumulative effect of change in accounting principle from discontinued operations			(0.06	)			(0.04	)			(0.07	)			(0.00	)			(0.02	)
Net loss per common share — basic and diluted			(0.06	)			(0.04	)			(0.08	)			(0.06	)			(0.16	)
Cash generated by (used in) operations			(4,651	)			(3,781	)			4,431				1,635				(6,289	)
Working capital			15,078				23,952				3,890				10,646				14,590
Total assets			147,448				105,160				73,360				70,736				70,312
Long term obligations			26,524				1,254				—				—				—
Minority shareholder advances			—				—				—				—				450
Options with redemption feature			2,120				—								—				—
Stockholders’ equity			107,849				96,821				56,708				62,105				65,800
Cash dividends per common share			—				—				—				—				—

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The Financial Statements required to be filed in this Report begin at Page F-1 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

ITEM 9A. CONTROLS AND PROCEDURES.

Management’s Responsibility for Financial Statements

     Our management is responsible for the integrity and objectivity of all information presented in this Annual Report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations. The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, L J Soldinger Associates LLC and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, is defined in the rules promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting procedures (“GAAP”) and includes those policies and procedures that:

	•		pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
	•		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and
	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the framework in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. As of December 31, 2005, we have concluded that our internal control over financial reporting was ineffective as of December 31, 2005 and that we have material weaknesses in each of the following areas:

1. Financial Statement Close Process

     The Company’s controls over the financial reporting close process were not consistently applied. As a result, the Company has a material weakness related to its ability to compile and review accurate financial statements.

	•		The financial statement close process relies heavily upon manual rather than automated system process controls and places significant reliance on spreadsheets;
	•		Formal policies and procedures in many functions including maintenance of the Chart of Accounts, financial statement close, purchasing, payroll, and cash management operations do not exist;
	•		Preparation and review of account reconciliations, particularly in Georgia and Kazakhstan, are not performed; and
	•		There is no review, reconciliation or approval of various schedules and reconciliations, including the transfer of amounts from subsidiary trial balances to consolidating spreadsheets prepared to support the financial close and disclosure processes

     These material weaknesses related to the financial statement close process affect all of the Company’s significant accounts and could result in a material misstatement to the Company’s annual or interim consolidated financial statements that would not be prevented or detected.

2. Disclosure Controls

     The Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including chief executive officer and chief financial officer, as appropriate to allow timely decisions. Inadequate controls include the lack of procedures used for identifying, determining, and calculating required disclosures and other supplementary information requirements.

3. Information Technology

     The Company did not adequately implement certain controls over information technology, including certain spreadsheets, used in its core business and financial reporting. These areas included logical access security controls to financial applications, segregation of

duties and backup and recovery procedures. The Company’s controls over the completeness, accuracy, validity, restricted access, and the review of certain spreadsheets used in the period-end financial statement preparation and reporting process was not designed appropriately. This material weakness affects the Company’s ability to prevent improper access and changes to its accounting records.

4. Production

     The Company did not have effective controls and procedures to ensure that revenues and associated costs from the sales of its products based on production and transmission records between the Company and its third party production sharing partner were reconciled or correctly recognized. Controls associated with the product transmission are performed by the third party production sharing partner and there is no evidence that these controls have been reviewed by the Company.

     Deficiencies in the Company’s internal controls and procedures relating to the recording of production do not allow assurance that revenues and costs are recognized in accordance with generally accepted accounting principles.

5. Inventory Management

     The Company did not maintain a control environment that fully emphasized the establishment of, adherence to, or adequate communication regarding appropriate internal control for the management of its inventory, including the lack of documented procedures to update and review the material master file and valuation table or compare the cost of inventory to net realizable value.

     These weaknesses increased the likelihood of potential material errors in the Company’s financial reporting.

6. Entity Level Controls

     As evidenced by the material weaknesses described above, entity-level controls related to the control environment, risk assessment, monitoring function and dissemination of information and communication activities did not operate effectively. This includes a lack of adequate mechanisms for anticipating and identifying financial reporting risks and for reacting to changes in the operating environment that could have a potential effect on financial reporting. Such entity level controls, and a comprehensive monitoring of internal controls, are part of the framework to ensure that the designed system of internal control is operating effectively to ensure that significant transactions are adequately identified, recorded and disclosed.

     As a result, misappropriation of assets and misstatements in the financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner. In the light of the review Management, in consultation with the Audit Committee, is reviewing the most cost effective way to address the issues raised. Management considers that remediation measures will include the appointment of a Group Compliance Officer with responsibility for ensuring the preparation, review, testing and updating of the appropriate policies, procedures and standards. Recruitment of a Country Financial Controller in Kazakhstan to strengthen group reporting is underway.

     CEO and CFO Certifications — The Certifications of our CEO and CFO which are attached as Exhibits 31(1) and 31(2) to this Report include information about our disclosure controls and procedures and internal control over financial reporting. These Certifications should be read in conjunction with the information contained in this Item 9A for a more complete understanding of the matters covered by the Certifications.

Changes in Internal Control over Financial Reporting

     There were no changes in our internal control in the fourth quarter.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of CanArgo Energy Corporation

     We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that CanArgo Energy Corporation did not maintain effective internal control over financial reporting as of 31 December 2005, because of the effect of the Material Weaknesses Identified in Management’s Assessment, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO). CanArgo Energy Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment.

Information Technology

     The Company did not adequately implement certain controls over information technology, including certain spreadsheets, used in its core business and financial reporting. These areas included logical access security controls to financial applications, segregation of duties and backup and recovery procedures. The Company’s controls over the completeness, accuracy, validity, restricted access, and the review of certain spreadsheets used in the period-end financial statement preparation and reporting process was not designed appropriately. This material weakness affects the Company’s ability to prevent improper access and changes to its accounting records.

Financial Reporting Close Process

     The Company’s controls over the financial reporting close process were not consistently applied. As a result, the Company has a material weakness related to its ability to compile and review accurate financial statements.

     1. The financial statement close process relies heavily upon manual rather than automated system process controls and places significant reliance on uncontrolled spreadsheets;

     2. Formal policies and procedures in many functions including maintenance of the Chart of Accounts, financial statement close, purchasing, payroll, and cash management operations do not exist;

     3. Preparation and review of account reconciliations, particularly in Georgia and Kazakhstan, are not performed; and

     4. There is no review, reconciliation or approval of various schedules and reconciliations, including the transfer of amounts from subsidiary trial balances to consolidating spreadsheets prepared to support the financial close and disclosure processes

     These material weaknesses related to the financial statement close process affect all of the Company’s significant accounts and could result in a material misstatement to the Company’s annual or interim consolidated financial statements that would not be prevented or detected.

Disclosure

     The Company’s disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Inadequate controls include the lack of procedures used for identifying, determining and calculating required disclosures and other supplementary information requirements.

Production

     The Company did not have effective controls and procedures to ensure that revenues and associated costs from the sales of its products based on production and transmission records between the Company and its third party production sharing partner were reconciled or correctly recognized. Controls associated with the product transmission are performed by the third party production sharing partner and there is no evidence that these controls have been reviewed by the Company.

     Deficiencies in the Company’s internal controls and procedures relating to the recording of production do not allow assurance that revenues and costs are recognized in accordance with generally accepted accounting principles.

Inventory Management

     The Company did not maintain a control environment that fully emphasized the establishment of, adherence to, or adequate communication regarding appropriate internal control for the management of its inventory, including the lack of documented procedures to update and review the material master file and valuation table or compare the cost of inventory to net realizable value.

     These weaknesses increased the likelihood of potential material errors in the Company’s financial reporting.

Entity Level

     As evidenced by the material weaknesses described above, entity-level controls related to the control environment, risk assessment, monitoring function and dissemination of information and communication activities did not operate effectively. This includes a lack of adequate mechanisms for anticipating and identifying financial reporting risks and for reacting to changes in the operating environment that could have a potential effect on financial reporting. Such entity level controls, and a comprehensive monitoring of internal controls, are part of the framework to ensure that that the designed system of internal control is operating effectively to ensure that significant transactions are adequately identified, recorded and disclosed.

     As a result, misappropriation of assets and misstatements in the financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner.

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of CanArgo Energy Corporation and our report dated 9 March 2006 expressed an unqualified opinion.

     These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 financial statements, and this report does not affect our report dated 9 March 2006 on those financial statements.

     In our opinion, management’s assessment that CanArgo Energy Corporation did not maintain effective internal control over financial reporting as of 31 December 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, CanArgo Energy Corporation has not maintained effective internal control over financial reporting as of 31 December 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

L J Soldinger Associates LLC

Deer Park, Illinois USA
March 9, 2006

ITEM 9B. OTHER INFORMATION

     On March 14, 2006, we entered into an agreement (“Termination Agreement”) with Europa Oil Services Limited (“Europa”), an unaffiliated company, formally terminating the consultancy agreement between CanArgo and Europa dated January 8, 2004. Under the terms of the consultancy agreement, CanArgo had an outstanding obligation to issue up to 12 million shares of CanArgo common stock to Europa upon certain production targets being met from future developments under the Samgori PSC. With effect from February 16, 2006, we have withdrawn from the Samgori PSC. Pursuant to the terms of the Termination Agreement the parties accordingly agreed that the consultancy agreement had terminated with effect from February 16, 2006. CanArgo has not incurred any material early termination penalties as a result of the termination of the consultancy agreement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)(1) Financial Statements

     The following financial statements and related notes of the Company contained on pages F-1 through F-61 are filed as part of this Report:

     Reports of Independent Auditors

     Consolidated Statements of Operations — Years Ended December 31, 2005, 2004, and 2003.

     Consolidated Balance Sheets — December 31, 2005 and 2004.

     Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004, and 2003.

     Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2005, 2004 and 2003.

     Notes to Consolidated Financial Statements

     (2) Financial Statements Schedules

     None

     All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.

     (b) Exhibits

Documents filed herewith are identified by a cross (†).

† 23(1)		Consent of LJ Soldinger Associates LLC.
† 31(1)		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of CanArgo Energy Corporation.
† 31(2)		Rule 13a-14(c)/15d-14(a) Certification of Chief Financial Officer of CanArgo Energy Corporation.
† 32(1)		Section 1350 Certification of Chief Executive Officer.
† 32(2)		Section 1350 Certification of Chief Financial Officer.

SIGNATURES

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

CanArgo Energy Corporation (Registrant)
By: /s/ Jeffrey Wilkins
Jeffrey Wilkins
Chief Financial Officer (Principal Financial and Accounting Officer)

Date: January 10, 2007

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

Date: January 10, 2007
By: /s/ David Robson
David Robson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
Date: January 10, 2007
By: /s/ Vincent McDonnell
Vincent McDonnell, President, Executive Director, Chief Operating Officer and Chief Commercial Officer
Date: January 10, 2007
By: /s/ Michael Ayre
Michael Ayre, Director
Date: January 10, 2007
By: /s/ Russell Hammond
Russell Hammond, Director
Date: January 10, 2007
By: /s/ Nils N. Trulsvik
Nils N. Trulsvik, Director

EXHIBIT INDEX

† 23(1)		Consent of L J Soldinger Associates LLC
† 31(1)		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of CanArgo Energy Corporation.
† 31(2)		Rule 13a-14(c)/15d-14(a) Certification of Chief Financial Officer of CanArgo Energy Corporation.
† 32(1)		Section 1350 Certification of Chief Executive Officer.
† 32(2)		Section 1350 Certification of Chief Financial Officer.

CANARGO ENERGY CORPORATION

INDEX TO FINANCIAL STATEMENTS

Report on Management’s Responsibilities			F-2
Independent Auditors’ Report			F-3
Consolidated Balance Sheets			F-4
Consolidated Statements of Operations and Comprehensive Loss			F-5
Consolidated Statements of Cash Flows			F-6
Consolidated Statements of Stockholders’ Equity			F-7
Notes to Financial Statements			F-9

REPORT ON MANAGEMENT’S RESPONSIBILITIES

To the Stockholders of CanArgo Energy Corporation:

     CanArgo’s management is responsible for the integrity and objectivity of the financial information contained in this Annual Report. The financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States and, where necessary, reflect the informed judgements and estimates of management.

     Management maintains and is responsible for systems of internal accounting control designed to provide reasonable assurance that all transactions are properly recorded in the Company’s books and records, that procedures and policies are adhered to, and that assets are safeguarded from unauthorized use.

     The financial statements for 2005 and 2004 have been audited by the independent accounting firm of L J Soldinger Associates LLC, as indicated in their report. Management has made available to its outside auditors all the Company’s financial records and related data and minutes of directors’ and audit committee meetings.

     CanArgo’s audit committee, consisting solely of directors who are not employees of CanArgo, is responsible for: reviewing the Company’s financial reporting; reviewing accounting and internal control practices; recommending to the Board of Directors and shareholders the selection of independent accountants; and monitoring compliance with applicable laws and company policies. The independent accountants have full and free access to the audit committee and meet with it, with and without the presence of management, to discuss all appropriate matters. On the recommendation of the audit committee, the consolidated financial statements have been approved by the Board of Directors.

		/s/ Dr. David Robson				/s/ Richard Battey
		Dr. David Robson				Richard Battey
		Chief Executive Officer				Chief Financial Officer

March 16, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
CanArgo Energy Corporation
St Peter Port, Guernsey, British Isles

     We have audited the accompanying consolidated balance sheets of CanArgo Energy Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 statements presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CanArgo Energy Corporation as of December 31, 2005 and 2004, and its consolidated results of operations, changes in stockholders’ equity and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CanArgo Energy Corporation internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2005 expressed an unqulaified opinion on management’s assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.

L J SOLDINGER ASSOCIATES LLC

Deer Park, Illinois, USA
March 9, 2006

CANARGO ENERGY CORPORATION

Consolidated Balance Sheets

		December 31,
		2005				2004
		(Expressed in United States dollars)
ASSETS
Cash and cash equivalents		$	18,540,558			$	24,617,047
Restricted cash			3,181,672				1,400,000
Accounts receivable			414,597				2,526,442
Crude oil inventory			886,250				253,858
Prepayments			4,379,553				1,517,836
Assets held for sale			600,000				600,000
Other current assets			150,712				121,610
Total current assets		$	28,153,342			$	31,036,793
Capital assets, net (including unevaluated amounts of $50,644,999 and $25,102,945, respectively)			119,048,049				72,995,666
Prepaid financing fees			246,910				648,507
Investments in and advances to oil and gas and other ventures — net			—				478,632
Total Assets		$	147,448,301			$	105,159,598
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable — trade		$	5,754,882			$	2,331,945
Loans payable			964,142				1,500,000
Deposits			—				3,080,839
Accrued liabilities			6,356,623				172,117
Total current liabilities		$	13,075,647			$	7,084,901
Long term debt			25,000,000				832,165
Other non current liabilities			1,001,041				—
Provision for future site restoration			523,000				422,000
Total Liabilities		$	39,599,688			$	8,339,066
Commitments and contingencies
Options with redemption feature			2,119,530				723,280
Stockholders’ equity:
Common stock, par value $0.10; authorized — 300,000,000 shares; shares issued, issuable and outstanding — 222,586,867 at December 31, 2005 and 195,212,089 at December 31, 2004			22,258,685				19,521,208
Capital in excess of par value			202,892,303				183,418,338
Deferred compensation expense			(2,220,399	)			(1,976,102	)
Accumulated deficit			(117,201,506	)			(104,866,192	)
Total stockholders’ equity		$	105,729,083			$	96,097,252
Total Liabilities, Temporary Equity and Stockholders’ Equity		$	147,448,301			$	105,159,598

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

CANARGO ENERGY CORPORATION

Consolidated Statements of Operations and Comprehensive Loss

		For Year Ended December 31,
		2005				2004				2003
		(Expressed in United States dollars)
Operating Revenues from Continuing Operations:
Oil and gas sales		$	7,582,375			$	9,574,520			$	7,881,172
Other			—				—				223,608
			7,582,375				9,574,520				8,104,780
Operating Expenses:
Field operating expenses			2,281,434				2,320,756				1,051,905
Direct project costs			1,458,315				1,434,114				1,028,682
Selling, general and administrative			11,575,826				7,324,292				3,505,489
Depreciation, depletion and amortization			3,275,553				2,881,020				3,294,086
Impairment of oil and gas properties, ventures and other assets			—				174,812				—
Income on dispositions			—				(1,606,274	)			(616,741	)
			18,591,128				12,528,720				8,263,421
Operating Loss from Continuing Operations			(11,008,753	)			(2,954,200	)			(158,641	)
Other Income (Expense):
Interest income			829,798				52,868				—
Interest and amortization of debt discount and expense			(1,899,522	)			(954,998	)			(35,386	)
Foreign exchange gains (losses)			14,450				(447,455	)			(511,370	)
Other			(116,271	)			(790,689	)			(123,541	)
Equity Loss from investments			(155,016	)			(205,230	)			65,544
Total Other Expense			(1,326,561	)			(2,345,504	)			(604,753	)
Loss from Continuing Operations Before Taxes			(12,335,314	)			(5,299,704	)			(763,394	)
Income taxes			—				—				—
Minority interest in loss of consolidated subsidiaries			—				—				7,406
Loss from Continuing Operations			(12,335,314	)			(5,299,704	)			(755,988	)
Net Income (Loss) from Discontinued Operations, net Of taxes and minority interest			—				542,210				(6,607,517	)
Loss Before Cumulative Effect of Change in Accounting Principle			(12,335,314	)			(4,757,494	)			(7,363,505	)
Cumulative effect of change in accounting principle			—				—				41,290
Net Loss		$	(12,335,314	)		$	(4,757,494	)		$	(7,322,215	)
Weighted average number of common shares outstanding
— Basic			211,586,953				134,005,490				99,432,000
— Diluted			211,586,953				134,005,490				99,432,000
Basic and Diluted Net Loss Per Common Share
— from continuing operations		$	(0.06	)		$	(0.04	)		$	(0.01	)
— from discontinued operations		$	—			$	—			$	(0.07	)
— cumulative effect of change in accounting principle, net of Income tax		$	—			$	—			$	—
Basic and Diluted Net Loss Per Common Share After Cumulative Effect of Change in Accounting Principle		$	(0.06	)		$	(0.04	)		$	(0.08	)
Other Comprehensive Income (Loss):
Foreign currency translation			—				146,463				(151,131	)
Comprehensive Loss		$	(12,335,314	)		$	(4,611,031	)		$	(7,473,346	)

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

CANARGO ENERGY CORPORATION

Consolidated Statements of Cash Flows

		For Year Ended December 31,
		2005				2004				2003
		(Expressed in United States dollars)
Operating activities:
Net Loss			(12,335,314	)			(4,757,494	)			(7,322,215	)
Cumulative effect of change in accounting principle			—				—				41,290
Net income (loss) from discontinued operations, net of taxes and minority interest			—				542,210				(6,607,517	)
Loss from continuing operations			(12,335,314	)			(5,299,704	)			(755,988	)
Adjustments to reconcile net loss from continuing operations to net cash generated (used) by operating activities:
Non-cash stock compensation expense			2,374,578				1,395,035				276,507
Non-cash interest expense and amortization of debt discount			1,277,878				653,313				14,000
Non-cash reduction in selling, general and administrative expenses			—				(300,000	)			—
Non-cash debt extinguishment expense			—				349,923				—
Common stock issued for services			53,600				118,400				—
Non-cash miscellaneous expenses			193,000				—
Depreciation, depletion and amortization			3,275,553				2,881,020				3,294,086
Impairment of oil and gas ventures and other assets			—				174,812				—
Equity loss (income) from investments			155,016				205,230				(65,544	)
Gain on dispositions			—				(1,606,274	)			(616,741	)
Allowance for doubtful accounts			145,829				5,803				170,000
Minority interest in loss of consolidated subsidiaries			—				—				(7,406	)
Changes in assets and liabilities:
Restricted cash			(1,781,672	)			(1,400,000	)			—
Accounts receivable			2,146,016				(2,370,473	)			(81,169	)
Inventory			(632,392	)			214,935				(309,897	)
Prepayments			(202,801	)			(12,560	)			54,767
Other current assets			(29,102	)			84,923				(30,581	)
Accounts payable			757,401				1,848,664				78,047
Deferred revenue			(3,080,839	)			(449,255	)			2,228,899
Income taxes payable			—				(97,500	)			36,500
Accrued liabilities			(585,541	)			(177,370	)			145,442
Net cash generated (used) by operating activities			(8,268,790	)			(3,781,078	)			4,430,922
Investing activities:
Capital expenditures			(33,450,583	)			(11,190,290	)			(5,283,388	)
Proceeds from disposition of investments			—				—				1,000,000
Proceeds from disposition of subsidiary			—				2,107,001				—
Acquisitions, net of cash acquired			609,553				—				—
Investments in oil and gas and other ventures			—				(383,862	)			—
Repayments from oil and gas and other ventures			—				—				114,428
Advance proceeds from the sale of CanArgo Standard Oil Products			—				—				1,443,729
Advance proceeds from the sale of CanArgo Petroleum Refining Limited			—				—				301,195
Change in oil and gas supplier prepayments			(855,466	)			(499,933	)			(804,732	)
Net cash used in investing activities			(33,696,496	)			(9,967,084	)			(3,228,768	)
Financing activities:
Proceeds from sale of common stock			4,429,303				37,999,516				—
Share issue costs			(191,876	)			(4,543,845	)			—
Deferred offering costs			—				(309,318	)			—
Advances from joint venture partner			—				290,000				1,427,612
Payments of joint venture obligations			—				(1,063,146	)			(654,466	)
Proceeds from loans			39,237,000				3,806,000				380,000
Repayment of loans			(7,200,000	)			(1,408,179	)			(277,821	)
Deferred loan costs			(385,630	)			—				—
Net cash provided by financing activities			35,888,797				34,771,028				875,325
Discontinued activities:
Net cash generated (used) by operating activities			—				—				(1,456,303	)
Net cash used in investing activities			—				121,929				(348,546	)
Net cash provided by financing activities			—				—				1,614,622
Net cash flows from assets and liabilities held for sale			—				121,929				(190,227	)
Net increase (decrease) in cash and cash equivalents			(6,076,489	)			21,144,795				1,887,252
Cash and cash equivalents, beginning of period			24,617,047				3,472,252				1,585,000
Cash and cash equivalents, end of period		$	18,540,558			$	24,617,047			$	3,472,252

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

CANARGO ENERGY CORPORATION

Consolidated Statements of Stockholders’ Equity

		Common Stock
		Number of								Additional				Deferred				Foreign								Total
		Shares Issued								Paid-In				Compensation				Currency				Accumulated				Stockholders’
		and Issuable				Par Value				Capital				Expense				Translation				Deficit				Equity
		(Expressed in United States dollars)
Balance, December 31st 2002			97,356,206			$	9,735,620			$	145,151,475			$	—			$	4,668			$	(92,786,483	)		$	62,105,280
Shares issued pursuant to Norio buy-out Sept 2003			6,000,000				600,000				540,000																1,140,000
Shares issued pursuant to Manavi buy-out Dec 2003			2,000,000				200,000				460,000																660,000
Shares issued pursuant to Standby Equity Distribution Agreement			261,782				26,178				(26,178	)															—
Change in accounting policy pursuant to the Company electing to utilize the “prospective” method of transitioning to fair value method of accounting for stock-based compensation under SFAS No. 148			—				—				276,507																276,507
Current year adjustment																			(151,131	)			—				(151,131	)
Net loss			—				—				—												(7,322,215	)			(7,322,215	)
Total, December 31, 2003			105,617,988			$	10,561,798			$	146,401,804			$	—			$	(146,463	)		$	(100,108,698	)		$	56,708,441
Current year adjustment																			146,463								146,463
Exercise of stock options and warrants			3,815,084				381,508				118,008																499,516
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			163,218				16,322				79,446																95,768
Shares Issued pursuant to Standby Equity Distribution agreement (Newbridge Securities)			30,799				3,080				15,091																18,171
Shares Issued pursuant to consultancy agreement (Europa Oil Services Ltd)			4,000,000				400,000				3,480,000																3,880,000
Shares Issued pursuant to consultancy agreement (CEOCast)			80,000				8,000				49,600																57,600
Issue of Warrants to purchase 1 million shares pursuant to a loan agreement			—				—				754,000																754,000
Issue of Warrants to purchase 300,000 shares pursuant to a Loan agreement			—				—				197,040																197,040
Stock based compensation under SFAS 148			—				—				2,647,858				(1,976,102	)											671,756
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			425,000				42,500				182,750																225,250
Issue of Warrants to purchase 1 million shares pursuant to a Loan agreement			—				—				263,786																263,786
Shares Issued pursuant to Global public offering			75,000,000				7,500,000				30,000,000																37,500,000
Share issue costs			—				—				(4,543,845	)															(4,543,845	)
Shares Issued pursuant to CanArgo Norio Limited Buy-Out			6,000,000				600,000				3,720,000																4,320,000
Shares Issueable pursuant to consultancy agreement (CEOCast)			80,000				8,000				52,800																60,800
Net Loss			—				—				—								—				(4,757,494	)			(4,757,494	)
Total, December 31, 2004			195,212,089			$	19,521,208			$	183,418,338			$	(1,976,102	)			—			$	(104,866,192	)		$	96,097,252

		Common Stock
		Number of								Additional				Deferred				Foreign								Total
		Shares Issued								Paid-In				Compensation				Currency				Accumulated				Stcokholders’
		and Issuable				Par Value				Capital				Expense				Translation				Deficit				Equity
		(Expressed in United States dollars)
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			380,836				38,084				469,514																507,598
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			335,653				33,565				458,837																492,402
Exercise of stock options			1,067,833				106,783				255,850																362,633
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			344,758				34,476				498,072																532,548
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			370,599				37,060				562,940																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			381,170				38,117				561,883																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			495,745				49,574				550,426																600,000
Exercise of stock options			1,570,000				157,000				11,000																168,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			552,639				55,264				544,736																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			473,634				47,363				552,637																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			837,054				83,705				516,295																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			813,670				81,367				518,633																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			872,854				87,285				512,715																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			847,458				84,746				515,254																600,000
Shares Issueable pursuant to consultancy agreement (CEOCast)			80,000				8,000				45,600																53,600
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			801,068				80,107				519,893																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			812,348				81,235				518,765																600,000
Shares Issued pursuant to Tethys buy-out			11,000,000				1,100,000				7,260,000																8,360,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			639,591				63,959				536,041																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			596,421				59,642				540,358																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			613,246				61,325				538,675																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			630,120				63,012				536,988																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			669,568				66,957				533,043																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			761,325				76,133				523,867																600,000
Shares Issued pursuant to Standby Equity Distribution agreement (Cornell Capital)			783,188				78,319				521,681																600,000
Exercise of stock options			360,000				36,000				481,320																517,320
Exercise of stock options			284,000				28,400				352,950																381,350
Stock based compensation under SFAS 148			—				—				1,222,625				(244,297	)											978,328
Share issue costs			—				—				(1,186,633	)															(1,186,633	)
Net Loss			—				—				—												(12,335,314	)			(12,335,314	)
Total, December 31, 2005			222,586,867			$	22,258,685			$	202,892,303			$	(2,220,399	)			—			$	(117,201,506	)		$	105,729,083

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

CANARGO ENERGY CORPORATION

Notes to Consolidated Financial Statements

NOTE 1 — NATURE OF OPERATIONS

     CanArgo Energy Corporation, headquartered in Guernsey, British Isles, and its consolidated subsidiaries (collectively “CanArgo”, “we”, “our”, “us”), is an integrated oil and gas company operating predominately within Georgia and the Republic of Kazakhstan. Our principal activity is the acquisition of interests in and development of crude oil and natural gas fields.

     In 2002 and 2003, we approved a plan to sell CanArgo Standard Oil Products Limited (“CSOP”), Lateral Vector Resources Inc. (“LVR”), the Georgian American Oil Refinery Limited (“GAOR”) and a generating power unit. During 2004, CSOP, GAOR and LVR were sold. The results of these operations have been classified as discontinued for all periods presented. Net income (loss) from discontinued operations is disclosed net of taxes and minority interest for all periods presented. The generating power unit has been classified as “Assets held for sale” for all periods presented.

     In the years ended December 31, 2005 and 2004 the Company’s revenues from its Georgian operations did not cover the costs of its operations. At December 31, 2005 the Company had unrestricted cash and cash equivalents of approximately $18,541,000. In 2005 the Company experienced a net cash outflow from operations of approximately $8,269,000. In addition, the Company has a planned capital expenditure budget in 2006 of approximately $20,000,000 in Georgia. In the event that the exploration and development wells currently undergoing or waiting to undergo production testing in Georgia fail to produce enough commercially available quantities of oil and or gas, the Company may not have sufficient working capital and may have to delay or suspend its capital expenditure plans and possibly make cutbacks in its operations. There are no assurances the Company could raise additional sources of equity financing and because of the covenants contained in the Senior Secured Convertible Notes (see Note 11) the Company is restricted from incurring additional debt obligations unless it receives consent from at least 51% of the noteholders, which cannot be assured.

     In March 2006 with the private placement of the $13,000,000 Senior Subordinated Convertible Guaranteed Notes we have fully funded the currently planned budget for our operating and development expenditure in Kazakhstan for 2006.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The consolidated financial statements and notes thereto are prepared in accordance with accounting principles generally accepted in the United States. All amounts are in U.S. dollars. Certain items for prior years in the consolidated financial statements have been reclassified to conform to the current year’s presentation. There was no effect on the reported net loss as a result of these reclassifications.

Consolidation

     The consolidated financial statements include the accounts of CanArgo Energy Corporation and its majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Investments in less than majority owned corporations and corporate like entities in which we exercise significant influence are accounted for using the equity method. Entities in which we do not have significant influence are accounted for using the cost method.

Equity Method

     Under the guidance of Emerging Issue Task Force D-46, “Accounting for Limited Partnership Investments” the Company uses the equity method to account for all of its limited partnership interests in oil and gas ventures that exceed 5% and is less than 50%. Under the equity method of accounting, the Company’s proportionate share of the investees’ net income or loss is included in “Equity Income from Investments” in the consolidated statements of operations. Any excess of the carrying value of the investment and loan advances over the underlying net equity of the investee is evaluated each reporting period for impairment.

     In accordance with Emerging Issues Task Force (“EITF”) 98-13 “Accounting by an Equity Method Investor for Investee Losses When the Investor has Loans to and Investments in Other Securities of the Investee,” and 99-10 “Percentage Used to Determine the Amount of Equity Method Losses,” in the event that minority interest losses exceed stockholders’ equity for the majority interest, the excess minority interest loss is recorded against loan advances or other forms of equity invested in the subsidiary. In accordance with the requirements of EITF 99-10 the Company has chosen to account for the percentage of losses to be applied to reduce its loan balance based on its ownership percentage and not on its relative percentage of investment in each security class across all investors.

Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Management believes that it is reasonably possible the following material estimates affecting the financial statements could significantly change in the coming year: (1) estimates of proved oil and gas reserves, (2) estimates as to the expected future cash flow from proved oil and gas properties, and (3) estimates of future dismantlement and restoration costs.

Cash and Cash Equivalents

     Cash and cash equivalents, of which include all liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Fair Value of Financial Instruments

The carrying amounts reflected in the consolidated balance sheets for cash and equivalents, short-term receivables and short-term payables approximate their fair value due to the short maturity of the instruments. The carrying value of the short-term note payable with detachable warrants reflects a discount for the value of warrants and was $964,142 at December 31, 2005. The face amount of the note payable is $1,050,000. The carrying value of the short-term debt approximates fair value as the debt bears interest at a market rate. The carrying and face value of $25,000,000 of the long-term debt approximates fair value as the debt bears interest at a market rate. Please refer to Note 11 Loans Payable and Long Term Debt for a more detailed discussion of the accounting treatment of the long-term debt.

Concentration of Credit Risk

     Although our cash and temporary investments and accounts receivable are exposed to potential credit loss, we do not believe such risk to be significant. Even though a substantial amount of funds were in accounts at financial institutions which were not covered under bank guarantees, management does not believe that maintaining balances in excess of bank guarantees resulted in a significant risk to us.

     As an independent oil and gas producer, our revenue, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas, which are dependent upon numerous factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. The energy markets have historically been very volatile, and there can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and gas prices could have a material adverse effect on our financial position, results of operations, cash flows and our access to capital and on the quantities of oil and gas reserves that may be economically produced.

     We sold approximately 90%, 82% and 92% of our oil to 2 customers, 4 customers and 3 customers respectively in 2005, 2004 and 2003. Management believes that due to the global nature of the market for oil and gas, that the loss of any customer or group of customers would not have a material effect on its sales.

Reclassification

     Certain items in the consolidated financial statements have been reclassified to conform to the current year presentation. There was no effect on reported net loss as a result of these reclassifications.

Accounts Receivable and Allowance for Doubtful Debts

     Accounts receivable are carried at the amount owed by customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The allowance for doubtful accounts is estimated based upon historical write-off percentages, known problem accounts, and current economic conditions. Accounts are written off against the allowance for doubtful accounts when we determine that amounts are not collectable and recoveries of previously written-off accounts are recorded when collected.

Inventories

     Inventories of crude oil are valued at the lower of average cost or net realizable value. Inventory costs include expenditures and other charges (including depreciation, depletion and amortization) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost.

Capital Assets

     Capital assets are recorded at cost less accumulated provisions for depreciation, depletion and amortization unless the carrying amount is viewed as not recoverable in which case the carrying value of the assets is reduced to the estimated recoverable amount. See “Impairment of Long-Lived Assets” below. Expenditures for major renewals and betterments, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is reflected in operations. Unproved properties are not deemed to be impaired until the right to drill on those properties is lost and planned development has ceased.

     Oil And Gas Properties — CanArgo and the unconsolidated entities (for which it accounts using the equity method) account for oil and gas properties and interests under the full cost method. Under the full cost method, all acquisition, exploration and development costs, including certain directly related employee costs incurred for the purpose of finding oil and gas are capitalized and accumulated in pools on a country—by—country basis. Capitalized costs include the cost of drilling and equipping productive wells, including the estimated costs of dismantling and abandoning these assets, dry hole costs, lease acquisition costs, seismic and other geological and geophysical costs, delay rentals and costs related to such activities. Employee costs associated with production and other operating activities and general corporate activities are expensed in the period incurred.

     Where proved reserves are established, capitalized costs are limited on a country—by—country basis (the ceiling test). The ceiling test is calculated as the sum of the present value of future net cash flows related to estimated production of proved reserves, using end—of—the-current-period prices, discounted at 10%, and takes into account expected future costs to develop proved reserves, and operating expenses and income taxes. Under the ceiling test, if the capitalized cost of the full cost pool exceeds the ceiling limitation, the excess is charged as an impairment expense.

     Unit-of-production depreciation is applied to capitalized cost of the full cost pool. Unit-of-production rates are based on the amount of proved developed reserves of oil, gas and other minerals that are estimated to be recoverable from existing facilities using current operating methods.

     We utilize a single cost center for each country where we have operations for amortization purposes. Any conveyances of properties are treated as adjustments to the cost of oil and gas properties with no gain or loss recognized unless the operations are suspended in the entire cost center or the conveyance is significant in nature.

     The costs of investments in unproved properties and portions of costs associated with major development projects are excluded from the depreciation, depletion and amortization (“DD&A”) calculation until the project is evaluated.

     Unproved property costs include leasehold costs, seismic costs and other costs incurred during the exploration phase. In areas where proved reserves are established, significant unproved properties are evaluated periodically, but not less than annually, for impairment. If a reduction in value has occurred, these property costs are considered impaired and are transferred to the related full cost pool. Unproved properties whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to be ultimately nonproductive, based on experience, is amortized to the full cost pool over an average holding period.

     In countries where the existence of proved reserves has not yet been determined, leasehold costs, seismic costs and other costs incurred during the exploration phase remain capitalized in unproved property cost centers until proved reserves have been established or until exploration activities cease or impairment and reduction in value occurs. If exploration activities result in the establishment of a proved reserve base, amounts in the unproved property cost center are reclassified as proved properties and become subject to depreciation, depletion and amortization and the application of the ceiling test. If exploration efforts in a country are unsuccessful in establishing proved reserves, it may be determined that the value of exploratory costs incurred there have been permanently diminished in part or in whole. Therefore, based on the impairment evaluation and future exploration plans, the unproved property cost centers related to the area of interest could be impaired, and accumulated costs charged against earnings.

     Property and Equipment — Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets ranging from three to five years for office furniture and equipment to three to fifteen years for oil and gas related equipment.

     Property and Equipment (CanArgo Standard Oil Products) — Depreciation of property and equipment at CanArgo Standard Oil Products’ petrol stations and additions thereto were depreciated over the estimated useful lives of the assets ranging from ten to fifteen years until operations were reclassified as discontinued.

Revenue Recognition

     Continuing operations — We recognize revenues when hydrocarbons have been produced and delivered and payment is reasonably assured.

     Discontinued operations — We recognize revenues when goods have been delivered, when services have been performed, or when hydrocarbons have been produced and delivered and payment is reasonably assured.

Foreign Operations

     Our future operations and earnings will depend upon the results of our operations in the Georgia. There can be no assurance that we will be able to successfully conduct such operations, and a failure to do so would have a material adverse effect on our financial position, results of operations and cash flows. Also, the success of our operations will be subject to numerous contingencies, some of which are beyond management control. These contingencies include general and regional economic conditions, prices for crude oil and natural gas, competition and changes in regulation. Since we are dependent on international operations, specifically those in Georgia, we will be subject to various additional political, economic and other uncertainties. Among other risks, our operations may be subject to the risks and restrictions on transfer of funds, import and export duties, quotas and embargoes, domestic and international customs and tariffs, and changing taxation policies, foreign exchange restrictions, political conditions and regulations.

Foreign Currency Translation

     The U.S. dollar is the functional currency for our upstream operations and the Lari is the functional currency for marketing operations. All monetary assets and liabilities denominated in foreign currency are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date and the resulting unrealized translation gains or losses are reflected in operations. Non-monetary assets are translated at historical exchange rates. Revenue and expense items (excluding depreciation and amortization which are translated at the same rates as the related assets) are translated at the average rate of exchange for the year.

Income Taxes

     We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established, when appropriate, to reduce deferred tax assets to the amount expected to be realized.

Impairment of Long-Lived Assets

     The Company evaluates its long-lived assets for impairment using the guidance of Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations.

Dismantlement, Restoration and Environmental Costs

     We recognize liabilities for asset retirement obligations associated with tangible long-lived assets, such as producing well sites, with a corresponding increase in the related long-lived asset. The asset retirement cost is depreciated along with the property and equipment in the full cost pool. The asset retirement obligation is recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the full cost pool using the units of production method.

     Upon adoption of this standard in 2003 we recorded the fair value of its existing asset retirement obligations as if the liabilities had been initially accounted for in accordance with SFAS 143 using assumptions present at the date of adoption. The income statement effect of this treatment was recorded as a cumulative effect in accounting principle in the period of adoption. During 2003, we recorded a credit to income for the cumulative effect of change in accounting principle of $41,290, increased long-term liabilities to recognise our total obligation and increased net capital assets in accordance with the provisions of SFAS No. 143 to the amount of $82,000. We did not recognise deferred tax expense on the SFAS 143 credit as the group is in a net deferred tax asset position against which full allowance has been made as it is considered more likely than not that the deferred tax asset will not be realised. There was no impact on our cash flows as a result of adopting SFAS No. 143. The asset retirement obligation, which is included on the consolidated balance sheet in provision for future site restoration, was $523,000 at December 31, 2005, which includes $58,800 for retirement obligations related to our acquired Tethys operations.

		2005				2004
Beginning balance, January 1		$	422,000			$	151,000
Cumulative effect of change in accounting principle			—				—
New obligations incurred in 2005			58,800				270,000
Liabilities settled in 2005			—				—
Accretion of expense			42,200				14,000
Revision in estimates, including timing			—				(13,000	)
Balance at December 31			523,000				422,000

Stock-Based Compensation Plans

     Effective January 1, 2003, we adopted SFAS No. 123 Accounting For Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148 Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. We elected to utilize the “prospective” method of transitioning from the intrinsic value to the fair value method of accounting for stock-based compensation. Stock based awards in existence prior to 2003 will continue to be accounted for under APB Opinion No. 25 Accounting for Stock Issued to Employees, unless they are re-priced or modified.

     In accordance with SFAS 123, compensation expense for awards granted on or after January 1, 2003, have been measured by the fair value of the award at the date of grant and recognized over the vesting or requisite service period. The fair value of awards in the form of stock options is estimated using an option-pricing model.

     Under Opinion No. 25, stock-based employee compensation cost was not recognized in net income when stock options granted had an exercise price equal, or greater, to the market value of the underlying common stock on the date of grant.

     The pro forma information regarding net loss and net loss per share is required by SFAS 123 and has been determined as if we had accounted for our employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003; risk free interest rate of 2.91%; dividend yield of 0%; volatility factors of the expected market price of CanArgo common stock of 80.47; and a weighted-average expected life of the options of four years. The following table illustrates the pro forma effect on net loss and net loss per share if the fair value based method had been applied to all outstanding and unvested awards for the year ended December 31, 2003:

		For the Year Ended
		December 31, 2003
Net Loss as reported		$	(7,322,215	)
Add: Stock-based compensation cost, net of related tax effects, included in the determination of net income As reported			276,507
Less: Stock-based compensation cost, net of related Tax effects, that would have been included in the determination of net income reported if the fair value based method had been applied to all awards			786,783
Pro forma net loss			(7,832,491	)
Loss per share
Basic and diluted — as reported			(0.08	)
Basic and diluted — pro forma			(0.08	)

     In December 2004, the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-based Payment”, which will become effective for the Company as of January 1, 2006. Adoption of FAS 123R will not materially change the Corporation’s existing accounting practices or the amount of share-based compensation recognized in earnings. The Company expects that for options issued in 2005 and 2004 with graded vesting schedules, that each vesting tranche will remain unexercised until the expiration of the option and has thus chosen to amortize compensation costs recorded for those options using the straight line method.

     The Company accounts for options issued with redemption features in accordance with Accounting Series Release 268 — Presentation in Financial Statements of “Redeemable Preferred Stocks” and EITF D-98: Classification and Measurement of Redeemable Securities. Adjustments which are made to the amounts reflected in the temporary equity category for options with redemption features are made against additional paid in capital until such time when the intrinsic value exceeds the fair value originally recorded in which case the excess intrinsic value would be recorded as stock based compensation. In 2005 the temporary equity increased by $1,396,250 and this amount was less than the fair value originally recorded.

Recently Issued Pronouncements

     In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement. The Company is required to adopt Interpretation No. 47 prior to the end of 2006 and its adoption is not expected to have a significant effect on the Company’s results of operations or financial condition.

     In November 2004, the FASB issued SFAS No. 151 “Accounting for Inventory Costs” that amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS No. 151 in the beginning of 2006 and its adoption is not expected to have a significant effect on the Company’s results of operations or financial condition.

     In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets” that amends Accounting Principles

Board (APB) Opinion No. 29, “Accounting for Nonmonetary Transactions” and Amends FAS 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies”, paragraphs 44 and 47(e). ARB No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and SFAS 153 amended ABP 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary asset exchanges occurring in the first quarter of 2006 and its adoption is not expected to have a significant effect on the Company’s results of operations or financial condition.

     In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections” to replace ABP No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, SFAS 154 requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of FAS 154 is not expected to have a significant effect on the Company’s results of operations or financial condition.

     In November 2005, accounting standards were revised to provide guidance for determining and measuring other-than-temporary impairments of debt and equity securities. The new guidance is effective for reporting periods beginning after December 15, 2005. At December 31, 2005, available-for-sale investments in our marketable securities had unrealized losses totaling $0.9 million which are recorded in Other Accumulated Comprehensive Income. We do not believe that the securities with unrealized losses as of December 31, 2005 currently meet the criteria for recognizing the loss under existing other-than-temporary guidance.

NOTE 3 — BUSINESS COMBINATIONS

Tethys Petroleum Investments Limited

     On June 7, 2005, CanArgo made an offer to acquire 55% of the ordinary share capital of Tethys Petroleum Investments Limited (“Tethys”) which was held by Provincial Securities Limited (“Provincial”) and Vando International Finance Limited (“Vando”) for consideration of 11,000,000 CanArgo common shares. On June 9, 2005 CanArgo issued 5,500,000 shares to Provincial, of which Russell Hammond (one of our non-executive directors) is Investment Advisor and 5,500,000 shares to Vando in connection with this transaction. At June 7, 2005, the closing price of CanArgo total common stock was $0.76 giving the common stock consideration a market value of $8,360,000 for the 11 million shares. On completion of the acquisition, CanArgo held 100% of the ordinary share capital of Tethys through its subsidiary CanArgo Limited and Tethys became a wholly-owned subsidiary of the Company. We have recorded our interest as if the acquisition occurred on June 30, 2005. Tethys’ primary asset was its 70% interest in BN Munai, a Kazakhstan limited partnership.

     The purchase price was allocated to the net assets of Tethys as follows:

Cash		$	609,553
Oil and Gas Properties			6,418,115
Other Current Assets			1,688,294
Current Liabilities			(297,162	)
Provision for future site restoration			(58,800	)
		$	8,360,000

     The principal reason for the purchase was to secure Tethys’ current interests in a proven gas field and significant exploration areas in western Kazakhstan.

     The Company has included the results of operations of Tethys in the consolidated financial statements starting July 1, 2005.

     The following pro forma presentation assumes the Company’s acquisition of Tethys took place on January 1, 2004. The historical column presents the financial information of the Company for the periods indicated.

		Pro Forma
		Twelve Months Ended December 31, 2005
		Historical				Tethys				Adjustments				Combined
Revenue		$	7,582,375			$	0			$	—			$	7,582,375
Loss from continiung operations		$	(12,335,314	)		$	(215,649	)		$	155,016	(1)		$	(12,395,947	)
Net (loss)		$	(12,335,314	)		$	(215,649	)		$	155,016			$	(12,395,947	)
Basic and diluted loss per Share														$	(0.06	)
Basic and diluted weighted average common shares outstanding															211,586,953

		Pro Forma
		Twelve Months Ended December 31, 2004
		Historical				Tethys				Adjustments				Combined
Revenue		$	9,574,520			$	0			$	—			$	9,574,520
Loss from continiung operations		$	(5,299,704	)		$	0			$	0			$	(5,299,704	)
Net (loss)		$	(4,757,494	)		$	0			$	0			$	(4,757,494	)
Basic and diluted income per share														$	(0.04	)
Basic and diluted weighted average common shares outstanding															134,005,390

		Pro Forma
		Twelve Months Ended December 31, 2003
		Historical				Tethys				Adjustments				Combined
Revenue		$	7,881,172			$	0			$	—			$	7,881,172
Loss from continiung operations		$	(755,988	)		$	0			$	0			$	(755,988	)
Net (loss)		$	(7,322,215	)		$	0			$	0			$	(7,322,215	)
Basic and diluted income per share														$	(0.07	)
Basic and diluted weighted average common shares outstanding															99,432,000

Kul Bas LLP

     In November 2005, CanArgo acquired through its subsidiary BN Munai, 100% of the charter capital of Kul-Bas LLP, a company registered in Kazakhstan, for consideration of $100,000. Kul-Bas LLP owns an Exploration contract, which is for a period of 25 years, with an initial six year exploration period, covering an unexplored area of approximately 2.75 million acres (11,133 km(2)) surrounding the Akkulka area. The purchase price of the company reflected the fair value of the unevaluated property and was allocated to unevaluated oil and gas properties.

NOTE 4 — RESTRICTED CASH

     Restricted cash consisted of the following at December 31:

		2005				2004
Restricted Cash — Escrow		$	—			$	1,400,000
Restricted Cash — Secured deposits			3,181,672				—
		$	3,181,672			$	1,400,000

     In the first quarter of 2005 we funded a certificate of deposit in the amount of $3,900,000 to secure the issuance of a letter of credit as required under the rig rental and drilling contract we entered into with Saipem, S.p.A. Under the terms of the letter of credit $1,100,000 was released and became unrestricted cash in July 2005. The remaining deposit was due to become unrestricted in January 2006. The letters of credit were extended until June and August 2006 and will become unrestricted then.

     In the third quarter of 2005, we deposited approximately $300,000 to secure the issuance of a letter of credit as required under the drilling contract we entered into with Baker Hughes International.

     Restricted cash of $1,400,000 at December 31, 2004 related to money placed in a third party escrow account in October 2004, to fund part of the horizontal development program, of which WEUS Holding Inc., a subsidiary of Weatherford International Limited (“Weatherford”) was the primary contractor, at the Ninotsminda and Samgori Fields in Georgia. These funds were disbursed to the contractor in July 2005 in satisfaction of liabilities for drilling services provided to the Company in 2005 in accordance with the terms of the escrow agreement.

NOTE 5 — ACCOUNTS RECEIVABLE

     Accounts receivable consisted of the following at December 31:

		2005				2004
Trade receivables before allowance for doubtful debts		$	1,021,868			$	1,081,055
Allowance for doubtful debts			(1,012,068	)			(866,239	)
Due from Samgori PSC partner			—				1,057,534
Insurance receivable			31,755				1,047,359
Fees due from underwriters			180,000				—
Other receivables			193,042				206,733
		$	414,597			$	2,526,442

     Bad debt expense for 2005, 2004 and 2003 was $145,829, $5,803 and $170,000 respectively, and is reflected under other income in the statement of operations.

     In September 2004, a blow-out occurred at the N100 well on the Ninotsminda Field. Our insurers will cover 80% of the costs associated with the blow out up to a maximum cover of $2,500,000. We received $800,000 from our insurers in the second quarter of 2005 in respect of costs incurred to date. As of December 31, 2005 and 2004, $31,755 and $1,047,359 was recorded as a receivable, respectively.

     Included in receivables as of December 31, 2004 was $1,057,534 due from Georgian Oil Samgori Limited (“GOSL”) for its share of capital expenditure, on the planned horizontal well drilling program on the Samgori Field. We funded 100% of the costs which were mainly related to mobilizing Weatherford to Georgia for the commencement of the horizontal well drilling program. Following the failure of Weatherford to successfully complete any horizontal sidetrack development wells on the Ninotsminda Field using Under-Balanced Coiled Tubing Drilling technology, Weatherford demobilised its equipment and left Georgia in July 2005. These costs have now been transferred to oil and gas properties.

NOTE 6 — INVENTORY

     Inventory of crude oil consisted of the following at December 31:

		2005				2004
Crude oil		$	886,250			$	253,858
		$	886,250			$	253,858

NOTE 7 — PREPAYMENTS

     Prepayments consisted of the following at December 31:

		2005				2004
Drilling Contractors		$	4,053,471			$	1,324,147
Financing Fees			115,158				—
Other			210,924				193,689
		$	4,379,553			$	1,517,836

NOTE 8 — CAPITAL ASSETS

     Capital assets, net of accumulated depletion, depreciation and amortization (“DD&A”) and impairment, include the following at December 31, 2005:

						Accumulated
						DD&A and				Net Capital
		Cost				Impairment				Assets
Oil and Gas Properties
Proved properties		$	83,451,848			$	(26,033,501	)		$	57,418,347
Unproved properties			50,644,999				—				50,644,999
			134,096,847				(26,033,501	)			108,063,346
Property and Equipment
Oil and gas related equipment			15,453,405				(5,146,040	)			10,307,365
Office furniture, fixtures and equipment and other			1,135,601				(458,263	)			677,338
			16,589,006				(5,604,303	)			10,984,703
		$	150,685,853			$	(31,637,804	)		$	119,048,049

     Capital assets, net of accumulated depletion, depreciation and amortization and impairment (“DD&A”), include the following at December 31, 2004:

						Accumulated
						DD&A and				Net Capital
		Cost				Impairment				Assets
Oil and Gas Properties
Proved properties		$	61,458,503			$	(23,382,448	)		$	38,076,055
Unproved properties			25,102,945				—				25,102,945
			86,561,448				(23,382,448	)			63,179,000
Property and Equipment
Oil and gas related equipment			14,119,443				(4,693,368	)			9,426,075
Office furniture, fixtures and equipment and other			689,439				(298,848	)			390,591
			14,808,882				(4,992,216	)			9,816,666
		$	101,370,330			$	(28,374,664	)		$	72,995,666