UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


      (Mark One)

      [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

                      For the fiscal year ended June 30, 2003

      [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

      Commission File No:  0-9261

                             KESTREL ENERGY, INC.
                             --------------------
            (Exact name of registrant as specified in its charter)

State of Incorporation: Colorado   I.R.S. Employer Identification No. 84-0772451

      1726 Cole Boulevard, Suite 210
      Lakewood, Colorado                                    80401
      (Address of principal executive offices)           (Zip Code)

      Registrant's telephone number, including area code:  (303) 295-0344

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

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

                               TITLE OF EACH CLASS
                           COMMON STOCK, NO PAR VALUE

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.

                      [X]....YES       ......[ ]     ......NO

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

The issuer's revenues for its most recent fiscal year were $1,304,581.

At September 30, 2003, 9,798,400 common shares (the registrant's only class of
voting stock) were outstanding. The aggregate market value of the 5,164,673
common shares of the registrant held by nonaffiliates on that date (based upon
the mean of the closing bid and asked price on the OTC Bulletin Board) was
$1,647,531.

                       Documents Incorporated by Reference

Certain portions of the registrant's Proxy Statement relating to the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III.



                           TABLE OF CONTENTS

PART I

Item 1. Description of Business..............................................1

        General Description of Business......................................1

        Recent Developments..................................................1

        Recent Activities....................................................1

        Proved Reserves Position.............................................1

        Borrowing Activities.................................................2

        Fundraising Activities...............................................2

        Greens Canyon Project................................................3

        Move to OTC Bulletin Board...........................................3

        Recent Accounting Pronouncements.....................................4

        Operations and Policies..............................................4

        Customers............................................................5

        Risk Factors.........................................................5

        Forward-Looking Statements...........................................6

Item 2. Description of Property..............................................8

        Oil and Gas Interests................................................8

        Royalty Interests Under Producing Properties.........................8

        Drilling Activities..................................................8

        Farmout Agreements...................................................9

        Oil and Gas Production, Prices and Costs.............................9

        Office Facilities...................................................10

Item 3. Legal Proceedings...................................................10

Item 4. Submission of Matters to a Vote of Security Holders.................10

PART II.....................................................................10

Item 5. Market for Registrant's Common Equity and Related Stockholder
        Matters.............................................................10

        Outstanding Shares of Common Stock..................................11

        Stock Price.........................................................11

        Dividend Policy.....................................................11

Item 6. Management's Discussion and Analysis of Financial Condition and
        Results of Operations...............................................13

        Liquidity and Capital Resources.....................................14

        Results of Operations...............................................14

Item 7. Financial Statements and Supplementary Data.........................14

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure................................................14

PART III  ..................................................................14

Item 9. Directors and Executive Officers of the Registrant..................14

Item 10.Executive Compensation..............................................14

Item 11. Security Ownership of Certain Beneficial Owners and Management.....14

Item 12. Certain Relationships and Related Transactions.....................14

PART IV ....................................................................15

Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K....15

Item 14. Controls and Procedures............................................16

                                       ii


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL DESCRIPTION OF BUSINESS

Kestrel Energy, Inc. (the "Company") was incorporated under the laws of the
State of Colorado on November 1, 1978. The Company's principal business is the
acquisition, either alone or with others, of interests in proved developed
producing oil and gas leases, and exploratory and developmental drilling.

At June 30, 2003 the Company owned oil and gas interests in the states of
Louisiana, New Mexico, Oklahoma, Texas and Wyoming

                               RECENT DEVELOPMENTS

RECENT ACTIVITIES

The Company is pleased to report that development activity at the Company's
Hilight CBM project, located in Campbell Co., Wyoming, has been accelerated due
to a dramatic improvement in gas prices in the area. During the later part of
fiscal 2003 the Company participated in the drilling of 4 additional development
wells and in the early part of fiscal 2004 has already drilled another 4 wells.
It is expected that further development activity at Hilight field will continue
during the year. In addition, the development of a shallower coal seam has begun
and could add a further 80 drilling locations. The shallow coal seam is
productive elsewhere in the area.

In July, 2003 the Company was the successful bidder at the Louisiana State lease
sale for offsetting acreage to the shut-in Royal Resources #1 North Lake Boeuf
field. By acquiring this acreage Kestrel now controls the acreage within the two
productive Unit areas and can now begin to pursue farm-out efforts to bring the
well back on production and evaluate additional zones of potential.

In June, 2003 the Company participated in the Chadron exploration well, located
in Dawes Co. Nebraska. Although unsuccessful, the Company will continue to
review data from the well in order to decide if any further activity is
warranted. The Company and it's joint venture participants still hold a large
acreage position under options and will continue to high grade areas of
interest. The funds used for the Chadron project were raised from a small
private placement that was completed in June, 2003.

PROVED RESERVES POSITION

As of June 30, 2003, the Company's undiscounted net future cash flows have been
estimated by Sproule Associates Inc., an independent petroleum engineering firm,
to be approximately $21,667,000. This compares to $18,641,000 as of June 30,
2002. The increase in the current year is the result of higher oil and natural
gas prices offset against revisions of previous quantity estimates, particularly
at Greens Canyon.

For the fiscal year ended June 30, 2003, the Company's proved oil reserves
increased approximately 37,300 bbls. to 310,700 bbls., or 14% from 273,400 in
2002. The Company's proved gas reserves decreased 7,310 Mmcf to 4,759 Mmcf, or
61%, from 12,069 Mmcf in 2002. The decrease in proved gas reserves is
attributable primarily to the decision to remove all proved undeveloped and
proved developed non-producing reserves associated with the Greens Canyon
project, production during the year and the sale of several non-core producing
assets. The resource at Greens Canyon will remain as unproved until further
appraisal drilling can confirm the projects commerciality.

Despite the reserve write down at the Greens Canyon property, the Company's
reserve value on the remaining properties grew during the year due to higher
prices for natural gas and oil. The Company's core properties have extremely
long lived reserves, in excess of 40 years, which will provide a solid
foundation as the Company moves forward.




The Company is also investigating other petroleum targets at different horizons
on the Company's leasehold in the Greens Canyon property. The other horizons
include numerous coalbed methane zones at depths up to 5,800 feet. While these
targets remain unproved they do provide the potential for significant reserve
additions should exploration efforts prove successful. The Company will be
seeking industry partners to evaluate these other targets.

BORROWING ACTIVITIES

On January 24, 2003, the Company borrowed $400,000 from R&M Oil and Gas, Ltd.,
of which Timothy L. Hoops, one of the Company's directors and its Operations
Manager, is a partner. That loan is due on January 31, 2005, bears interest at
12.5% per annum and is secured by the Company's oil and gas interests in Grady
County, Oklahoma. In the event of a default under the terms of the R&M loan, and
the sale of the collateral securing the loan, the Company would receive any
remaining proceeds after payment to R&M of its expenses in connection with such
sale(s) and any indebtedness due and payable to R&M under the loan. The proceeds
from the R&M loan were used to retire the outstanding debt to Samson Exploration
N.L. and reduce the Company's accounts payable position at the time. The R&M
loan was approved unanimously by the Board of Directors with Mr. Hoops
abstaining.

     On May 5, 2003, the Company entered into a Line of Credit Agreement with
     Barry D. Lasker, the Company's President and CEO, and for a maximum of
     $200,000. Under the terms of the agreement all outstanding amounts are due
     on May 4, 2005 and bear interest at 10% per annum. The loan can also be
     converted, at Lasker's election, into common shares of the Company at $0.40
     per share. The initial proceeds of the loan consisted of $40,000 cash and
     the conversion of debt of approximately $152,000 of unpaid wages and
     unreimbursed business expenses owed to Mr. Lasker by the Company. The
     Lasker loan is secured by the Company's oil and gas interests in Campbell
     County, Wyoming. In the event of a default under the terms of the Lasker
     loan, and the sale of the collateral securing the loan, the Company would
     receive any remaining proceeds after payment to Mr. Lasker of his expenses
     in connection with such sale(s) and the indebtedness due and payable to him
     under the loan. Like the R&M loan, the Lasker loan was approved as an arms
     length transaction by the entire Board of Directors with Mr. Lasker
     abstaining.

On February 4, 2003, the Company repaid the Samson Exploration N.L. note in
full, including all accrued interest and fees, with $327,143.15 in cash and the
transfer of the Company's remaining 25,000,000 shares of Victoria Petroleum N.L.
common stock.

FUNDRAISING ACTIVITIES

In April 2002, the Company completed a private placement of 1,409,000 units at a
price of $0.70 per unit. Each unit consisted of one common share and one common
share purchase warrant. Each of the common share purchase warrants sold in that
offering entitled the holder to acquire an additional common share of the
Company at a price of $1.25 on or before March 10, 2003. The warrants have since
expired. The net proceeds of approximately $950,000 was used for debt
consolidation and for general corporate purposes.

In June 2003, the Company completed a private placement of 335,000 units at a
price of $1.00 per unit. Each unit consisted of two common shares and one common
share purchase warrant. Each of the common share purchase warrants sold in that
offering entitled the holder to acquire an additional common share of the
Company at a price of $0.50 on or before June 18, 2004. The net proceeds of
approximately $335,000 was used for payment of the Chadron prospect fee and for
50% of the costs to drill the Sellman-1X exploration well, located in Dawes
County, Nebraska.

                                       2



GREENS CANYON PROJECT

Beginning in fiscal 2000, the Company began accumulating a substantial amount of
acreage in southwest Wyoming's Green River Basin (the "Greens Canyon Prospect").
The Company also drilled and completed two wells, the Greens Canyon #1 (UPRC
#27-3) and Greens Canyon #2 (UPRC #29-2). While the drilling results of both
wells indicated that substantial amounts of gas were present and could be
produced, the Company encountered a series of mechanical problems when it
attempted to fracture the wells to stimulate production. As a result, initial
production from the wells was only 500 to 700 mcf per day. Information gathered
during the completion process made it clear that the mechanical problems, which
were unrelated to any specific characteristics of the wells themselves, were the
sole cause of the lower production. The Company announced its intent to take
necessary corrective actions to remedy the mechanical problems and re-establish
commercial production levels. In consultation with its independent petroleum
engineering consultants, Sproule Associates Inc., the Company classified a
substantial amount of Greens Canyon reserves as proved undeveloped reserves in
its June 30, 2000 petroleum reserves report because the Company believed that
its geological and engineering data demonstrated with reasonable certainty that
those known reserves were recoverable under existing economic and operating
conditions.

During fiscal 2001, the Company began the process of re-working the Greens
Canyon wells. The Company re-completed the 27-3 well, resulting in improved
production levels in the short run. By the end of fiscal 2001, however, daily
production rates for the well had declined to modest levels. In October of 2001,
new Company management declared that, while the Company was still convinced that
significant gas reserves were present, the Company would bring in additional
participants into the Greens Canyon project in order to share the financial
burden of further development. As a result, the Company reported a decrease in
the total proved gas reserves to 13.4 Bcf and oil reserves to 355,000 barrels.

In fiscal 2002 the Company was overburdened by debt and limited cash flow, which
was at least partially attributable to additional debt incurred to support
development of the Greens Canyon project. Management's resulting focus on
strengthening its balance sheet in fiscal 2003 prevented it from focusing its
full attention on the Greens Canyon farm out effort. During fiscal 2003, the
Company pursued the Greens Canyon farm out effort, however, as of this date, it
has not secured a suitable farm-out partner. Several parties have expressed an
interest in the project and discussions with these parties are ongoing. As of
June 30, 2003, the Company has decided to remove all proved undeveloped and
proved developed non-producing reserves formally attributed to the Greens Canyon
project from its reported reserves until further drilling activity demonstrates
that commercial flow-rates can be achieved. The Company continues to believe
that an economic resource has been discovered at Greens Canyon and will continue
to press forward seeking out additional industry participants.

MOVE TO OTC BULLETIN BOARD

By letter dated February 14, 2002, The Nasdaq Stock Market, Inc. informed the
Company that it did not meet all of the requirements for continued listing on
the SmallCap Market because, as of that date, the Company's stock had traded
below the minimum $1.00 per share requirement for 30 consecutive trading days.
The Company was provided 180 calendar days, or until August 13, 2002, to regain
compliance with the minimum trading price standard. If compliance could not be
achieved by that date, but the Company met the initial listing criteria for the
SmallCap Market on that date, the Company would receive an additional 180
calendar day grace period to demonstrate compliance with the $1.00 per share
requirement. On August 14, 2002, Nasdaq informed the Company that, even though
it had not complied with the minimum $1.00 per share trading requirement by
August 13, 2002, because the Company satisfied the initial listing requirements
as of March 31, 2002, it was granted the additional 180 calendar day grace
period, or until February 10, 2003, to regain compliance with the minimum
trading price standard. On April 8, 2003, the Company's stock was delisted from
the SmallCap Market, and it now trades on the OTC Bulletin Board and will
continue to do so as long as the Company continues to file its reports with the
SEC.

                                       3



RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the financial Accounting Standards Board ("FASB") issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". SFAS 146 generally requires a liability for a cost
associated with an exit or disposal activity to be recognized and measured
initially at its fair value in the period in which the liability is incurred.
The pronouncement is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 has had no impact on the Company's
financial position or results of operations.

SFAS 147, "Acquisitions of Certain Financial Institutions," was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.

In December 2002, the FASB approved SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement 123."
SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock based compensation using the methods detailed in the
stock-based compensation accounting policy.

In April 2003, the FASB approved SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 is not expected to
apply to the Company's current or planned activities.

In June 2003, the FASB approved SFAS. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS. 150 is not expected to have an
effect on the Company's financial position.

                             OPERATIONS AND POLICIES

The Company currently is focusing its exploration, acquisition and development
opportunities in areas where it has gained historical knowledge, specifically
within its current project inventory. However, the acquisition, development,
production and sale of oil and gas acreage are subject to many factors outside
the Company's control. These factors include worldwide and domestic economic
conditions; proximity to pipelines; existing oil and gas sales contracts on
properties being evaluated; the supply and price of oil and gas as well as other
energy forms; the regulation of prices, production, transportation and marketing
by federal and state governmental authorities; and the availability of, and
interest rates charged on, borrowed funds.

Historically, in attempting to acquire, explore and drill wells on oil and gas
leases, the Company has often been at a competitive disadvantage since it had to
compete with many companies and individuals with greater capital and financial
resources and larger technical staffs. The Company has in the past sought to
mitigate some of these problems by forming acquisition joint ventures with other
companies. These joint ventures allow the Company access to more acquisition
candidates and enable the Company to share the evaluation and other costs among
the venture partners.

                                       4



The Company's operations are also subject to various provisions of federal,
state and local laws regarding environmental matters. The impact of these
environmental laws on the Company may necessitate significant capital outlays,
which may materially affect the earnings potential of the Company's oil and gas
business in particular, and could cause material changes in the industry in
general. The Company strongly encourages the operators of the Company's oil and
gas wells to do periodic environmental assessments of potential liabilities. To
date, environmental laws have not materially hindered nor adversely affected the
Company's business. Please see Item 3, Legal Proceedings, however, for a
discussion of potential environmental litigation involving the Company.

The Company has three full-time employees, including the Company's President,
Barry D. Lasker. The Company also hires outside professional consultants to
handle certain additional aspects of the Company's business. Management believes
this type of contracting for professional services is the most economical and
practical means for the Company to obtain such services at this time.

CUSTOMERS

During fiscal year 2003, the Company had three major customers: Kaiser Francis
Oil Company, Eighty-Eight Oil LLC and BP America Production Company. Sales to
these customers accounted for 27%, 11% and 11%, respectively, of oil and gas
sales in 2003. The Company does not believe that it is dependent on a single
customer. The Company has the option at most properties to change purchasers if
conditions so warrant.

                                  RISK FACTORS

WE MUST CONTINUE TO EXPAND OUR OPERATIONS

Our long term success is ultimately dependent on our ability to expand our
revenue base through the acquisition of producing properties and, to a much
greater extent, by successful results in our exploration efforts. We will need
to continue to raise capital to make additional acquisitions and to make further
investments in our current portfolio of exploration properties. We have made
significant investments in exploration properties in the Green River Basin in
Wyoming. There is no assurance that any of these acquisitions or investments or
any other acquisitions or investments in the future will be successful. In fact,
while we have already had some measure of success with these acquisitions, we
have also had some disappointments. All of our exploration projects are subject
to failure and the loss of our investment.

PRICES OF OIL AND NATURAL GAS FLUCTUATE WIDELY BASED ON MARKET CONDITIONS AND
ANY DECLINE WILL ADVERSELY AFFECT OUR FINANCIAL CONDITION

Our revenues, operating results, cash flow and future rate of growth are very
dependent upon prevailing prices for oil and gas. Historically, oil and gas
prices and markets have been volatile and not predictable, and they are likely
to continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuations in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond our control, including:

o    the strength of the United States and global economy;
o    political conditions in the Middle East and elsewhere;
o    the supply and price of foreign oil and gas;
o    the level of consumer product demand;
o    the price and availability of alternative fuels;
o    the effect of federal and state regulation of production and
     transportation; and
o    the proximity of our natural gas to pipelines and their capacity.

WE MUST REPLACE THE RESERVES WE PRODUCE

Even though we have recently removed a substantial amount of proved undeveloped
reserves attributable to the Greens Canyon Project in Wyoming, a substantial
portion of our oil and gas properties still contain

                                       5



proved undeveloped reserves. Successful development and production of those
reserves cannot be assured. Additional drilling will be necessary in future
years both to maintain production levels and to define the extent and
recoverability of existing reserves. There is no assurance that our present oil
and gas wells will continue to produce at current or anticipated rates of
production, that development drilling will be successful, that production of oil
and gas will commence when expected, that there will be favorable markets for
oil and gas which may be produced in the future or that production rates
achieved in early periods can be maintained.

THERE ARE MANY RISKS IN DRILLING OIL AND GAS WELLS

The cost of drilling, completing and operating wells is often uncertain.
Moreover, drilling may be curtailed, delayed or canceled as a result of many
factors, including title problems, weather conditions, shortages of or delays in
delivery of equipment, as well as the financial instability of well operators,
major working interest owners and well servicing companies. Our gas wells may be
shut-in for lack of a market until a gas pipeline or gathering system with
available capacity is extended into our area. Our oil wells may have production
curtailed until production facilities and delivery arrangements are acquired or
developed for them.

WE FACE INTENSE COMPETITION

The oil and natural gas industry is highly competitive. We compete with others
for property acquisitions and for opportunities to explore or to develop and
produce oil and natural gas. We have previously formed acquisition joint
ventures with several other companies, including Victoria Petroleum N.L. and
other affiliates, which have allowed us more access to acquisition candidates
and to share the evaluation costs with them. We face strong competition from
many companies and individuals with greater capital, financial resources and
larger technical staffs. We also face strong competition in procuring services
from a limited pool of laborers, drilling service contractors and equipment
vendors.

THE AMOUNT OF INSURANCE WE CARRY MAY NOT BE SUFFICIENT TO PROTECT US

We, our partners, co-venturers and well operators maintain general liability
insurance but it may not cover all future claims. If a large claim is
successfully asserted against us, we might not be covered by insurance, or it
might be covered but cause us to pay much higher insurance premiums or a large
deductible or co-payment. Furthermore, regardless of the outcome, litigation
involving our operations or even insurance companies disputing coverage could
divert management's attentions and energies away from operations. The nature of
the oil and gas business involves a variety of operating hazards such as fires,
explosions, cratering, blow-outs, adverse weather conditions, pollution and
environmental risks, encountering formations with abnormal pressures, and, in
horizontal wellbores, the increased risk of mechanical failure and collapsed
holes, the occurrence of any of which could result in substantial losses to us.

OUR SUCCESS MAY BE DEPENDENT ON OUR ABILITY TO RETAIN BARRY LASKER AND BOB
PETT AS KEY PERSONNEL

We believe that the oil and gas exploration and development and related
management experience of our key personnel is important to our success. The
active participation in the Company of our president, Barry Lasker and Robert J.
Pett, our chairman, is a necessity for our continued operations. We have an
employment contract with Mr. Lasker which currently expires August 14, 2004, and
renews automatically each May 14 for an additional year if neither party gives
timely notice of intent to terminate. We do not have key person life insurance
on either Mr. Lasker's or Mr. Pett's lives. We compete with bigger and better
financed oil and gas exploration companies for these individuals. Our future
success may depend on whether we can attract, retain and motivate highly
qualified personnel. We cannot assure you that we will be able to do so.

                                       6



OUR RESERVES ARE UNCERTAIN

Estimating our proved reserves involves many uncertainties, including factors
beyond our control. Our annual report on Form 10-KSB for fiscal year 2003
contains estimates of our oil and natural gas reserves and the future cash flow
to be realized from those reserves for fiscal years 2003 and 2002, as prepared
by our independent petroleum engineers, Sproule Associates Inc. There are
uncertainties inherent in estimating quantities of proved oil and natural gas
reserves since petroleum engineering is not an exact science. Estimates of
commercially recoverable oil and gas reserves and of the future net cash flows
from them are based upon a number of variable factors and assumptions including:

o    historical production from the properties compared with production from
     other producing properties;
o    the effects of regulation by governmental agencies;
o    future oil and gas prices; and
o    future operating costs, severance and excise taxes, abandonment costs,
     development costs and workover and remedial costs.

GOVERNMENTAL REGULATION, ENVIRONMENTAL RISKS AND TAXES COULD ADVERSELY AFFECT
OUR OIL AND GAS OPERATIONS IN THE UNITED STATES

Our oil and natural gas operations in the United States are subject to
regulation by federal and state government, including environmental laws. To
date, we have not had to expend significant resources in order to satisfy
environmental laws and regulations presently in effect. However, compliance
costs under any new laws and regulations that might be enacted could adversely
affect our business and increase the costs of planning, designing, drilling,
installing, operating and abandoning our oil and gas wells and other facilities.
Additional matters that are, or have been from time to time, subject to
governmental regulation include land tenure, royalties, production rates,
spacing, completion procedures, water injections, utilization, the maximum price
at which products could be sold, energy taxes and the discharge of materials
into the environment.

THE MARKET FOR OUR STOCK IS HIGHLY VOLATILE

Our stock is currently traded on the OTC Bulletin Board, but there has
historically been a relatively low volume of trading in the shares even when we
listed on the Nasdaq Small Cap Market. Consequently, the price at which the
shares trade may be highly volatile. We were delisted from the Nasdaq SmallCap
Market on April 8, 2003 because our stock traded below the minimum $1.00 share
requirement for too long a period of time. Under current rules our stock will be
listed on the OTC Bulletin Board as long as we continue to file our reports with
the SEC. The change to the OCT Bulletin Board may have reduced the liquidity of
our stock which, in turn, may adversely affect its trading price.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. We use words such as
"anticipate", "believe", "expect", "future", "may", "will", "should", "plan",
"intend", and similar expressions to identify forward-looking statements. These
statements are based on our beliefs and the assurances we made using information
currently available to us. Because these statements reflect our current views
concerning future events, these statements involve risks, uncertainties and
assumptions. Our actual results could differ materially from the results
discussed in the forward-looking statements. Some, but not all, of the factors
that may cause these differences include those discussed in the risk factors in
this report. You should not place undue reliance on these forward-looking
statements. You should also remember that these statements are made only as of
the date of this report and future events may cause them to be less likely to
prove to be true.

                                       7



ITEM 2. DESCRIPTION OF PROPERTY.

OIL AND GAS INTERESTS

The following table describes the Company's leasehold interests in developed and
undeveloped oil and gas acreage at June 30, 2003:

                              Total                         Total
                              -----                         -----
                     Developed Acreage (1)(2)     Undeveloped Acreage (1)(2)
          State           Gross       Net             Gross         Net
          -----           -----       ---             -----         ---
            Louisiana      480        365               -0-         -0-
             Nebraska      -0-        -0-             2,601       1,300
           New Mexico      240         91               320          87
             Oklahoma    1,567        451               -0-         -0-
                Texas      148          4               -0-         -0-
              Wyoming    9,463      2,387            30,894      30,698
                         -----      -----            ------      ------
                TOTAL   11,898      3,298            33,815      32,085

(1) Gross acres are the total acreage involved in a single lease or group of
leases. Net acres represent the number of acres attributable to an owner's
proportionate working interest in a lease (e.g., a 50% working interest in a
lease covering 320 acres is equivalent to 160 net acres).

(2) The acreage figures are stated on the basis of applicable state oil and gas
spacing regulations.

ROYALTY INTERESTS UNDER PRODUCING PROPERTIES

At June 30, 2003, the Company held overriding royalty interests ranging from .2%
to 1.4% in 3 producing oil and gas wells located on 1,280 gross developed acres
in the United States. This compares with overriding royalty interest ranging
from 1.5% to 9.26% in 23 producing oil and gas wells located on 3,034 gross
developed acres in the U.S. at June 30, 2002. The net production for the royalty
interests for the year ended June 30, 2003 were 101 Bbls and 101 Mcf for oil and
gas respectively. The net production for the Company's royalty interests for the
fiscal year ended June 30, 2002 was, 329 Bbls and 640 Mcf for oil and gas
respectively. The royalty interests are considered to be immaterial by the
Company.

DRILLING ACTIVITIES

The Company participated in drilling 4 Hilight CBM wells located in Campbell
Co., Wyoming and the Chadron prospect, located in Dawes Co., Nebraska during the
year ended June 30, 2003. The Company did not participated in drilling any wells
in the year ended June 30, 2002.

Kestrel Energy, Inc. owned interests in net exploratory and net development
wells for the years ended June 30, 2003, and 2002 as set forth below. This
information does not include wells drilled under farmout agreements.

                                UNITED STATES
                               ---------------
                               6/30/03 6/30/02
Net Exploratory Wells: (1)
  Dry (2)                        .5       --
  Productive (3)                 --       --
                               -----    -----
                                 .5       --
                               =====    =====
Net Development Wells: (1)
  Dry (2)                         0       --
  Productive (3)                 .7     1.76
                               -----    -----
                                 .7     1.76
                               =====    =====

                                       8



(1)   A net well is deemed to exist when the sum of fractional ownership working
      interests in gross wells equals one. The number of net wells is the sum of
      the fractional working interests owned in gross wells expressed as whole
      numbers and fractions thereof.
(2)   A dry well (hole) is a well found to be incapable of producing either oil
      or natural gas in sufficient quantities to justify completion as an oil or
      natural gas well.
(3)   Productive wells are producing wells and wells capable of production,
      including wells that are shut-in.

FARMOUT AGREEMENTS

Under a farmout agreement, outside parties undertake exploration activities
using prospects owned by Kestrel. This enables the Company to participate in the
exploration prospects without incurring additional capital costs, although with
a substantially reduced ownership interest in each prospect.

During the year ended June 30, 2003, no wells were drilled under farmout
agreements.

OIL AND GAS PRODUCTION, PRICES AND COSTS

As of June 30, 2003, the Company had a royalty and/or working interest in 90
gross (3.4 net) wells that produce oil only, 36 gross (9.7 net) wells that
produce gas only, and 19 (1.2 net) wells that produce both oil and gas. All
wells that produced gas are connected to pipelines. As of June 30, 2002, the
Company had a royalty and/or working interest in 93 gross (3.5 net) wells that
produce oil only, 36 gross (9.7 net) wells that produce gas only, and 22 (1.3
net) wells that produce both oil and gas.

For information concerning the Company's oil and gas production, estimated oil
and gas reserves, and estimated future cash inflows relating to proved oil and
gas reserves, see Note 11 to the consolidated financial statements included in
this Report. The reserve estimates for the reporting year were prepared by
Sproule Associates Inc., an independent petroleum engineering firm. The Company
did not file any oil and gas reserve estimates with any federal authority or
agency during its fiscal year ended June 30, 2003.

For the year ended June 30, 2003, the Company's average operating cost
(including taxes and marketing) per barrel of oil equivalent (BOE) (converting
gas to oil at 6:1) was $10.45. The average operating cost per BOE on an
equivalent basis for fiscal years 2002 was $8.60. The average sales price per
barrel of oil sold was $24.10 for 2003 and $18.52 for 2002. The average sales
price per mcf of gas sold was $3.18 for 2003 and $2.00 for 2002.

OFFICE FACILITIES

The Company's executive offices are located at 1726 Cole Blvd., Suite 210,
Lakewood, Colorado 80401, where it leases approximately 2,358 square feet of
general office space, at an initial annual lease rate of $16.50 per square foot
escalating to $17.50 per square foot over the life of the lease. The Company's
current lease obligation expires July 31, 2006. The Company also has, under
lease, approximately 560 square feet of office space located at 1717 St. James
Place, Suite 240, Houston, Texas 77057, at an annual rate of $9,168. The current
lease obligation expires June 30, 2004.

ITEM 3. LEGAL PROCEEDINGS.

In the ordinary course of conducting its business, the Company becomes involved
in litigation, administrative proceedings and governmental investigations,
including environmental matters.

In May of 2000, the Company received a notice letter from the U.S. Environmental
Protection Agency (EPA) stating that the Company is a potentially responsible
party under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA") for the Casmalia Waste Disposal Site in Santa
Barbara County, California. If the Company is ultimately determined to be a
responsible party, it may be obligated to conduct remedial investigations,
feasibility studies, remediation and/or removal of alleged releases of hazardous
substances or to reimburse the EPA for such activities.

                                       9



The Company does not believe that it has any liability under CERCLA for wastes
disposed at Casmalia and believes that the EPA's notice was issued in error. The
Company has responded to the EPA, explaining that the Company did not arrange to
dispose of any waste at Casmalia. The Company's involvement with Casmalia is
limited to the purchase of assets from another entity, which disposed of waste
at Casmalia. The Company intends to defend allegations of its responsibility, if
any, and will also rely upon an indemnification given by the previous owner of
the properties at Casmalia, which previous owner has confirmed that the
indemnification would apply to any such allegations.

The Company is unable to estimate the dollar amount of exposure to loss in
connection with the above-referenced matter; however, the ultimate site-wide
clean up costs, which could be borne by the persons or entities found to be
responsible parties, have been estimated by the EPA at approximately $271.9
million.

It is the opinion of Company's management that the outcome of these proceedings,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.

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

None.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

OUTSTANDING SHARES OF COMMON STOCK

The Company's common stock trades over-the-counter on the OTC: Bulletin Board
Market under the symbol "KEST." Until April 8, 2003, the Company's common stock
traded on the Nasdaq SmallCap Market. At June 30, 2003, the Company had
9,798,400 shares outstanding. At June 30, 2003, the Company had approximately
1,478 shareholders of record, although the Company believes that there are more
beneficial owners of its stock, the number of which is unknown.

STOCK PRICE

These quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission and may not necessarily represent actual transactions.

      Fiscal Year June 30, 2002                      Sales Price
                                                     -----------
                                                High              Low
                                                ----              ---
      First Quarter                            $1.58            $0.69
      Second Quarter                            1.02             0.64
      Third Quarter                             0.80             0.56
      Fourth Quarter                            1.24             0.17

      Fiscal Year June 30, 2003                      Sales Price
                                                     -----------
                                                High              Low
                                                ----              ---
      First Quarter                            $0.74            $0.22
      Second Quarter                            0.70             0.17
      Third Quarter                             0.65             0.29
      Fourth Quarter                            0.55             0.10

                                       10



DIVIDEND POLICY

While there are no covenants or other aspects of any finance agreements or
bylaws that restrict the declaration or payment of cash dividends, the Company
has not paid any dividends on its common stock and does not expect to do so in
the foreseeable future.

In June 2003, the Company completed a private placement offering (the
"Offering") of 335,000 units at $1.00 per unit. Each unit consisted of two
shares of the Company's no par value Common Stock and one warrant (the
"Warrant") to purchase one share of Common Stock exercisable at $0.50 per share
(the "Unit"). The entire Offering was sold to one investor for $335,000. The
offer and sale of the Units were exempt from registration under Regulation S of
the Act for a sale to a qualified non-U.S purchaser. None of the shares of
Common Stock, Warrants or the shares of Common Stock underlying the Private
Warrants have been registered.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

     Working Capital and Cash Flows: Net working capital deficit at June 30,
2003, was $4,643 compared to a working capital deficit of $631,012 at June 30,
2002. The decrease in negative working capital of $626,369 for the year ended
2003 resulted primarily from the conversion of the Wells Fargo current debt to
the long-term R&M debt facility.

Net cash used in operating activities was $100,067 for fiscal 2003 as compared
to cash used by operating activities of $444,362 for fiscal 2002, a decrease of
$344,295. The increase in operating cash flows is primarily attributable to
higher operating margins and lower general and administrative expenses partially
offset by a net increase in operating assets when compared to last year.

Net cash used by investing activities was $349,904 in fiscal 2003 as compared to
net cash provided of $564,959 in fiscal 2002. For the year ended June 30, 2003,
$83,162 was used for capital expenditures including $41,500 on completion of 4
coalbed methane wells in Campbell County, Wyoming; and $335,000 on the Chadron
Exploration well located in Dawes Co., Nebraska. The well was unsuccessful and
has since been abandoned. The Company received $56,241 from the sale of
5,100,000 Victoria Petroleum, NL shares during the fiscal year ended June 30,
2003. The shares were acquired in May 2000 as part of the merger agreement
between the Company and Victoria Petroleum, NL. Proceeds from the sale of
several non-core assets during the year netted the Company approximately
$20,017.

Net cash provided by financing activities was $522,027 for fiscal 2003 versus
$183,074 used by financing activities a year ago. As of June 30, 2002, the
Company owed approximately $516,000 on a line of credit with Wells Fargo Bank
N.A. The line was secured by deeds of trust on various of the Company's oil and
gas producing properties. The Company borrowed $500,000 from Samson Exploration
N.L. (a related party) and used the proceeds of the loan to pay off the Wells
Fargo loan.

The Company borrowed $400,000 from R&M Oil and Gas, Ltd. The proceeds from the
R&M loan were used to retire the outstanding debt to Samson Exploration N.L. and
reduce the Company's accounts payable position at the time. The Company repaid
Samson Exploration N.L. in full, including all accrued interest and fees, with
$327,143 in cash and the transfer of the Company's remaining 25,000,000 shares
of Victoria Petroleum N.L. common stock.

The Company entered into a Line of Credit Agreement with Barry D. Lasker,
President and CEO of Kestrel, and for a maximum of $200,000. The initial
proceeds of the loan consisted of $40,000 cash and the conversion to debt of
approximately $150,000 of unpaid wages and unreimbursed business expenses owed
to Mr. Lasker by the Company.

In June 2003, the Company completed a private placement of 335,000 units at a
price of $1.00 per unit with net proceeds of approximately $335,000. During
fiscal 2003, 13,000 warrants were exercised at

                                       11



$1.25 with net proceeds of $15,678. These proceeds was used for payment of the
Chadron prospect fee and for 50% of the costs to drill the Sellman-1X
exploration well, located in Dawes County, Nebraska.

     Stockholders' Equity: Stockholders' equity decreased $1,461,944 to
$1,604,223 from $3,066,167 a year ago. The decrease is largely attributable to
impairment of $903,214 which was largely due to a write down in the value of
Greens Canyon gas reserves. As of June 30, 2003, the Company removed all proved
undeveloped and proved developed non-producing reserves formally attributed to
the Greens Canyon project from its reported reserves until further drilling
activity demonstrates that commercial flow-rates can be achieved.

     Debt Obligations: As of June 30, 2003, the Company had the following debt
obligations (all long-term):

Note Payable of $400,000 due to R&M Oil and Gas LTD (a related party). Under the
terms of the loan agreement, the note is due on January 31, 2005 and bears
interest at 12.5% per annum and is secured by the Company's oil and gas
interests in Grady County, Oklahoma. The proceeds from the loan were used to
retire outstanding indebtedness and reduce the Company's accounts payable
position at the time.

Note Payable of approximately $192,000 due to Barry D. Lasker, the Company's
President and CEO. Under the terms of the agreement all outstanding amounts are
due on May 4th, 2005 and bear interest at 10% per annum. The initial proceeds of
the loan consisted of $40,000 cash and the conversion to debt of approximately
$152,000 of unpaid wages and unreimbursed business expenses. The loan is secured
by the Company's oil and gas interests in Campbell County, Wyoming.

     Reserves and Future Cash Flows: For the fiscal year ended June 30, 2003,
the Company's proved oil reserves increased approximately 37,700 bbls. to
310,700 bbls., or 14% from 273,000 in 2002. The Company's proved gas reserves
decreased 7,310 Mmcf to 4,759 Mmcf, or 61%, from 12,069 Mmcf in 2002. The
decrease in proved gas reserves is attributable primarily to the decision to
remove all proved undeveloped and proved developed non-producing reserves
associated with the Greens Canyon project, production during the year and the
sale of several non-core producing assets. The resource at Greens Canyon will
remain as unproved until further appraisal drilling can confirm the projects
commerciality.

The Company's undiscounted net future cash flows have been estimated by Sproule
Associates Inc., an independent petroleum engineering firm, to be approximately
$21,667,000 as of June 30, 2003. This compares to $18,641,000 as of June 30,
2002. The increase in the current year is the result of higher oil and natural
gas prices offset against revisions of previous quantity estimates, particularly
at Greens Canyon,

     Gas Balancing: At June 30, 2003, the Company held no under-produced or
over-produced properties. The Company at June 30, 2002 the Company held no
under-produced or over-produced properties.

     Natural Gas Sales Contracts: The Company's gas production is generally sold
under short term contracts with pricing set on current spot markets with
adjustments for marketing and transportation costs. All contracts are cancelable
within 30-90 days notice by the Company. The Company has no contracts that are
based on a fixed natural gas price.

      Net Operating Loss and Tax Credit Carryforwards: At June 30, 2003, the
Company estimated that, for United States federal income tax purposes, it had
net operating loss carryforwards of approximately $12,122,000. The utilization
of approximately $356,000 of these carryforwards are limited to an estimated
$80,000 annually. Of the balance of the loss carryforwards, $11,766,000 is
available to offset any future taxable income of the Company. If not utilized,
the net operating loss carry forwards will expire during the period from 2003
through 2023.

                                       12



RESULTS OF OPERATIONS

FISCAL 2003 VS. FISCAL 2002

     Net Earnings: The Company reported a net loss of $2,335,980 in fiscal 2003
compared to a net loss of $8,111,561 in fiscal 2002, which was a decrease of
$5,775,581. The net loss in fiscal 2003 is primarily attributable to abandonment
and impaired expenses of $1,238,214, depreciation and depletion expenses of
$339,002 and the loss on sale of available-for-sale securities of $575,893
partially offset by positive operating margin. The abandonment and impairment
expenses of $1,238,214 was largely attributable to a write down in value of
Greens Canyon gas reserves and the dry hole costs associated with the Chadron
prospect exploration well.

     Revenue: Revenue from oil and gas sales increased in fiscal 2003 by
$146,898, or 13%, to $1,304,581. Average prices per barrel of oil increased 30%
to $24.10 from $18.52 a year ago. Average prices received per Mcf of gas
increased 59% to $3.18 from $2.00 a year ago. Sales volumes for oil decreased
29% to 17,100 barrels from 24,000 barrels a year ago. Sales volumes for gas
decreased 24% to 267 Mmcf from 353 Mmcf a year ago.

The Company recorded a gain on sale of property and equipment of $21,538. In
July, 2003, the Company sold, at auction, its over-riding royalty interests in 5
wells for gross proceeds of $22,300. After expenses of $2,083 the Company
received net proceeds of $20,017. Effective August 1, 2002, the Company conveyed
its interest in the West Buffalo Red River Unit to the Operator for settlement
of debt which, also yielded $431 in gain on sale.

The Company also disposed of 30,100,000 shares of common stock of Victoria
Petroleum, NL during fiscal 2003. The common stock was acquired as part of the
merger with Victoria Petroleum, NL in May of 2000. The Company received cash of
$56,241 for the sale of 5,100,000 shares and transferred the remaining
25,000,000 shares to Samson, which together with the cash payment of $327,143
paid off the Samson loan in full. As a result, the Company realized a loss of
$575,893 the year ended June 30, 2003 versus a loss of $561,282 for the year
ended June 30, 2002.

Other income decreased $74,144 to $99,567 from $173,711 a year ago. The decrease
is attributable to an adjustment of over-accrued severance taxes which took
place in the year ended June 30, 2002 which effectively increased last year's
other income.

     Lease Operating Expenses: Lease operating expenses decreased $67,624, or
9%, to $644,751 from $712,375 a year ago. The caption "Lease Operating Expenses"
includes not only the direct costs of operating a well, but workover costs, gas
handling fees and production taxes. Direct lease expense decreased 29% to
$421,148 from $590,083 a year ago. Workover costs increased 288% to $32,141 from
$8,282 last year. Gas handling fees increased 105% to $50,156 from $24,446 a
year ago. Production taxes increased 13% to $128,864 from $114,040 a year ago.
The decrease in direct lease expenses is attributable to lower lease expenses at
the Pierce water-flood project in Campbell County, Wyoming and the sale during
the last two years of several high operating cost properties, the full effects
of which were seen this year. The increase in workover expenses is attributable
to higher workover costs in the Company's Pierce water-flood project. The
increase in gas handling fees and production taxes was a result of higher oil
and gas revenues. Lease operating expenses on a BOE (barrel of oil equivalent)
basis increased 22% to $10.45 from $8.60 a year ago.

     Exploration Expenses: Exploration expenses decreased $32,924, or 34%, to
$63,677 from $96,601 in 2002. The decrease in exploration expense continued the
slower pace of the Company's exploration program during fiscal 2003 as the
Company's emphasis has been on reducing the outstanding debt obligation.

     Dry Holes, Abandoned and Impaired Properties: Dry holes, abandoned and
impaired property costs were $1,238,214 in fiscal 2003 as compared to $6,589,695
a year ago, a decrease of $5,351,481. The current year costs were primarily
attributable to the impairment of the Greens Canyon property and

                                       13



the dry hole costs associated with the Chadron exploration well. No wells were
abandoned during fiscal 2002.

     General and Administrative Expense: General and administrative expenses
decreased $209,836, or 21%, to $797,282 as compared to $1,007,118 a year ago.
The decrease in general and administrative expenses is attributable to lower
accounting, legal, rent, investor relations and company personnel costs offset
by higher insurance and taxation expenses. The Company continues to review ways
to reduce overhead expenses.

     Interest Expense and Loan Fees: Interest expense totaled $115,690 for the
fiscal year ended June 30, 2003 versus $121,655 a year ago. The interest is
attributable to the line of credit the Company had with Wells Fargo Bank, short
term borrowings from Samson Exploration NL and Victoria Petroleum USA, Inc., and
long term borrowings from R & M Oil and Gas LTD and Barry D. Lasker. The Wells
Fargo line of credit and the Samson loan have been satisfied in full, however,
$6,557 remains owed to VP USA, $400,000 to R&M, and $191,860 to Barry Lasker.

ITEM 7. FINANCIAL STATEMENTS.

     See pages F-1 through F-21 for this information.

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

     None

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
        SECTION 16(A) OF THE EXCHANGE ACT.

     The information required herein is incorporated by reference from the
     Company's definitive proxy statement for the 2003 annual meeting of
     shareholders. ITEM 10. EXECUTIVE COMPENSATION.

     The information required herein is incorporated by reference from the
     Company's definitive proxy statement for the 2003 annual meeting of
     shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

     The information required herein is incorporated by reference from the
     Company's definitive proxy statement for the 2003 annual meeting of
     shareholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The information required herein is incorporated by reference from the
      Company's definitive proxy statement for the 2003 annual meeting of
      shareholders.

                                       14



                                    PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits

         EXHIBIT NO.  DESCRIPTION

            3.1       Amended and Restated Articles of Incorporation, as filed
                      with the Secretary of State of Colorado on March 16, 1995,
                      filed as Exhibit (3)1 to the Annual Report on Form 10-K/A
                      for the fiscal year ended June 30, 1994 and incorporated
                      herein by reference.

            3.2       Amended and Restated Bylaws, as adopted by the Board of
                      Directors on January 16, 1995, filed as Exhibit (3)2 to
                      the Annual Report on Form 10-K/A for the fiscal year ended
                      June 30, 1994 and incorporated herein by reference.

             4.1      The form of common stock share certificate filed as
                      Exhibits 5.1 to the Registrant's Form S-2 Registration
                      Statement (No. 2-65317) and Article II of the Registrant's
                      Articles of Incorporation filed as Exhibit 4.1 thereto, as
                      amended on March 4, 1994 and filed with the Annual Report
                      on Form 10-K for the fiscal year ended June 30, 1994 are
                      incorporated herein by reference.

             4.2      Warrant  Agreement  dated January 18, 2000 with American
                      Securities  Transfer & Trust,  Inc. filed as Exhibit 4.1
                      to the  Registrant's  Form  8-A  Registration  Statement
                      filed  January  20,  2000  and  incorporated  herein  by
                      reference.

            4.3       Form of Warrant Certificate filed as Exhibit 4.2 to the
                      Registrant's Form 8-A Registration Statement filed January
                      20, 2000 and incorporated herein by reference.

            10.1      Amended and Restated Incentive Stock Option Plan as
                      amended March 14, 1995 and filed as Exhibit 10.7 with the
                      Annual Report on Form 10-K for the fiscal year ended June
                      30, 1995 and incorporated herein by reference.

            10.2      Kestrel Energy, Inc. Stock Option Plan effective as of
                      December 5, 2002 filed as Exhibit 10.1 to the Registrant's
                      Form 10-QSB for the quarter ended December 31, 2002, and
                      incorporated herein by reference.

            10.3      Line of Credit with Norwest Bank, Colorado National
                      Association dated February 21, 2000 filed as Exhibit 10.1
                      to the Registrant's Form 10-Q for the period ended March
                      31, 2000 and incorporated herein by reference.

            10.4      Letter Amendment to Wells Fargo Bank West, N.A. Agreement
                      dated September 27, 2000 filed as Exhibit 10 to the
                      Registrant's Form 10-Q for the period ended September 30,
                      2000 and incorporated herein by reference.

            10.5      Wells Fargo Bank, N.A. Term Loan Agreement dated November
                      29, 2001 filed as Exhibit 10.2 to the Registrant's Form
                      10-Q for the period ended December 31, 2001 and
                      incorporated herein by reference

            10.6      Promissory Note with Samson Exploration N.L. dated August
                      6, 2002 filed as Exhibit 99 to the Registrant's Form S-3
                      registration Statement (No. 333-99151) and incorporated
                      herein by reference.

            10.7      Loan Agreement with R&M Oil and Gas, Ltd. Dated January
                      24, 2003 filed as Exhibit 10.2 to the Registrant's Form
                      10-QSB for the period ended December 31, 2002 and
                      incorporated herein by reference.

                                       15



            10.8      Revolving Credit Loan Agreement dated May 5, 2003 with
                      Barry D. Lasker filed as Exhibit 99.1 to the Registrant's
                      Form 8-K dated May 5, 2003 and incorporated herein by
                      reference.

            10.9      Mortgage, Deed of Trust, Security Agreement, Assignment of
                      Production and Financing Statement dated May 5, 2003 filed
                      as Exhibit 99.2 to the Registrant's Form 8-K dated May 5,
                      2003 and incorporated herein by reference.

           10.10      Mortgage, Security Agreement, Assignment, Financing
                      Statement and Fixture Filing to R&M Oil and Gas, Ltd.
                      Dated January 24, 2003.

            23.1      Consent of Wheeler Wasoff, P.C.

            23.2      Consent of Sproule Associates Inc.

            31        Certificate of Chief  Executive and Principal  Financial
                      Officer  pursuant to Section  302 of The  Sarbanes-Oxley
                      Act of 2002

            32        Certification of Chief Executive and Principal Financial
                      Officer pursuant to Section 906 of the Sarbanes-Oxley Act
                      of 2002

     (b) Financial Statements.
         Independent Auditors' Report                            F-1
          Balance Sheets                                         F-3
          Statements of Operations and Comprehensive Loss        F-4
          Statements of Stockholders' Equity                     F-5
          Statements of Cash Flows                               F-6
         Notes to Financial Statements                           F-7

     (c) Reports on Form 8-K.
         A Form 8-K under Item 5 dated May 5, 2003 was filed with the
         Commission on May 19,2003. A Form 8-K under Item 12 dated May 19,
         2003 was filed with the Commission on May 20, 2003.

ITEM 14. CONTROLS AND PROCEDURES

     Disclosure Controls and Procedures

     Within the 90 days prior to the date of this report, the Company carried
     out an evaluation, under the supervision and participation of the Company's
     Chief Executive and Principal Financial Officer (the "Officer") of the
     effectiveness of the design and operation of the Company's disclosure
     controls and procedures pursuant to Securities Exchange Act Rule 13a-14.
     Based upon that evaluation, the Officer concluded that the Company's
     disclosure controls and procedures are effective in timely alerting him to
     material information relating to the Company required to be included in the
     Company's periodic SEC filings, including this report.

     Internal Controls

     There were no significant changes made in the Company's internal controls
     or in other factors that could significantly affect these controls
     subsequent to the date of his evaluation.

                                       16



                                   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.

                                             KESTREL ENERGY, INC.
                                             (Registrant)

Date:  October 14, 2003                      By: /S/BARRY D. LASKER
                                                ------------------------------
                                                Barry D. Lasker, President,
                                                Chief Executive Officer,
                                                Principal Financial  Officer and
                                                Director


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: October 14, 2003                       By: /S/BARRY D. LASKER
                                                -------------------------------
                                                 Barry D. Lasker, President,
                                                 Chief Executive Officer,
                                                 Principal Financial Officer
                                                 and Director


Date: October __, 2003                       By:
                                                -------------------------------
                                                 Robert J. Pett, Chairman of
                                                 the Board


Date: October 14, 2003                       By: /S/KENNETH W. NICKERSON
                                                -------------------------------
                                                 Kenneth W. Nickerson, Director


Date: October 14, 2003                       By: /S/JOHN T. KOPCHEFF
                                                -------------------------------
                                                 John T. Kopcheff, Director


Date: October __, 2003                       By:
                                                -------------------------------
                                                 Mark A. E. Syropoulo, Director


Date: October 14, 2003                       By: /S/TIMOTHY L. HOOPS
                                                -------------------------------
                                                 Timothy L. Hoops, Director


Date: October __, 2003                       By:
                                                -------------------------------
                                                 Neil T. MacLachlan, Director

                                       17



                              KESTREL ENERGY, INC.

                              Financial Statements

                             June 30, 2003 and 2002

                   (With Independent Auditors' Report Thereon)



           Independent Auditor's Report.....................................F-3

           Balance Sheet....................................................F-4

           Statements of Operations and Comprehensive Income................F-5

           Statement of Shareholders Equity.................................F-6

           Statement of Cash Flows..........................................F-7

Note 1     Summary Of Significant Accounting Polices........................F-8

     2     Investments in Related Party.....................................F-12

     3     Line Of Credit...................................................F-12

     4     Asset Retirement Obligations.....................................F-13

     5     Notes Payable....................................................F-13

     6     Stockholders' Equity.............................................F-14

     7     Income Taxes.....................................................F-16

     8     Lease Commitments................................................F-17

     9     Contingencies ...................................................F-17

     10    Disclosures about Capitalized Costs, Costs Incurred and
           Major Customers..................................................F-17

     11    Information regarding Proved Oil and Gas Reserves (Unaudited)....F-18





                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors and Stockholders
Kestrel Energy, Inc.

We have audited the accompanying balance sheet of Kestrel Energy, Inc. as of
June 30, 2003, and the related statements of operations and comprehensive
(loss), stockholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kestrel Energy, Inc. as of June
30, 2003, and the results of its operations and its cash flows for the two years
then ended, in conformity with accounting principles generally accepted in the
United States of America.




                              Wheeler Wasoff, P.C.

Denver, Colorado
September 29, 2003

                                      F-3



                               KESTREL ENERGY INC.

                                  BALANCE SHEET

                                  JUNE 30, 2003
                  ASSETS
Current assets
  Cash and cash equivalents  (note 1)                   $    128,604
  Accounts receivable                                        354,570
  Other current assets                                        18,400
                                                         -----------
         Total current assets                                501,574
                                                         -----------

Property and equipment, at cost
  Oil and gas properties, successful efforts
    method of accounting (note 10 and 11)
      Unproved                                               215,892
      Proved                                              10,918,017
  Pipeline and facilities                                    807,851
  Furniture and equipment                                     52,703
                                                         -----------
                                                          11,994,463
  Accumulated depreciation, depletion and amortization    (9,577,728)
                                                         -----------
         Net property and equipment                        2,416,735
                                                         -----------
                                                        $  2,918,309
                                                         ===========

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Notes payable-related party (note 5)                  $      6,556
  Accounts payable-trade                                     429,663
  Accrued liabilities                                         69,998
                                                         -----------
         Total current liabilities                           506,217
                                                         -----------

Long-term liabilities
  Line of credit-related party (note 3)                      191,860
  Note payable-related party                                 400,000
  Asset retirement obligation (note 4)                       216,009
                                                         -----------
         Total long-term liabilities                         807,869
                                                         -----------

  Total Liabilities                                        1,314,086
                                                         -----------

Commitments and contingencies (notes 4,8 and 9)

Stockholders' equity (note 6)
  Preferred stock, $1 par value. 1,000,000 shares
    authorized; none issued                                       --
  Common stock, no par value. 20,000,000 shares
    authorized; 9,798,200 shares outstanding              20,394,585
  Accumulated (deficit)                                  (18,790,362)
                                                         -----------
         Total stockholders' equity                        1,604,223
                                                         -----------

                                                        $  2,918,309
                                                         ===========

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

                                      F-4



                               KESTREL ENERGY INC.

            STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

                       YEARS ENDED JUNE 30, 2003 AND 2002



--------------------------------------------------------------------------------------------------------
                                                                                2003            2002
Revenue
                                                                                      
  Oil and gas sales                                                         $  1,304,581    $  1,157,683
                                                                             -----------     -----------
    Total revenue                                                              1,304,581       1,157,683
                                                                             -----------     -----------

Costs and expenses

  Lease operating expenses                                                       644,751         712,375

  Dry holes, abandoned and impaired properties                                 1,238,214       6,589,695

  Exploration expenses                                                            63,677          96,601

  Depreciation, depletion and amortization                                       339,002         327,353

  General and administrative                                                     797,282       1,007,118
                                                                             -----------     -----------
    Total costs and expenses                                                   3,082,926       8,733,142
                                                                             -----------     -----------

Other income (expense)

  Interest expense and financing costs                                          (115,690)       (121,655)

  Gain on sale of property and equipment                                          21,538          20,278

  Loss on sale of available-for-sale securities                                 (575,893)       (561,282)

  Interest income                                                                  1,953           3,728

  Foreign currency exchange (loss)                                                    --         (50,882)

  Other, net                                                                      99,567         173,711
                                                                             -----------     -----------
    Total  other  income (expense)                                              (568,525)       (536,102)
                                                                             -----------     -----------

Net loss before cumulative effect of change in accounting principle           (2,346,870)     (8,111,561)

Cumulative effect of change in accounting principle                               10,890              --
                                                                             -----------     -----------
Net loss before comprehensive (loss)                                          (2,335,980)     (8,111,561)

Other comprehensive (loss)

  Unrealized (loss) from available-for-sale securities                                --        (549,789)
                                                                             -----------     -----------
Comprehensive (loss)                                                       $  (2,335,980)   $ (8,661,350)
                                                                            ============     ===========

Loss per share - basic and diluted before change in accounting principle   $       (0.25)   $      (1.00)
                                                                            ============     ===========

Loss per share                                                             $       (0.25)   $      (1.00)
                                                                            ============     ===========
Weighted average number of common shares outstanding -

  basic and diluted                                                            9,288,325       8,100,292
                                                                            ============     ===========


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

                                      F-5





                              KESTREL ENERGY, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                       YEARS ENDED JUNE 30, 2003 AND 2002


                                                                                                     Accumulated
                                                           Common stock                                 other
                                               -----------------------------      Accumulated       comprehensive
                                                  Shares           Amount          (deficit)        income (loss)
                                               ------------     ------------      ------------      -------------
                                                                                        
Balance July 1, 2002                              7,700,200     $ 19,073,023      $ (8,342,821)     $     26,431

Common shares issued (note 6)                     1,415,000          993,560              --                --
Offering costs                                         --            (22,676)             --                --
Unrealized (loss) on securities classified
   as available for sale                               --               --                --            (549,789)
Net (loss)                                             --               --          (8,111,561)             --
                                               ------------     ------------      ------------      -------------

Balance June 30, 2002                             9,115,200       20,043,907       (16,454,382)         (523,358)

Common shares issued (note 6)                       670,000          335,000              --                --
Warrants exercised                                   13,000           16,250              --                --
Less cost of warrant exercise                          --               (572)             --                --
Realized (loss) on securities classified               --               --                --                --
   as available for sale                               --               --                --             523,538
Net (loss)                                             --               --          (2,335,980)             --
                                               ------------     ------------      ------------      -------------

Balance June 30, 2003                             9,798,200     $ 20,394,585      $(18,790,362)     $       --
                                               ============     ============      ============      =============




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

                                      F-6






                               KESTREL ENERGY INC.

                            STATEMENTS OF CASH FLOWS

                       YEARS ENDED JUNE 30, 2003 AND 2002
                                                                2003             2002
                                                            -----------      -----------
                                                                       
Cash flows from operating activities
  Net loss                                                  $(2,335,980)     $(8,111,561)
  Adjustments to reconcile net loss to net cash
      used in operating activities
        Cumulative effect of change in accounting
         principle                                              (10,890)            --
        Depreciation and depletion                              339,002          327,353
        Dry holes, abandoned and impaired properties          1,238,214        6,589,695
        Loss on sale of available-for-sale securities           575,893          561,282
        Gain on sale of property and equipment                  (21,538)         (20,278)
        Debt for services and costs - related                   141,594             --
        Stock issued for services and interest                     --             31,760
        Foreign exchange loss                                      --             50,882
        Other                                                    10,098          (48,808)
        Changes in operating assets and liabilities,
         net of dispositions                                       --               --
           (Increase) decrease in accounts receivable          (145,554)         119,818
           (Increase) decrease in other current assets          (17,132)           4,689
           Increase in accounts payable - trade                 189,309          120,743
           Decrease in accounts payable - related party         (51,813)         (26,397)
           (Decrease) in accrued liabilities                    (11,270)         (43,540)
                                                            -----------      -----------
  Net cash (used) in operating activities                      (100,067)        (444,362)
                                                            -----------      -----------
Cash flows from investing activities
  Capital expenditures                                         (426,162)         (92,461)
  Proceeds from sale of securities                               56,241          603,824
  Proceeds from sales of property and equipment                  20,017           53,596
                                                            -----------      -----------
  Net cash (used) provided by investing activities             (349,904)         564,959
                                                            -----------      -----------
Cash flows from financing activities
  Repayments to line of credit                                     --         (1,212,748)
  Proceeds from borrowings                                         --            703,322
  Loans from related parties                                    940,000             --
  Repayment of notes - related parties                         (252,651)            --
  Repayments of borrowings                                     (516,000)        (262,772)
  Proceeds from issuance of common stock and warrants           351,250          611,800
  Payment of offering costs                                        (572)         (22,676)
                                                            -----------      -----------
  Net cash provided (used) by financing activities              522,027         (183,074)
                                                            -----------      -----------
Net (decrease) in cash and cash equivalents                      72,056          (62,477)
Cash and cash equivalents, beginning of year                     56,548          119,025
                                                            -----------      -----------
Cash and cash equivalents, end of year                      $   128,604      $    56,548
                                                            ===========      ===========
Supplemental cash flow information - cash
  paid for interest                                         $    48,287      $   104,325
                                                            ===========      ===========
Supplemental disclosure of noncash investing and
 financing activities
  Repayment of debt through securities                      $   247,349             --
                                                            ===========      ===========
  Repayment of debt from sale of properties                 $      --        $   153,252
                                                            ===========      ===========
  Debt converted to common stock                            $      --        $   350,000
                                                            ===========      ===========
  Unrealized holding gain (loss) in
   available-for-sale securities                            $      --        $  (549,789)
                                                            ===========      ===========



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

                                      F-7


                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) ORGANIZATION

         Kestrel Energy, Inc. (the Company) was incorporated under the laws of
         the State of Colorado on November 1, 1978. The Company's principal
         business is the acquisition, either alone or with others, of interests
         in proved developed producing oil and gas leases, and exploratory and
         development drilling.

         The Company presently owns oil and gas interests in the states of
         Louisiana, New Mexico, Oklahoma, Texas and Wyoming.

     (b) ESTIMATES

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

     (c) CASH EQUIVALENTS

         Cash equivalents consist of certificates of deposit. At June 30, 2003,
         $53,902 of the cash equivalent balance is pledged as security in lieu
         of posting oil and gas performance bonds in the state of Wyoming. The
         funds are restricted as to their use and cannot be accessed by the
         Company without the written release by the appropriate jurisdictional
         authority. For purposes of the statements of cash flows, the Company
         considers all highly liquid investments with original maturities of
         three months or less to be cash equivalents.

     (d) PROPERTY AND EQUIPMENT

         The Company follows the successful efforts method of accounting for its
         oil and gas activities. Accordingly, costs associated with the
         acquisition, drilling and equipping of successful exploratory wells are
         capitalized. Geological and geophysical costs, delay and surface
         rentals and drilling costs of unsuccessful exploratory wells are
         charged to expense as incurred. Costs of drilling development wells,
         both successful and unsuccessful, are capitalized. Upon the sale or
         retirement of oil and gas properties, the cost thereof and the
         accumulated depreciation or depletion are removed from the accounts and
         any gain or loss is credited or charged to operations.

         Depreciation and depletion of capitalized oil and gas properties is
         computed on the units-of-production method by individual fields as the
         related proved reserves are produced. A reserve is provided for
         estimated future costs of site restoration, dismantlement, and
         abandonment activities, net of residual salvage value, as a component
         of depletion.

         Pipeline and facilities are stated at original cost. Depreciation of
         pipeline and facilities is provided on a straight-line basis over the
         estimated useful life of the pipeline of twenty years.

         Furniture and equipment are depreciated using the straight-line method
         over estimated lives ranging from three to seven years.

         Management periodically evaluates capitalized costs of unproved
         properties and provides for impairment, if necessary, through a charge
         to operations.

                                      F-8



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

         Proved oil and gas properties are assessed for impairment on a
         field-by-field basis. If the net capitalized costs of proved properties
         exceeds the estimated undiscounted future net cash flows from the
         property, a provision for impairment is recorded to reduce the carrying
         value of the property to its estimated fair value. The Company recorded
         an impairment of $903,214 for its proved oil and gas properties for the
         year ended June 30, 2003 and $6,440,000 for the year ended June 30,
         2002.

     (e) GAS BALANCING

         The Company uses the sales method of accounting for gas balancing of
         gas production and would recognize a liability if the existing proven
         reserves were not adequate to cover the current imbalance situation.

         As of June 30, 2003, the Company's gas production is in balance.

     (f) INCOME TAXES

         The Company accounts for income taxes under the provisions of Statement
         of Financial Accounting Standards No. 109 (SFAS 109), Accounting for
         Income Taxes. Under the asset and liability method of SFAS 109,
         deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating loss and tax credit carryforwards.
         Deferred tax assets and liabilities are measured using enacted income
         tax rates expected to apply to taxable income in the years in which
         those differences are expected to be recovered or settled. Under SFAS
         109, the effect on deferred tax assets and liabilities of a change in
         income tax rates is recognized in the results of operations in the
         period that includes the enactment date.

     (g) STOCK-BASED COMPENSATION

         In October 1995, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation (SFAS 123), effective for fiscal years
         beginning after December 15, 1995. This statement defines a fair value
         method of accounting for employee stock options and encourages entities
         to adopt that method of accounting for its stock compensation plans.
         SFAS 123 allows an entity to continue to measure compensation costs for
         these plans using the intrinsic value based method of accounting as
         prescribed in Accounting Pronouncement Bulletin Opinion No. 25,
         Accounting for Stock Issued to Employees (APB 25). The Company has
         elected to continue to account for its employee stock compensation
         plans as prescribed under APB 25. Had compensation cost for the
         Company's stock-based compensation plans been determined based on the
         fair value at the grant dates for awards under those plans consistent
         with the method prescribed in SFAS 123, the Company's net (loss) and
         (loss) per share would have been increased to the pro forma amounts
         indicated below:

                                                Years ended June 30,
                                             ---------------------------
                                                2003          2002
                                             -----------  --------------

            Net earnings (loss):
               As reported                 $ (2,335,980)  $ (8,111,561)
               Pro forma                     (2,341,995)    (8,558,645)

            (Loss) per share:
               As reported                     (.25)         (1.00)
               Pro forma                       (.25)         (1.00)

                                      F-9



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

     (h) (LOSS) PER SHARE

         Basic (loss) per share is based on the weighted average number of
         common shares outstanding during the period.

         Diluted (loss) per share is computed by adjusting the weighted average
         number of common shares outstanding for the dilutive effect, if any, of
         stock options and warrants.

         At June 30, 2003 and 2002, all outstanding options and warrants were
         excluded from the computation of diluted loss per share for the years
         then ended, as the effect of the assumed exercises of these options was
         antidilutive.

     (i) REVENUE RECOGNITION

         Sales of oil and gas production are recognized at the time of delivery
         of the product to the purchaser.

     (j) TRANSLATION OF FOREIGN CURRENCIES

         Monetary items are translated at the rate of exchange in effect at the
         balance sheet date. Non-monetary items are translated at average rates
         in effect during the period in which they were earned or incurred.
         Gains and losses resulting from the fluctuation of foreign exchange
         rates have been included in the determination of income.

     (k) MARKETABLE SECURITIES

         The Company accounts for investments in marketable securities under
         SFAS 115, "Accounting for Certain Investments in Debt and Equity
         Securities." The Company determines the appropriate classification at
         the time of purchase. Securities are classified as held-to-maturity
         when the Company has the positive intent and ability to hold the
         securities to maturity. Held-to-maturity securities are stated at cost,
         adjusted for amortization of premiums and discounts to maturity.
         Marketable securities not classified as held-to-maturity are classified
         as available-for-sale. Available-for-sale securities are carried at
         fair value, which is based on quoted prices. Unrealized gains and
         losses, net of tax, are reported as a separate component of
         shareholders' equity. The cost of securities available-for-sale is
         adjusted for amortization of premiums and discounts to maturity.
         Interest and amortization of premiums and discounts for all securities
         are included in interest income. Realized gains and losses are included
         in other income. Cost of securities sold is determined on a specific
         identification basis.

     (l) FAIR VALUE

         The carrying amount reported in the balance sheet for cash, accounts
         receivable, accounts payable and accrued liabilities approximates fair
         value because of the immediate or short-term maturity of these
         financial instruments.

     (m) CONCENTRATION OF CREDIT RISK

         Financial instruments which potentially subject the Company to
         concentrations of credit risk consist of cash. The Company maintains
         cash accounts at four financial institutions. The Company periodically
         evaluates the credit worthiness of financial institutions, and
         maintains cash accounts only in large high quality financial
         institutions, thereby minimizing exposure for deposits in excess of
         federally insured amounts. The Company believes that credit risk
         associated with cash is remote.  The Company is exposed to credit risk
         in the event of nonpayment by counter parties, a significant portion
         of which are concentrated in energy

                                      F-10



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

         related industries. The creditworthiness of customers and other
         counter parties is subject to continuing review.

     (n) RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2002, the financial Accounting Standards Board ("FASB") issued
         SFAS 146, "Accounting for Costs Associated with Exit or Disposal
         Activities". SFAS 146 addresses financial accounting and reporting for
         costs associated with exit or disposal activities and nullifies
         Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
         Certain Employee Termination Benefits and Other Costs to Exit an
         Activity". SFAS 146 generally requires a liability for a cost
         associated with an exit or disposal activity to be recognized and
         measured initially at its fair value in the period in which the
         liability is incurred. The pronouncement is effective for exit or
         disposal activities initiated after December 31, 2002. The adoption of
         SFAS 146 has had no impact on the Company's financial position or
         results of operations.

         SFAS 147, "Acquisitions of Certain Financial Institutions," was issued
         in December 2002 and is not expected to apply to the Company's current
         or planned activities.

         In December 2002, the FASB approved SFAS 148, "Accounting for
         Stock-Based Compensation - Transition and Disclosure - an amendment of
         FASB Statement 123." SFAS 148 amends SFAS 123, "Accounting for
         Stock-Based Compensation" to provide alternative methods of transition
         for a voluntary change to the fair value based method of accounting for
         stock-based employee compensation. In addition, SFAS 148 amends the
         disclosure requirements of SFAS 123 to require prominent disclosures in
         both annual and interim financial statements about the method of
         accounting for stock-based employee compensation and the effect of the
         method used on reported results. SFAS 148 is effective for financial
         statements for fiscal years ending after December 15, 2002. The Company
         will continue to account for stock based compensation using the methods
         detailed in the stock-based compensation accounting policy.

         In April 2003, the FASB approved SFAS 149, "Amendment of Statement 133
         on Derivative Instruments and Hedging Activities". SFAS 149 is not
         expected to apply to the Company's current or planned activities.

         In June 2003, the FASB approved SFAS. 150, "Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equity". SFAS. 150 establishes standards for how an issuer classifies
         and measures certain financial instruments with characteristics of both
         liabilities and equity. This Statement is effective for financial
         instruments entered into or modified after May 31, 2003, and otherwise
         is effective at the beginning of the first interim period beginning
         after June 15, 2003. SFAS. 150 is not expected to have an effect on the
         Company's financial position.

     (o) RECLASSIFICATION

         Certain amounts in the 2002 financial statements have been reclassified
         to conform to the 2003 financial statement presentation.

     (p) SEGMENT REPORTING

         The Company follows SFAS 131, "Disclosure about Segments of an
         Enterprise and Related Information", which amended the requirements
         for a public enterprise to report financial and descriptive
         information about its reportable operating segments. Operating
         segments, as defined in the pronouncement, are components of an
         enterprise about which separate financial information is available
         that is evaluated regularly by the Company in deciding how to allocate
         resources and in assessing performance. The financial information is
         required to be reported on the basis that is used internally for
         evaluating segment performance and deciding

                                      F-11



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

         how to allocate resources to segments. The Company operates in one
         segment, oil and gas producing activities.

     (q) COMPREHENSIVE INCOME

         The company adopted SFAS 130, "Reporting Comprehensive Income". SFAS
         130 requires the reporting of comprehensive income in addition to net
         income from operations. Comprehensive income is a more inclusive
         financial reporting methodology that includes disclosures of certain
         financial information that historically has not been recognized in the
         calculation of net income. As of June 30, 2002, the Company's
         comprehensive income, as shown in the Statement of Operations and
         Comprehensive (Loss), consists of unrealized loss on securities in the
         amount of $523,358.

(2)  INVESTMENT IN RELATED PARTY

     On May 5, 2000, the Company sold six international permits, with a net book
     value of $143,179, for petroleum drilling in Western Australia and New
     Guinea to Victoria Petroleum USA, Inc. (VP/USA), a Colorado corporation and
     wholly owned subsidiary of VP, in exchange for 8,250,000 shares of VP
     Common Stock. The stock was valued at $0.029 per share and resulted in a
     gain on the sale of $97,721. The investment was recorded at cost.

     Also, on May 5, 2000, KEC, VP and VP/USA entered into an Agreement and Plan
     of Merger (Merger Agreement). Pursuant to the Merger Agreement, on May 12,
     2000, the Company, as sole shareholder of KEC, acquired 66,750,000 shares
     of VP common stock and VP/USA acquired all of the issued and outstanding
     shares of KEC through a merger of KEC into VP/USA, with KEC as the
     surviving corporation. The stock was valued at $0.029 per share and
     resulted in a gain on the sale of $1,497,208, based upon sales of other
     assets totaling $242, accounts payable totaling $2,000, and property and
     equipment with a net book value of $454,899. The investment was recorded at
     cost. In prior years the Company, from time-to-time, sold shares of VP in
     the open market. During the year ended June 30, 2003, the Company disposed
     of a total of 30,100,000 shares of VP stock for cash and satisfaction of
     debt (note 5) and recorded a loss on the disposition of $575,893. As a
     result, the Company owns no interest in VP at June 30, 2003.

(3)  LINE OF CREDIT

     On February 21, 2000, the Company entered into a $2,000,000 Line of Credit
     agreement with Wells Fargo Bank, formerly Norwest Banks Colorado, N.A.,
     which provided the Company with an initial borrowing base of $600,000,
     based on reserves with interest at Wells Fargo's prime rate plus 2.5%. On
     September 27, 2000, the Company and Wells Fargo amended the Line of Credit
     Agreement to provide the Company with a borrowing base of $2,000,000 and
     reduced the interest rate to 1.5% over the Wells Fargo prime rate. On
     May 31, 2001, Wells Fargo reduced the borrowing base to $1,400,000. On
     October 31, 2001, Wells Fargo and the Company amended the Term Loan
     Agreement to extend the maturity date by 30 days to November 30, 2001. On
     November 30, 2001, the Company entered into a new Term Loan Agreement with
     Wells Fargo in the amount of the existing balance of the old Line of
     Credit, $1,396,000, with interest at Wells Fargo's prime rate plus 1.75%.
     Terms of the Agreement required periodic payments of varying amounts to pay
     off the entire balance by the maturity of the Agreement, November 30, 2002.
     The line of credit was secured by Deeds of Trust on various oil and gas
     producing properties held by the Company. As of June 30, 2002, $516,000 was
     outstanding on the line of credit.

     On May 5, 2003, the Company entered into a Line of Credit Agreement with
     Barry D. Lasker, President and CEO of the Company, for a maximum of
     $200,000 (Lasker loan). Under the terms of the agreement all outstanding
     amounts are due on May 4, 2005 and bear interest at 10% per annum. The
     Lasker loan is secured by the Company's oil and gas interests in Campbell
     County,

                                      F-12



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

     Wyoming. In the event of a default under the terms of the Lasker loan, and
     the sale of the collateral securing the loan, the Company would receive any
     remaining proceeds after payment to Mr. Lasker of his expenses in
     connection with such sale(s) and the indebtedness due and payable to him
     under the loan. Like the R&M loan (see Note 4), the Lasker loan was
     approved as an arms length transaction by the entire Board of Directors
     with Mr. Lasker abstaining. As at June 30, 2003 the outstanding balance on
     the Lasker loan was $191,860, consisting of a cash advance of $40,000 and
     unpaid wages and unreimbursed business expenses in the aggregate amount of
     $151,860. The Lasker loan can be converted into common stock of the
     company, at Lasker's election, at $0.40 per share.

(4)  ASSET RETIREMENT OBLIGATIONS

     In 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143,
     "Accounting for Asset Retirement Obligations." SFAS. 143 addresses
     financial accounting and reporting for obligations associated with the
     retirement of tangible long-lived assets and the associated asset
     retirement costs. This statement requires companies to record the present
     value of obligations associated with the retirement of tangible long-lived
     assets in the period in which it is incurred. The liability is capitalized
     as part of the related long-lived asset's carrying amount. Over time,
     accretion of the liability is recognized as an operating expense and the
     capitalized cost is depreciated over the expected useful life of the
     related asset. The Company's asset retirement obligations relate primarily
     to the plugging, dismantlement, removal, site reclamation and similar
     activities of its oil and gas properties. Prior to adoption of this
     statement, such obligations were accrued ratably over the productive lives
     of the assets through its depreciation, depletion and amortization for oil
     and gas properties without recording a separate liability for such amounts.

     The transition adjustment related to adopting SFAS 143 on July 1, 2002, was
     recognized as a cumulative effect of a change in accounting principle. The
     cumulative effect on net income of adopting SFAS No. 143 was a net
     favorable effect of $10,890. At the time of adoption, total assets
     increased $117,147, and total liabilities increased $205,842. The amounts
     recognized upon adoption are based upon numerous estimates and assumptions,
     including future retirement costs, future recoverable quantities of oil and
     gas, future inflation rates and the credit-adjusted risk-free interest
     rate. Changes in asset retirement obligations during the year were:

     Asset retirement obligations as of July 1, 2002               $ 205,842
         Liabilities incurred                                           --
         Liabilities settled                                            --
         Accretion expense (included in depreciation,
           depletion and amortization)                                10,167

                                                                    --------
     Asset retirement obligations as of June 30, 2003              $ 216,009
                                                                    ========

(5)  NOTES PAYABLE

     On February 14, 2002, the Company borrowed $97,940 from VP and $255,382
     from Lakes Oil N.L. ("Lakes") due May 15, 2002 with interest at 8%. The
     loans were secured by shares of VP and seismic data owned by the Company.
     As of June 30, 2002, an aggregate $294,953 had been repaid and VP assumed
     the balance due to Lakes of $58,369. As of June 30, 2003, the balance due
     VP on the note is $6,556.

     On May 13, 2002, VP advanced an additional $350,000 to the Company with
     interest at 7.5%. The loan of $350,000 was assigned to an unrelated company
     and subsequent converted, including interest of $10,500, to 515,000 shares
     of the Company's common stock (See Note 6b).

     On August 6, 2002, the Company borrowed $500,000 from Samson Exploration
     N.L. ("Samson"), due December 4, 2002, or at any other date agreed to by
     the parties, with interest at 10%. The

                                      F-13



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

     Company agreed to pay $50,000 as a financing fee to Samson. Proceeds from
     the loan were used to repay the Company's outstanding balance on its line
     of credit to Wells Fargo. On February 4, 2003, the Company repaid Samson
     Exploration N.L. in full, including all accrued interest and fees, with
     $327,143.15 in cash and the transfer of the Company's remaining 25,000,000
     shares of Victoria Petroleum N.L. common stock, valued at $247,349. At
     June 30, 2003, Samson owned 20.5% of the common shares of the Company.

     On January 24, 2003, the Company borrowed $400,000 from R&M Oil and Gas,
     Ltd., of which Timothy L. Hoops, one of the Company's directors and its
     Operations Manager, is a partner. That loan is due on January 31, 2005,
     bears interest at 12.5% per annum and is secured by the Company's oil and
     gas interests in Grady County, Oklahoma. In the event of a default under
     the terms of the R&M loan, and the sale of the collateral securing the
     loan, the Company would receive any remaining proceeds after payment to R&M
     of its expenses in connection with such sale(s) and any indebtedness due
     and payable to R&M under the loan. The proceeds from the R&M loan were used
     to retire the outstanding debt to Samson Exploration N.L. and reduce the
     Company's accounts payable position at the time. The R&M loan was approved
     unanimously by the Board of Directors with Mr. Hoops abstaining.

(6)  STOCKHOLDERS' EQUITY

     (a) PREFERRED STOCK

         The Company is authorized to issue up to 1 million shares of $1 par
         value preferred stock, the rights and preferences of which are to be
         determined by the Board of Directors at or prior to the time of
         issuance.

     (b) COMMON STOCK

         On January 18, 2000, the Board of Directors of the Company declared a
         dividend distribution of 10 Warrants for every 100 shares of
         outstanding common stock of the Company held of record by the
         shareholders at the close of business on February 4, 2000 (record
         date). The Warrant Certificates were only issued in increments of 10
         Warrants based upon a rounding of individual shareholders' record
         holdings. No Warrants were issued to shareholders holding less than 100
         shares as of the Record Date. Each Warrant entitled the registered
         holder to purchase from the Company one share of Common Stock at a
         price of $3.125 per share, subject to adjustment. The Warrants were to
         expire on February 4, 2001. On January 24, 2001 the Board of Directors
         reduced the exercise price to $2.50 and extended the exercise period to
         September 4, 2002. On January 24, 2002, the Board of Directors reduced
         the exercise price to $1.25 and extended the exercise period to March
         10, 2003. On March 17, 2003 13,000 warrants were exercised with net
         proceeds received of $15,678. The remaining warrants have since expired

         In April 2002, the Company completed a private offering of 1,409,000
         units at $.70 per unit. Each unit consisted of one share of common
         stock and one warrant to purchase an additional share of common stock
         for a period of 12 months, at $1.25 per share. Net cash proceeds to the
         Company from the sale of 874,000 units was $589,124 after offering and
         related expenses of $22,676. Additionally, 20,000 units were issued to
         the Company's President in exchange for $14,000 due for unreimbursed
         expenses and 515,000 units were issued in exchange for debt and related
         interest in the aggregate amount of $360,500 (See note 4). The warrants
         associated with this placement have expired.

         In June 2003, the Company completed a private placement of 335,000
         units at a price of $1.00 per unit. Each unit consisted of two common
         shares and one common share purchase warrant. Each of the common share
         purchase warrants sold in that offering entitled the holder to acquire
         an additional common share of the Company at a price of $0.50 on or
         before June

                                      F-14



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

         18, 2004. The net proceeds of approximately $335,000 was used for
         payment of the Chadron prospect fee and for 50% of the costs to drill
         the Sellman-1X exploration well, located in Dawes County, Nebraska.

     (c) STOCK OPTION PLANS

         The Company has reserved 36,000 shares of its no par common stock for
         key employees of the Company under its 1993 Amended Restated Stock
         Incentive Plan (the Incentive Plan). Under the terms of the Incentive
         Plan, no stock options are exercisable more than ten years after the
         date of grant (five years after date of grant for 10% shareholders).
         All 36,000 options had been granted under the Incentive Plan.

         The Company has reserved 75,000 shares of its no par common stock for
         employees, officers, directors, consultants and advisors of the Company
         under its 1993 Nonqualified Stock Option Plan (the Nonqualified Plan).
         Under the terms of the Nonqualified Plan, no stock options are
         exercisable more than ten years after the date of grant (five years
         after date of grant for 10% shareholders).

         During fiscal 1998, the Company merged the Incentive Plan and the
         Nonqualified Plan into the Stock Option Plan (the Plan). The Company
         has reserved 1,200,000 shares of its no par common stock for employees,
         officers, directors, consultants and advisors of the Company under the
         Plan. Under the terms of the Plan, no stock options are exercisable
         more than ten years after the date of grant (five years after date of
         grant for 10% shareholders).

         During fiscal 2003 and 2002, the Board of Directors granted options to
         purchase shares of common stock to key employees and directors pursuant
         to the Plan. The exercise prices of the options range from $.68 to $.89
         per share. The options granted are exercisable upon issuance.

         On December 1, 1998, the Board of Directors reduced the number of
         options outstanding and repriced certain options. The exercise prices
         of the repriced options range from $1.875 to $2.00 per share. The
         options are immediately exercisable.

         On December 6, 2001, the Plan was amended to increase the number of
         shares reserved under the Plan to 2,233,000.

         On December 5, 2002, the Plan was amended to extend the term of the
         Plan for an additional ten years to December 16, 2012.

         The Company applies APB Opinion 25 and related interpretations in
         accounting for its plan. Accordingly, no compensation cost has been
         recognized for stock options granted at or above market value at the
         date of the grant to key employees and directors.

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option-pricing model with the following
         assumptions used for grants in fiscal 2003 and 2002 respectively: no
         dividend yield for all years; expected volatility of 97% and 83%;
         weighted average risk-free interest rates of 4.375% and 4.35%; and
         expected lives of ten years.

         A summary of the status of the Company's fixed stock options plan as of
         June 30, 2003 and 2002, and changes during the years then ended is
         presented below:

                                      F-15



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

                                                   2003                2002
                                          ------------------  ------------------
                                                    Weighted            Weighted
                                                    Average             Average
                                                    Exercise            Exercise
                 Fixed Options            Shares     Price     Shares     Price
                                        --------  --------    --------- --------

          Outstanding  at beginning of
          year                            1,693,964   1.39     1,148,96  $ 1.58
          Granted                            10,000    .33      545,000     .99
          Exercised                            --                  --       --
          Cancelled                            --                  --       --
          Expired                            95,980   1.13         --       --
                                          ---------  -------- ---------  -------
          Outstanding at end of year      1,607,984   1.40    1,693,964  $ 1.39
                                          =========           =========
          Options  exercisable at year
          end                             1,607,984           1,688,964
          Weighted average fair value
            of options granted during    $    .30            $    .82
            the year
          Weighted average
          remaining
          contractual life                    5.6                 6.6

(7)  INCOME TAXES

     At June 30, 2003 and 2002, the Company's significant deferred tax assets
     and liabilities are as follows:



                                                                                  2003           2002
                                                                            ------------------------------

        Deferred tax assets:
                                                                                        
            Net operating loss carryforwards                               $    4,060,000       3,820,000
            Depletion carry forwards                                              282,000         203,000
            Oil and gas properties, principally due to differences                603,000       2,850,000
                                                                            ------------------------------
                                                                                4,945,000       6,873,000
        Deferred liabilities:
            Oil and gas properties, principally due to differences               (569,000)       (570,000)
                                                                            ------------------------------
                                                                                 (569,000)       (570,000)
                                                                            ------------------------------
        Valuation allowance                                                    (4,376,000)     (6,303,000)
                                                                            ------------------------------
            Net deferred tax assets                                        $        --        $     --
                                                                            ==============================


     The valuation allowance for deferred tax assets as of June 30, 2003 was
     $4,376,000. The net change in the valuation allowance for the year ended
     June 30, 2003 was a decrease of $1,927,000.

     At June 30, 2003, the Company had net operating loss carryforwards of
     approximately $12,122,000. The utilization of approximately $356,000 of
     these loss carryforwards is limited to an estimated $80,000 per year as a
     result of a change of ownership which occurred June 30, 1994. Of the
     balance of the net operating loss carryforwards, $11,766,000 is available
     to offset future taxable income of the Company. If not utilized, the tax
     net operating losses will expire during the period from 2003 through 2023.

     Income tax expense is different from amounts computed by applying the
     statutory federal income tax rate due primarily to the change in valuation
     allowance for net deferred tax assets and the expiration of tax
     carryforwards.

                                      F-16



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

(8)  LEASE COMMITMENTS

     The Company has noncancelable operating leases, primarily for rent of
     office facilities that expire over the next five years. Rental expense for
     operating leases was $72,980 and $83,377 for the years ended June 30, 2003
     and 2002, respectively. The Company's executive offices are located at 1726
     Cole Blvd., Suite 210, Lakewood, Colorado 80401, which is comprised of
     approximately 2,358 square feet, at an initial annual rate of $16.50 per
     square foot escalating to $17.50 per square foot over the life of the
     lease. The Company also has, under lease, approximately 560 square feet of
     office space located at 1717 St. James Place, Suite 240, Houston, Texas
     77057, at a monthly rate of $764. The current lease obligation expires June
     30, 2004.

     Future minimum rental commitments under noncancelable operating leases as
     of June 30, 2003 are as follows:

                     Fiscal year:
                       2004                      $  35,665
                       2005                         39,988
                       2006                         41,167
                       2007                          3,439
                                                  =========
                                                 $ 120,259
                                                  =========
(9)  CONTINGENCIES

     In the ordinary course of conducting its business, the Company becomes
     involved in litigation, administrative proceedings and governmental
     investigations, including environmental matters.

     In May 2000, the Company received a notice letter from the U.S.
     Environmental Protection Agency (EPA) stating that the Company is a
     potentially responsible party under the federal Comprehensive Environmental
     Response, Compensation and Liability Act of 1980 (CERCLA) at the Casmalia
     Waste Disposal Site in Santa Barbara County, California. If the Company is
     ultimately determined to be a responsible party, it may be obligated to
     conduct remedial investigations, feasibility studies, remediation and/or
     removal of alleged releases of hazardous substances or to reimburse the EPA
     for such activities.

     The Company does not believe that it has any liability under CERCLA for
     wastes disposed at Casmalia and believes that the EPA's notice was issued
     in error. The Company has responded to the EPA, explaining that the Company
     did not arrange to dispose of any waste at Casmalia. The Company's
     involvement with Casmalia is limited to the purchase of assets from another
     entity, which disposed of waste at Casmalia. The Company intends to defend
     allegations of its responsibility, if any, and will also reply upon an
     indemnification given by the previous owner of the properties at Casmalia,
     which previous owner has confirmed that the indemnification would apply to
     any such allegations.

     The Company is unable to estimate the dollar amount of exposure to loss in
     connection with the above-referenced matter; however, it has been estimated
     that the ultimate site-wide clean up costs will be approximately $271.9
     million.

     It is the opinion of Company's management that the outcome of these
     proceedings, individually or in the aggregate, will not have a material
     adverse effect on the Company's financial position, results of operations
     or cash flows.

(10) DISCLOSURES ABOUT CAPITALIZED COSTS, COSTS INCURRED AND MAJOR CUSTOMERS

     Capitalized costs related to oil and gas producing activities at June 30,
     2003, are as follows:

                                      F-17



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

                                                   June 30,
                                             2003            2002

      Unproved - Domestic               $    215,892   $    215,892
      Proved                              10,918,017     11,062,848
                                          ----------    -----------
                                          11,133,909     11,278,740

      Accumulated depletion and           (9,420,570)    (8,685,589)
      impairment
                                          ----------    -----------
                                        $  1,713,339   $  2,593,151
                                          ==========    ===========

     Costs incurred in oil and gas producing activities for the years ended June
     30, 2003 and 2002 were approximately as follows:

                                            2003           2002
                                        ------------   -----------

      Unproved property acquisition
      costs                             $    --              --
      Proved property acquisition
      costs                                  --             257
      Development costs                    83,162        87,087
      Exploration costs                    63,677        96,601

     During fiscal 2003, the Company had three major customers. Sales to those
     customers accounted for approximately 27%, 11% and 11% of fiscal 2003 oil
     and gas sales. The Company does not believe that it is dependent on a
     single customer. The Company has the option at most properties to change
     purchasers if conditions so warrant. During fiscal 2002, the Company had
     two major customers. Sales to these customers accounted for approximately
     27% and 13% of fiscal 2002 oil and gas sales.

     During fiscal 2003, the Company spent approximately $41,500 converting
     proved undeveloped reserves at Hilight field (4 wells) into proved
     producing reserves. During fiscal 2002, the Company spent approximately
     $51,000 converting proved undeveloped reserves at Hilight field into proved
     producing reserves.

(11) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)

     The information presented below regarding the Company's oil and gas
     reserves were prepared by independent petroleum engineering consultants.
     All reserves are located within the continental United States.

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

     Proved developed oil and gas reserves are those expected to be recovered
     through existing wells with existing equipment and operating methods. The
     determination of oil and gas reserves is highly complex and interpretive.
     The estimates are subject to continuing changes as additional information
     becomes available.

     Estimated net quantities of proved developed and undeveloped reserves of
     oil and gas for the years ended June 30, 2003 and 2002, are as follows:

                                      F-18



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

                                            2003                     2002
                                  -----------------------  ---------------------
                                      Oil         Gas          Oil         Gas
                                    (BBLS)       (MCF)       (BBLS)       (MCF)
                                  ----------  -----------  ---------  ----------

     Beginning of year              273,000   12,069,000    356,000  13,384,000
     Revisions of previous
       quantity estimates            43,000   (7,274,300)   (17,000)   (611,000)
     Extensions, discoveries
       and improved recovery         11,800      231,100         --          --
     Sales of reserves in place          --           --    (42,000)   (351,000)
     Production                     (17,100)    (267,100)   (24,000)   (353,000)
                                 ----------   ----------  ---------  ----------

     End of year                    310,700    4,758,700    273,000  12,069,000
                                 ==========   ==========  =========  ==========

     Proved developed
     reserves - end of year         232,100    2,351,200    201,000   4,992,000
                                 ==========   ==========  =========  ==========

     STANDARDIZED MEASURE OF DISCOUNTED FUTURE
     NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES

     Future net cash flows presented below are computed using year-end prices
     and costs. Future corporate overhead expenses and interest expense have not
     been included.

                                               2003             2002
                                           -----------      -----------
    Future cash inflows                   $ 33,352,000     $ 32,752,000
    Future costs:
      Production                            (10,295,000)     (9,386,000
      Development                           (1,390,000)      (4,725,000)
                                           -----------      -----------

    Future net cash flows                   21,667,000       18,641,000

    10% discount factor                     (11,070,000)     (9,743,000)
                                           -----------      -----------
      Standardized measure of discounted
        future net cash flows             $ 10,597,000     $  8,898,000
                                           ===========      ===========

     To achieve the 2004 future cash inflows reported, the capital expenditure
     of approximately $0.24 mm in fiscal 2004, $0.64 mm in fiscal 2005 and $0.23
     mm in fiscal 2006 will be required to develop existing proved undeveloped
     reserves. The capital expenditure of approximately $0.24 mm in fiscal 2004
     will be required to develop existing proved developed non-producing
     reserves.

     The principal sources of changes in the standardized measure of discounted
     future net cash flows during the years ended June 30, 2003 and 2002, are as
     follows:

                                      F-19



                               KESTREL ENERGY INC

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2003 AND 2002

                                                         2003          2002
                                                     -----------   -----------

    Beginning of year                               $  8,898,000   $13,825,000
    Sales of oil and gas produced during the
      period, net of production costs                   (629,000)     (437,000)
    Net change in prices and production costs         12,766,000    (3,688,000)
    Changes in estimated future development costs      2,910,000       (66,000)
    Extensions, discoveries and improved recovery        628,000           --
    Revisions of previous quantity estimates and
      other                                          (14,866,000)     (864,000)
    Sales of reserves in place                                --    (1,255,000)
    Purchase of reserves in place                             --            --
    Accretion of discount                                890,000     1,383,000
                                                     -----------   -----------

    End of year                                     $ 10,597,000  $  8,898,000
                                                     ===========   ===========


    The standardized measure of discounted future net cash flows relating to
    proved oil and gas reserves and the changes in standardized measure of
    discounted future net cash flows relating to proved oil and gas reserves
    were prepared in accordance with the provisions of SFAS 69. Future cash
    inflows were computed by applying current prices at year-end to estimated
    future production. Future production and development costs are computed by
    estimating the expenditures to be incurred in developing and producing the
    proved oil and gas reserves at year-end, based on year-end costs and
    assuming continuation of existing economic conditions. Future income tax
    expenses are calculated by applying appropriate year-end tax rates to
    future pretax net cash flows relating to proved oil and gas reserves, less
    the tax basis of properties involved and tax credits and loss carryforwards
    relating to oil and gas producing activities. Future net cash flows are
    discounted at a rate of 10% annually to derive the standardized measure of
    discounted future net cash flows. This calculation procedure does not
    necessarily result in an estimate of the fair market value or the present
    value of the Company's oil and gas properties.

    The complete definition of proved oil and gas reserves appears at
    Regulation S-X 4-10(a)(2), 17 CFR 210.4-10(a)(2). The complete definition
    of proved developed oil and gas reserves appears at Regulation S-X
    4-10(a)(3), 17 CFR 210.4-10(a)(3). The complete definition of proved
    undeveloped reserves appears at Regulation S-X 4-10(a)(4), 17 CFR
    210.4-10(a)(4).

                                      F-20