ENERGY EXPLORATION TECHNOLOGIES / - 10-K Annual Report

As filed with the Securities and Exchange Commission on April 14, 2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________

FORM 10–K
_________________

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2003

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ___________

Commission file number: 0-24027

ENERGY EXPLORATION TECHNOLOGIES INC
(Exact name of registrant as specified in its charter)
Alberta, Canada		N/A
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
700-840-7 Avenue SW, Calgary, Alberta, Canada,		T2P 3G2
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (403) 264-7020

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

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

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

YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $4,618,959 based upon the closing price per share of the registrant's common shares of $0.40 on that date.

The number of shares outstanding of the registrant's common stock as of April 6, 2004: 19,845,293 shares.

Advisement

Unless specified otherwise as used herein, the terms "we," "NXT", "us" or "our" refers to Energy Exploration Technologies Inc., its wholly owned subsidiaries and its interest in its joint ventures.

Our functional currency is the United States dollar. All references to "dollars" in this annual report refer to United States or U.S. dollars unless specific reference is made to Canadian or CDN dollars. The rate of exchange of Canadian dollars to United States dollars as of December 31, 2003, was CDN $1.2965 to U.S. $1. For information relative to the conversion of Canadian amounts into US dollars, see the section contained in explanatory Note 2 to our consolidated financial statements captioned "Foreign Currency Translation".

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

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

TABLE OF CONTENTS

PART I

	Page
Item 1. Business	4
Item 2. Properties	15
Item 3. Legal Proceedings	16
Item 4. Submission of Matters to a Vote of Security Holders	16
PART II
Item 5. Market for the Registrant’s Common Shares and Related Stockholder Matters.	17
Item 6. Selected Financial Data	19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
Of Operations	21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	28
Item 8. Financial Statements and Supplementary Data	29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure	56
Item 9A. Controls and Procedures	57
PART III
Item 10. Directors and Executive Officers of the Registrant	57
Item 11. Executive Compensation	60
Item 12. Security Ownership of Certain Beneficial Owners and Management	64
Item 13. Certain Relationships and Related Transactions	66
Item 14. Principal Accounting Fees and Services	66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K	67

PART I

ITEM 1. BUSINESS

OVERVIEW

Energy Exploration Technologies Inc. is an oil and gas exploration company that utilizes the Stress Field Detector (SFD) technology invented by George Liszicasz, our CEO, President and largest shareholder. The SFD technology is a remote-sensing airborne survey technology comprised of SFD sensors, integrated electronic data acquisition, processing and interpretation subsystems and software. Our principal executive offices are located at 700, 840 - 7 Avenue SW, Calgary, Alberta, Canada and our telephone number is (403) 264-7020.

We use the airborne SFD technology to survey large exploration areas from leased aircraft at speeds of approximately 200 mph to identify and prioritize oil and gas prospects for further evaluation and potential drilling. Our SFD affords us the relatively inexpensive ability to acquire, analyze and interpret data on potential hydrocarbon prospects in a matter of days or weeks, as compared to months or years for other wide-area exploration activities. These advantages can dramatically reduce finding costs and the time required to identify oil and gas prospects. Once SFD prospects are identified, highly focused conventional geological and geophysical methods are employed to evaluate the potential commercial viability of the prospects. Finding costs include seismic acquisition, purchasing mineral rights and drilling and completing exploration wells.

We now conduct our activities primarily through our wholly owned subsidiary, NXT Energy Canada Inc., which focuses on Canadian-based exploration. We also have a division office in the United Arab Emirates. Prior to the sale of our U.S. properties in March of 2003, we also operated through NXT Energy USA Inc. which focused on United States-based exploration. Survey flight activities are conducted through our subsidiary, NXT Aero Canada Inc. The parent company concentrates on improving our SFD survey system and oversees the operations of and provides management, financial and administrative services to our subsidiaries.

CORPORATE HISTORY

We were initially incorporated in Nevada on September 27, 1994 under the name Auric Mining Corporation. In January 1996, we acquired all of the common stock of NXT Energy USA (then known as Pinnacle Oil Inc.) from its stockholders in exchange for our common stock. As a consequence of this reverse acquisition, NXT Energy USA became our wholly-owned subsidiary and its stockholders acquired a 92% controlling interest in our common stock.

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

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

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

CORPORATE OBJECTIVE

Our corporate objective is to become an industry leader in technology-driven oil and natural gas exploration. We believe our SFD technology has the potential to provide significant competitive advantages.

BUSINESS STRATEGY

Our primary objective is the achievement of profitability and self-sustaining growth:

·	through the development or sale of our current inventory of properties;
·	by using the SFD survey technology to identify oil and gas prospects that have the potential to justify the acquisition of mineral rights for oil and gas developments;
·	through the early acquisition of mineral rights;
·	through the use of conventional exploration technologies to confirm the oil and gas prospects identified with the SFD survey technology ;
·	by either directly participating in the selection of drilling locations or joint venturing with partners who will earn an interest by drilling the prospects at their cost and risk; and
·	by the monetization of the properties as they reach the development stage.

We believe that the majority of the value of hydrocarbon reserves is added early in the development cycle and we plan to sell the reserves as the value-adding curve begins to level off. We do not plan to be a long-term production based company, although we may hold properties after they begin production for periods of time while we wait for oil and natural gas prices to increase. Reserves will be treated as portfolio investments and will be sold off as product prices rise and held when prices drop. This strategy will require discipline and focus, as it tends to be contrary to the activities of many industry participants. Also, we will need to build a financial reserve to enable us to sustain operations through the cyclical price downturns that regularly occur in this industry.

We believe that by successfully exploiting our SFD we will be able to achieve market acceptance and access to additional capital to fund the exploration, land acquisition and drilling efforts that will be necessary to sustain our future growth and expansion.

STRESS FIELD DETECTOR TECHNOLOGY

Nature of SFD

Our SFD allows us to measure variations in energy fields, which we believe to be related to subsurface structures under stress and hydrocarbon accumulations. By analyzing these field patterns, we are able to determine the probability of locating commercially viable hydrocarbon deposits.

Subsurface mechanical stresses are caused by tectonic forces that disrupt the stress and pressure equilibrium in buried strata. Sedimentary basins are created in a marine environment and initially consist of relatively undisturbed flat-lying or gently dipping sediments or sedimentary rock generally maintaining balanced pressure equilibrium and therefore low constant stress. Where the sedimentary package is exposed to tectonic forces that compress, fold, fault or fracture the sedimentary column, a balanced mechanical equilibrium is not maintained. The sedimentary rock strata must absorb the additional stress caused by these tectonic forces. In other areas where the regional strata are characterized by non-uniform geologic layering or intrusive geological features, there appears to be exhibited higher residual stress than the surrounding regional strata.

Subsurface hydraulic stresses are caused by the presence of fluids (liquids and gases) such as water, oil and natural gas, within the strata and, more particularly, the inherent and directional pressures resulting from the relative buoyancy of the fluids. Oil and gas will percolate upwards through the strata by way of fractures or permeable strata

until they either reach the surface or are stopped or trapped by a non-porous barrier, in which case they will continue to exert pressure against the trapping barrier.

While the response of our SFD to known structurally trapped accumulations is more readily demonstrated, responses to stratigraphically trapped accumulations have led us to infer that a hydraulic component of stress exists in certain trapping conditions. As a consequence, our SFD technology has practical applications as an oil and natural gas finding tool.

The exact nature of the energy fields the SFD reacts to and measures are unknown. The two known energy sources to which the SFD may respond are electromagnetic fields (i.e., of an electric, magnetic or electromagnetic character) and gravitational fields. For the reasons explained below, we believe that the energy fields we are measuring are both non-electromagnetic and non-gravitational in character.

We have determined that when the SFD encounters changing natural or artificially-created electromagnetic fields, it does not appear to respond to the resulting changes in energy levels. As a consequence, we believe that the energy fields measured are non-electromagnetic by nature.

While conducting aerial surveys, the SFD is subjected to changes in horizontal and vertical acceleration arising from turbulence that exceed, by significant orders of magnitude, the changes in acceleration forces attributable to naturally occurring gravity. Since the SFD does not appear to respond to these horizontal and vertical acceleration forces, it follows that the lesser forces of acceleration associated with gravity do not affect it. As a consequence of this lack of response, we believe that the energy fields measured are non-gravitational by nature.

We hypothesize that the principal component of our SFD technology, which we refer to as the SFD sensor, is a passive transducer that creates and maintains a stress-related non-electromagnetic and non-gravitational energy field that interacts with stress-related non-electromagnetic and non-gravitational energy fields associated with subsurface conditions.

Our testing and development of the SFD technology to date has been almost entirely focused on an applied basis toward the identification of hydrocarbon related subsurface conditions. We have not scientifically proven our hypothesis and, at this time, we do not plan to conduct more comprehensive scientific evaluations.

SFD Survey System

Our SFD technology is comprised of the following components, which we collectively refer to as our SFD survey system, used for the following functions:

Stress Field Detector—the stress field detector or SFD is a unit, which houses the SFD sensor, the principal component of our technology. As discussed above, the SFD sensor is a passive transducer that interacts with energy fields created by subsurface stresses as our aircraft flies over those areas and registers that interaction in the form of digital electronic signals. When NXT conducts SFD surveys, we use an SFD array incorporating eight interchangeable SFD sensors, which allows us to collect eight sets of SFD signals. The ability to collect data from multiple SFD sensors is important for several reasons. First, it facilitates repeatability and signal verification, and cuts down on the need for additional SFD survey flights. Second, we use different SFD sensor designs which allow us to collect different qualitative information. For example, one design of SFD sensor appears to better identify anomalies associated with subsurface structures, while another design appears to offer more information concerning faults and a third appears to offer information concerning the quality of the reservoir in the subsurface structure. Finally, the SFD sensors are extremely sensitive devices, and the operational ability of any one sensor while on an SFD survey flight may be adversely impacted by a number of factors, including turbulence, the turning motion and angle of the aircraft, signal saturation or over-load, and in some cases the age of a given sensor.

Data Acquisition System—used in conjunction with the SFD array on surveys, our data acquisition system is a compact, portable computer system which concurrently acquires the eight electronic digital signals from the SFD array in two different data formats per sensor or sixteen signal sets in total, marks each of the signal sets with their geographic location using global positioning satellite coordinates and then stores this information for subsequent processing and interpretation at our home base.

Data Processing and Interpretation Systems—once returned to our home base, the SFD data collected is processed and converted into a format that can be used by our interpretive staff. All processing is performed by our staff using computer workstations and processing software, which has been developed in-house. Once the SFD data has been processed, our geological and geophysical staff review the data, plot the flight lines and produce computer-generated base maps using our processing software and industry standard mapping software and databases.

SFD Data Acquisition

Our SFD survey system is flown over pre-selected exploration areas at varying altitudes and from different directions. The SFD sensors interact with the constantly changing stress fields and responses are recorded in the form of digital electronic signals resembling waveforms, referred to as SFD signals. Our proprietary data acquisition system acquires and records these signals and marks their geographic location with global positioning satellites. These integrated signals are now referred to as SFD data. The SFD signals are also displayed in real time on board our survey aircraft, which allows our on-board technical crew to immediately identify areas of particular interest for further investigation.

SFD Data Interpretation

Once SFD datasets are returned to our offices, our geological and geophysical interpretive staff process the data, plot the flight lines and produce computer-generated base maps. We then commence the following screening and interpretation process:

·	First, we screen the SFD data for anomalous signals on the flight line, which we refer to as SFD anomalies. These SFD anomalies include signals from both unknown or non-producing areas that we survey as well as signals obtained over known oil and natural gas pool crossings.
·	Then our geological team puts each identified SFD anomaly into subsurface context using our in-house geological database. The SFD anomaly may then become a SFD lead should the signals of the SFD anomaly appear to coincide in proper geologic context. In other words we answer the question, "Does the anomaly make sense where it appears in the sedimentary basin?". Where we have sufficiently qualified an SFD lead with further SFD data acquired from additional surveys, we reclassify the lead as a "recommended SFD prospect" for further geological and geophysical evaluation.
·	Lastly, should the recommended SFD prospect be targeted for exploration, traditional geological and geophysical methods, usually 2D or 3D seismic, are employed to evaluate the potential commercial viability of the prospect and to pinpoint drilling sites.

SFD Time Frames

We conduct our SFD surveys at speeds of approximately 200 mph, and survey approximately 600 linear miles in a three-hour survey. For each survey, it takes our staff between one to two days of data processing and interpretation—including plotting flight routes, screening and analyzing anomalies, putting the anomalies in geologic context and ranking the anomalies—to sufficiently identify and recommend the SFD prospects from that survey.

As a consequence, we are able to record and interpret approximately 600 linear miles of SFD data acquired in one SFD survey flight over a period of only a few days. By way of comparison, traditional land-based seismic crews record up to five linear miles of 2D seismic per day. Two or more weeks are then required to process the data, followed by several weeks for interpretation. As a result, it can take a minimum of six months to record and interpret 1,000 linear miles of new 2D seismic data.

We identify approximately twenty SFD leads on average for each three-hour survey, and ultimately on average, two or 10% of these leads are considered for further evaluation. The SFD prospects which we tender can be pool to field-sized targets that could require two to ten wells or more to exploit depending upon the accumulation. The actual number of these recommended SFD prospects that are accepted and ultimately drilled would, however, be dependent upon any number of competitive, geological and environmental variables.

ANALYSIS OF SFD SURVEY RESULTS TO DATE

We have not identified and drilled any commercially viable prospects. The drilling results have validated the effectiveness of our SFD technology in locating the proper structures as most of the wells drilled have encountered hydrocarbon bearing formations.

JOINT VENTURES

We form standard industry joint ventures on a prospect-by-prospect basis with various partners, depending upon the requirements of the specific prospect.

BUSINESS AND GEOGRAPHIC SEGMENTS

We currently operate in only one business segment, oil and natural gas exploration. We intend to develop oil and natural gas exploration prospects identified using our SFD technology to the point of mineral rights acquisition either with or without joint venture partners. We do not currently sell or market our SFD data or surveying services as a separate product to third parties. For geographical segment information, see explanatory Note 17 to our consolidated financial statements included with this annual report.

OPERATIONAL RESULTS

During 2003, the following significant events occurred:

·	in March we sold all of our U.S. properties for $720,000 cash and the return to treasury of all of our outstanding preferred shares;
·	in August we acquired our Tenaka property in British Columbia, Canada;
·	in September, we closed a private placement for $750,000 for which we issued 1,875,000 common shares;
·	in October we continued NXT from Nevada to Alberta;
·	in November we commenced drilling our South Adsett , British Columbia, prospect;
·	in December we commenced two private placements and closed the 2003 flow-through placement segment; and
·	in December the South Adsett drilling was completed and although there were gas shows, the well was abandoned in late February 2004.

Summary of Exploration Costs

Summarized below are the oil and natural gas property costs we capitalized for the year ended and as of December 31, 2003 and 2002:

		Capitalized for the Years Ended December 31		Capitalized As of December 31
		2003	2002	2003	2002

Acquisition costs		$ 389,679	$ 232,226	$ 1,658,346	$ 1,268,667
Exploration costs		865,926	1,380,801	8,257,804	7,391,878
Development costs		-	27,681	83,234	83,234
	Oil and natural gas properties	1,255,605	1,640,708	9,999,384	8,743,779
Less depletion		(17,291)	(140,122)	(157,413)	(140,122)
Less impairment		(1,365,008)	(3,495,970)	(6,977,395)	(5,612,387)
Less dispositions		(1,442,819)	(158,255)	(1,670,170)	(227,351)
	Net oil and natural gas properties	$ (1,569,513)	$ (2,153,639)	$ 1,194,406	$ 2,763,919

Net proved and unproved oil and natural gas property costs are summarized below:

	Capitalized for the Years Ended December 31		Capitalized as of December 31
	2003	2002	2003	2002

Proved property costs	$ (781,446)	$ (1,363,260)	$ Nil	$ 781,446
Unproved property costs	(788,067)	(790,379)	1,194,406	1,982,473
	$ (1,569,513)	$ (2,153,639)	$ 1,194,406	$ 2,763,919

Summary of Drilling Results

Summarized below are our drilling results relative to natural gas or oil wells in which we have an interest.

			Total Wells Drilled In Period (1)	Wells Placed In Commercial Production	Wells Shut-In Pending		Wells Abandoned Because
			Total Wells Drilled In Period (1)	Wells Placed In Commercial Production	Connection To Pipeline	Further Development Decisions	Dry or NonCommercial	Junked For Mechanical Reasons

			(Gross Wells / Net Wells)

2003:
	United States		—	—	—	—	—	—
	Canada		2/ 0.375	—	1/ 0.225	1/ 0.15	—	—
		Total	2/ 0.375	—	1/ .0225	1/ 0.15	—	—


2002:
	United States		1 / 0.17	—	—	—	1 / 0.17	—
	Canada		1 / 0.21	—	—	—	1 / 0.21	—
		Total	2 / 0.38	—	—	—	2 / 0.38	—

2001:
	United States		2 / 0.46		1 / 0.23	—	1 / 0.23	—
	Canada		3 / 0.17	—	2 / 0.11	—	1 / 0.06	—
		Total	5 / 0.63	—	3 / 0.34	—	2 / 0.29	—

Cumulative to date			24 / 3.575	—	10 / 1.415	6 / 0.89	7 / 1.12	1 / 0.15

(1)

Based on rig release dates.

(2)

Summary of Proved Reserves

We do not have any proved reserves at December 31, 2003 as we sold our U.S. properties in March 2003.

Summary of Acreage

Summarized below is the acreage of land holdings in which we hold either direct working interest agreements, or have a right to acquire a working interest.

	Unproved
Interest (geographical area)	Gross Acres	Net Acres
Alberta	32,851	9,915
British Columbia	11,673	3,798
Total	44,524	13,713

DESCRIPTION OF PROPERTIES

Alberta, Canada

·	*Monarch—*We hold a combination 4 % overriding royalty interest in this 3,723 acre exploration block located in the Kehoe area of southwestern Alberta.
·	*Carbon —* We hold a 2.5% overall net overriding royalty interest in this 640 acre exploration block located in the Carbon area of southwestern Alberta and receive a monthly royalty.
·	*Nanton —* We hold 6,560 acres at this prospect in southern Alberta.
·	*Princess —* We currently own the Mannville and deeper rights to 1,280 acres in the Princess area. We hold a 22.5% working interest in this prospect.
·	*Reagan—* We hold a 22.5% working interest in 2,560 acres in this prospect.
·	*Fincastle —* We hold 21% to 50 % interests in 1,280 acres in this prospect which targets Jurassic Sawtooth sands in the Taber area. In December 2002, a partner drilled and abandoned a well on this prospect.

British Columbia, Canada

·	*South Adsett—* This land was purchased in August 2002 and was drilled in late 2003. Although there were gas shows the well was abandoned in late February 2004. We hold a 15.0 % interest in 8,235 acres.
·	*Tenaka—* This land was purchased in August 2003 and we plan to run seismic on it in 2004. We hold a 33% interest in 2,703 acres.

FUTURE ACTIVITIES

We are in the process of implementing the changes we have made to our business strategy. In the past, we were compelled by our joint venture agreements to accept our partners’ decisions on which prospects were to be drilled. The prospects selected by our partners were often not the preferred SFD targets.

As a result of the low success rates achieved in those joint ventures, which have now expired, we believe that we must:

·	take the lead in applying SFD to larger relatively unexplored basins, including regions outside of North America;
·	upon identification of likely prospects, run gravity and 2D seismic to pinpoint drilling locations;
·	acquire mineral rights or negotiate participation rights, and
·	drill the selected sites, either directly or with interested joint venture partners.

By taking control in certain circumstances, we will attempt to ensure that the following objectives are appropriately addressed:

·	focus our exploration efforts on areas where SFD will be most effective;
·	expeditiously pursue seismic, land acquisition and drilling operations to prove prospects when we believe the circumstances to be warranted;
·	avoid exploration areas where we cannot acquire all prospective zones as our SFD technology cannot determine the depth of subsurface reservoirs or other potential hydrocarbon-bearing features with a sufficient degree of accuracy; and
·	avoid exploration areas with inherent technical difficulties of a nature our SFD technology cannot currently satisfactorily address, as our SFD technology cannot to date determine whether reservoirs containing SFD identified prospects have sufficient porosity and permeability to enable any hydrocarbon accumulations to be extracted in commercial quantities.

Our future activities will be aggressively directed towards creating value from our existing lands through an active program of soliciting farm-ins, participating in the most attractive drilling prospects as well as dispositions of those prospects and reserves which we feel have limited upside potential or are not core to our plans.

Management will be seeking to monetize assets on a continuous basis to fund exploration efforts. A number of properties have been identified as disposition candidates and are being marketed. Creating a consistent revenue stream to fund on-going operations is critical at this point and will be a prime focus for much of 2004. At the same time, we will be seeking opportunities that do not require large outlays of capital but which will enable us to earn interests in mineral rights through the application of SFD.

COMPETITION

Since we use our SFD technology for wide-area oil and natural gas reconnaissance exploration, our competition would generally be described as other companies using other technologies for wide-area oil and natural gas reconnaissance exploration. The principal competitive technology in this regard is seismic, which is well accepted in the industry and has been used for over 70 years. While there are numerous seismic service companies, none use their technology for their own exploration but rather they sell the service to the oil and gas industry. The largest seismic providers to our knowledge are Compagnie Generale de Geophysique, S.A, Seitel, Inc., Veritas DGC Inc. and Petroleum Geo-Services A.S.A.

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

To our knowledge, there are no other companies in the oil and natural gas exploration industry who commercially employ any technology similar to our SFD technology.

EMPLOYEES

We utilize specialized skill and knowledge in the identification and evaluation of prospects and in the research, development and improvement of the SFD technology. We have obtained the necessary skill and knowledge through our current employees. As of December 31, 2003, we had a staff of 12 consisting of 7 full-time employees and 5 consultants including 2 financial staff, 2 operations staff, 1 landman, 1 geologist, 1 pilot, 1 electronics engineer, a research scientist holding a Ph.D. in micro-electronics and 3 administrative staff.

RESEARCH AND DEVELOPMENT

Our research and development activities have focused on developing, improving and testing our SFD survey system and related components. As we are now in the more mature stage of full practical application we have reduced our expenditures in the base research and are devoting our resources to enhanced application capability. Research and development expenses in 2003 were nil, $152,862 in 2002 and $418,422 in 2001.

MANUFACTURING CAPACITY AND SUPPLIERS

We are not dependent upon any third party contract manufacturers or suppliers to satisfy our technology requirements. Our SFD sensors and the SFD unit in which they are incorporated are custom designed, fabricated and assembled in-house. The customized software used in our data acquisition system are written and modified by outside consulting programmers with whom we have long-standing relationships. The computer hardware we use in our SFD survey systems (other than the SFD unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources.

SUBSIDIARIES

We have two wholly-owned operating subsidiaries: NXT Energy Canada Inc. and NXT Aero Canada Inc., federal Canadian corporations formed on April 1, 1997 and October 30, 2000, respectively. NXT Energy Canada focuses on Canadian-based exploration and the survey flight activities are conducted through NXT Aero Canada. We also have two wholly-owned inactive subsidiaries: NXT Energy USA, Inc. and NXT Aero USA, Inc., Nevada corporations formed on October 20, 1995 and August 28, 2000, respectively;

GOVERNMENTAL AND ENVIRONMENTAL REGULATION

SFD Survey Flight Operations

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

Oil and Gas Exploration and Development Projects

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

in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend to stricter environmental legislation and regulations will continue.

We do not expect that any of these government controls or regulations will affect projects in which we participate in a manner materially different than they would affect other projects of similar size or scope of operations. All current legislation is a matter of public record and we are not able to accurately predict what additional legislation or amendments may be enacted. Governmental regulations may be changed from time to time in response to economic or political conditions. Any laws enacted or other governmental action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and natural gas industry in general would have a material adverse effect on our business, financial condition and results of operations.

OPERATING HAZARDS

SFD Survey Flight Operations

The operations of SFD survey flights are subject to the usual hazards incident to general and low-level flight operations. These hazards can cause personal injury and loss of life, as well as severe damage to and destruction of property. We maintain general business insurance coverage and insurance specific to the operation of a third party aircraft.

Oil and Gas Exploration and Development Projects

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

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

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

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

SFD TECHNOLOGY AGREEMENT

Our rights to use our SFD technology arises from the technology agreement that we entered into with Momentum Resources Corporation whereby we have been granted the exclusive worldwide right to use, possess and control the SFD Data for hydrocarbon identification and exploration purposes.

The terms of the agreement are set forth in a document entitled “Restated Technology Agreement” and dated August 1, 1996, which purpose was to supercede a prior agreement dated January 1, 1996. Momentum Resources is a Bahamas corporation which is directly owned and controlled by Messrs. George Liszicasz and R. Dirk Stinson, who were also parties to the Restated Technology Agreement. Mr. Liszicasz, who is the inventor of the SFD technology, is also our largest stockholder and the Chief Executive Officer and a director of our company. Mr. Stinson is a past director and officer of NXT.

The material terms of the Restated Technology Agreement, as amended by the Amendment to the Restated Technology Agreement, dated April 3, 1998, are summarized as follows:

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We hold the exclusive worldwide right to use, possess and control all SFDs created as of August 1, 1996, as well as any enhancements and know-how relating thereto.

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We are also entitled to the exclusive use of all SFD data generated by the SFDs for hydrocarbon identification and exploration purposes.

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Momentum Resources is obligated to use its best efforts to survey with the SFD certain geographic areas throughout the world which have been mutually selected by us and Momentum Resources and to provide all raw SFD data resulting form such surveys to us for our exclusive use for the identification and exploitation of hydrocarbons. Momentum Resources further agreed to provide no less than 500 hours per year of trained manpower to generate the SFD data with respect to the selected areas. Despite this obligation, the Restated Technology Agreement does not set forth any provisions in the event that Momentum Resources fails to live up to these obligations.

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The agreement provides for the Company to pay Momentum Resources a data fee equal to (i) 1% of the “Prospect Profits” actually received by us or our subsidiaries with respect to the commercial exploitation of each Prospect for which SFD data is provided by Momentum on or before December 31, 2000; and (ii) 5% of any Prospect Profits actually received by us or our subsidiaries with respect to the commercial exploitation of each Prospect for which SFD data is provided by Momentum after December 31, 2000. As of the date of this annual report, we have not generated any Prospect Profits and thus have not paid any data fees to Momentum Resources. “Prospect Profits” generally means the aggregate of all gross revenues that we or our subsidiaries receive with respect to the commercial exploitation of all Prospects calculated, less all project expenses actually p aid by us or our subsidiaries with respect to the commercial exploitation of all Prospects. “Prospects” generally means any identified search areas that have commercially extractable amounts of hydrocarbons as determined by the interpretation of the SFD data.

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In addition to the noted royalty the agreement provides for the Company to grant Momentum Resources "performance options" entitling it to purchase 16,000 unregistered common shares for each month in which production from SFD prospects exceeds 20,000 barrels of hydrocarbons. The exercise price for these warrants will be the "fair market value" of our common shares as determined by the mean between the closing representative bid and asked price for our common shares on the last business day of the quarter of calculation as reported by NASDAQ or NASD or if the common shares are not traded on such date, on the next preceding trading day. The options automatically expire to the extent unexercised three years from the date of grant. We are not obligated, under any circumstances, to grant options which would entitle the holders to acquire more than 8% of our common shares, after taking into consideration outstanding unexercised options. The performance options are also non-transferable except to Momentum Resource's

affiliates. As of the date of this annual report, no performance options have been earned by Momentum Resources.

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Momentum Resources is prohibited during the term of the license from (i) engaging in the identification or exploitation of hydrocarbons for its own account or any party other than the Company; (ii) granting any license or sublicense to any third party to use SFDs or SFD data to any other party for any purpose; (iii) disclosing confidential and/or proprietary information relating to the SFD or SFD data to any other party; or (iv) selling, assigning or transferring its business, or license or sublicense the SFD or SFD data to any party.

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We are prohibited during the term of the license from (i) identifying or exploiting deposits other than hydrocarbons which have been identified using the SFD; (ii) licensing or sublicensing or providing the SFD data or interpretations thereof to any party (other than our subsidiaries and joint venture partners); (iii) disclosing confidential and/or proprietary information relating to the SFD or SFD data to any other party; or (iv) selling, assigning or transferring our business, or rights to the SFD data.

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

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Momentum Resources, in turn, reserves the right to terminate the SFD technology Agreement upon the occurrence of any of the following events:

our failure to make any payment required under the Agreement;

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

our dissolution or liquidation;

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

our failure to perform any other material covenant, agreement or term of the Agreement.

ITEM 2. PROPERTIES

FACILITIES

Our principal executive office and research and development facilities are located at 700-840-7 Avenue SW, Calgary, Alberta, T2P 3G2. Our sublease, consisting of approximately 6,600 square feet, expires on July 31, 2004. Our combined obligations for base lease payments and building operating cost and other pass-through items under this lease are approximately CDN $13,100 per month. We are currently considering new premises.

SURVEY AIRCRAFT

We have developed a universal platform for our SFD equipment that can be readily installed into most types of aircraft and we no longer require custom fitted airplanes. We lease airplanes as needed to conduct surveys.

PETROLEUM PROPERTIES

For a description of our petroleum properties, see the sections of this annual report captioned "Summary of Exploration Costs" and "Description of Properties" and Notes 5, 17 and 18 of our consolidated financial statements included at the end of this annual report.

ITEM 3. LEGAL PROCEEDINGS

On November 27, 2002, we were served a Statement of Claim which had been filed on November 25, 2002, in the Court of Queen’s Bench of Alberta, Judicial District of Calgary (Action No. 0201-19820), naming Energy Exploration Technologies Inc. and George Liszicasz as defendants. Mr. Dirk Stinson, the plaintiff, alleges that NXT failed to pay him compensation under a consulting agreement and further alleges that NXT, without lawful justification, obstructed Mr. Stinson from trading his shares of NXT. At the time of the filing of this suit, Mr. Stinson was a major shareholder of our common stock. He is a past President and director of NXT and is currently a director and shareholder of Momentum Resources. Mr. Stinson was seeking, among other things, damages in the amount of $1,614,750 and an injunction directing NXT to instruct our transfer agent to immediately remove the legend from Mr. Stinson&# 146;s shares. On December 10, 2002, we filed our Statement of Defence. On July 14, 2003, we received notice that the plaintiff had dropped all claims except for a claim for $74,750 plus interest for compensation under a consulting agreement.

We believe the claim against us is without merit and intend to vigorously defend ourselves against the claim and are seeking an expeditious dismissal of the claim.

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

Neither we nor our subsidiary, NXT Energy Canada, Inc., were parties to the Ferry Flight Contract. We believe the claim against us and our subsidiary is without merit and intend to vigorously defend ourselves against the claim and are seeking an expeditious dismissal of the claim.