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, 2004

      [ ]  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, 2004, 10,133,200 common shares (the registrant's only class of
voting stock) were outstanding. The aggregate market value of the 4,925,473
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
$2,955,284.


                                       i




                                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.................................................1
         
         Greens Canyon Project................................................2
         
         Recent Accounting Pronouncements.....................................3
         
         Operations and Policies..............................................3
         
         Customers............................................................3
         
         Risk Factors.........................................................4
         
         Forward-Looking Statements...........................................6
         
Item 2.  Description of Property..............................................6
         
         Oil and Gas Interests................................................6
         
         Royalty Interests Under Producing Properties.........................7
         
         Drilling Activities..................................................7
         
         Farmout Agreements...................................................7
         
         Oil and Gas Production, Prices and Costs.............................8
         
         Office Facilities....................................................8
         
Item 3.  Legal Proceedings....................................................8
         
Item 4.  Submission of Matters to a Vote of Security Holders..................8
         
PART II  .....................................................................8
         
Item 5.  Market for Registrant's Common Equity and Related 
         Stockholder Matters..................................................8
         
         Outstanding Shares of Common Stock...................................8
         
         Stock Price..........................................................8
         
         Dividend Policy......................................................9
         
Item 6.  Management's Discussion and Analysis of Financial 
         Condition and Results of Operations..................................9
         
         Liquidity and Capital Resources......................................9
         
         Results of Operations...............................................11
         
         Critical Accounting Policies and Estimates..........................12

Item 7.  Financial Statements and Supplementary Data.........................13
         
Item 8.  Changes in and Disagreements with Accountants on 
         Accounting and Financial Disclosure.................................13
         
Item 8A. Controls and Procedures.............................................13
         
Item 8B. Other Information...................................................13
         
PART III ....................................................................13
         
Item 9.  Directors and Executive Officers of the Registrant..................13
         
Item 10  Executive Compensation..............................................16
         
Item 11  Security Ownership of Certain Beneficial Owners and Management......19
         
Item 12  Certain Relationships and Related Transactions......................22
         
Item 13  Exhibits............................................................22
         
Item 14  Principal Accountant Fees & Services................................24

                                       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, 2004 the Company owned oil and gas interests in the states of
Louisiana, New Mexico, Oklahoma, Texas and Wyoming

                               RECENT DEVELOPMENTS

RECENT ACTIVITIES

The Company continues to develop its coal bed methane ("CBM") resources at the
Company's Hilight project. During the year, the Company participated in the
drilling of 8 additional wells. Continued development of the field is expected
during the coming year.

The Company expects a CBM well will be drilled in its Green River Basin project
during the first half of fiscal year 2005. Depending on the results from this
well more wells could be drilled. Kestrel has a 10% free carried interest on the
first $3 million expended in this project with the right to buy back an
additional 10% interest. Kestrel will operate the wells in this project.

The Company is continuing to look for ways to maximize its operated production
with workovers or recompletions.

PROVED RESERVES POSITION

As of June 30, 2004, the Company's undiscounted net future cash flows have been
estimated by Sproule Associates Inc., an independent petroleum engineering firm,
to be approximately $27,505,200. This compares to $21,667,000 as of June 30,
2003. The increase in the current year is the result of higher oil and natural
gas prices offset against revisions of previous quantity estimates.

For the fiscal year ended June 30, 2004, the Company's proved oil reserves
increased approximately 57,000 bbls. to 367,700 bbls., or 18% from 310,700 in
2003. The Company's proved gas reserves decreased 17 Mmcf to 4,742 Mmcf, or less
than one percent, from 4,759 Mmcf in 2003. The decrease in proved gas reserves
is attributable primarily to the recommendation by the Company's independent
engineering consultants, Sproule Associates, Inc., to make the maximum well life
no more than fifty years. In the past, some of our wells had a life expectancy
of more than 50 years, therefore increasing the reserves. 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.

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 President and
CEO, 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 all of then outstanding debt to Samson
Exploration N.L. (an affiliate of the Company) 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 former President and CEO for a maximum of
$200,000. Under the terms of the agreement all outstanding amounts were due on
May 4, 2005 and bore 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 owed to Mr. Lasker by the
Company. The Lasker loan was 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. On February 5, 2004, Mr. Lasker assigned the $200,000 Lasker Loan to
Samson Exploration N.L. (an affiliate of the Company) and Mr. Lasker was paid in
full. The terms and conditions of the Samson loan are a continuance of the terms
and conditions of the Lasker loan, except for the deletion of a provision
providing for acceleration upon termination of Mr. Lasker's employment by the
Company.

On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest rate
which is to be paid on repayment of the loan. This is an unsecured loan due on
demand.

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 and 2004 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, and, as of this
date, it has not secured a suitable farm-out partner. Several parties have
expressed an interest in the project and negotiations with these parties are


                                       2





ongoing. 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. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

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.


                                       3





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.

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.

The Company has four employees, including the Company's President and CEO,
Timothy L. Hoops. 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 2004, the Company had three major customers: Rim Operating
Inc., Kaiser Francis Oil Company and Eighty-Eight Oil LLC. Sales to these
customers accounted for 33%, 19% and 18%, respectively, of oil and gas sales in
2004. 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.


                                       4





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 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 TIMOTHY HOOPS 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, Timothy L. Hoops and
Robert J. Pett, our Chairman, is a necessity for our continued operations. We do
not have key person life insurance on either Mr. Hoops' 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.


                                       5





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 2004
contains estimates of our oil and natural gas reserves and the future cash flow
to be realized from those reserves for fiscal years 2004 and 2003, 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
were 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.


                                       6





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, 2004:


                               Total                          Total
                               -----                          -----
                      Developed Acreage (1)(2)      Undeveloped Acreage (1)(2)

        State               Gross        Net           Gross         Net
        -----               -----        ---           -----         ---
       Louisiana               480        480              111         111
       New Mexico              240         91              320          87
       Oklahoma              1,567        451              -0-         -0-
       Texas                   148          4              -0-         -0-
       Wyoming              10,263      3,056           28,454      28,454
                            ------      -----           ------      ------
       TOTAL                12,698      4,082           28,885      28,652


(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, 2004, 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, which remains unchanged since June 30, 2003. The net
production for the royalty interests for the year ended June 30, 2004 were 137
Bbls and 19 Mcf for oil and gas respectively. The net production for the
Company's royalty interests for the fiscal year ended June 30, 2003 was 101 Bbls
and 101 Mcf for oil and gas respectively. The royalty interests are considered
to be immaterial by the Company.

DRILLING ACTIVITIES

The Company participated in drilling 8 Hilight CBM wells located in Campbell
Co., Wyoming during the year ended June 30, 2004. 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.

Kestrel Energy, Inc. owned interests in net exploratory and net development
wells for the years ended June 30, 2004, and 2003 are as set forth below. This
information does not include wells drilled under farmout agreements.

                                  United States    
                                  -------------    
                               6/30/04    6/30/03
Net Exploratory Wells: (1)     
  Dry (2)                          -        .5
  Productive (3)                   -         -  
                               -----      ------
                                   -          .5   
                               =====      ======
Net Development Wells: (1)     
  Dry (2)                          0         -
  Productive (3)                 1.5        .7  
                               -----      ------
                                 1.5        .7 
                               =====      ======


                                       7





(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, 2004, no wells were drilled under farmout
agreements.

OIL AND GAS PRODUCTION, PRICES AND COSTS

As of June 30, 2004, the Company had a royalty and/or working interest in 90
gross (3.4 net) wells that produce oil only, 44 gross (11.2 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, 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.

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 8 (Unaudited) 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, 2004.

For the year ended June 30, 2004, the Company's average operating cost
(including taxes and marketing) per barrel of oil equivalent (BOE) (converting
gas to oil at 6:1) was $11.51. The average operating cost per BOE on an
equivalent basis for fiscal years 2003 was $10.45. The average sales price per
barrel of oil sold was $27.05 for 2004 and $24.10 for 2003. The average sales
price per mcf of gas sold was $4.20 for 2004 and $3.18 for 2003.

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 had, 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 lease
obligation expired September 15, 2004.

ITEM 3.  LEGAL PROCEEDINGS.

None.

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

None.


                                       8





                                    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." At June 30, 2004, the Company had 10,133,200
shares outstanding. At June 30, 2004, the Company had approximately 1,425
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, 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

      Fiscal Year June 30, 2004                       Sales Price
                                                      -----------
                                                High              Low
                                                ----              ---
      First Quarter                            $0.40              $0.31
      Second Quarter                            0.35               0.31
      Third Quarter                             0.85               0.40
      Fourth Quarter                            0.85               0.52

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.

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,
2004, was $439,824 compared to a working capital deficit of $4,643 at June 30,
2003. The increase in working capital deficit of $435,181 for the year ended
2004 resulted from the reclassification of the loans from R&M Oil & Gas, Ltd and
Samson Exploration N.L. Both loans will be renegotiated or paid in fiscal 2005
and are no longer considered long term debt.

Net cash provided by operating activities was $12,225 for fiscal 2004 as
compared to cash used by operating activities of $100,067 for fiscal 2003, an
increase in provided cash of $112,292. The increase in operating cash flows is
attributed to higher oil and gas prices offset by a lesser increase in lease
operating expenses.

Net cash used by investing activities was $195,822 in fiscal 2004 as compared to
net cash used of $349,904 in fiscal 2003. For the year ended June 30, 2004,
$195,822 was used for capital expenditures including $58,000 on completion of 8
coalbed methane wells in Campbell Co., Wyoming.


                                        9





Net cash provided by financing activities was $217,500 for fiscal 2004 versus
$522,027 provided by financing activities a year ago. In 2003, the Company
borrowed $500,000 from Samson Exploration N.L. (a related party). Also in 2003,
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 at that time, 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, former
President and CEO of Kestrel, for a maximum loan to the Company of $200,000. 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.

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 2004, 335,000 warrants were exercised at $0.50 with net proceeds of
$167,500. These proceeds were used to reduce the Company's accounts payable
position at the time.

On February 5, 2004, Mr. Lasker assigned the $200,000 Lasker Loan to Samson
Exploration N.L. and Mr. Lasker was paid off in full. The terms and conditions
of the Samson loan are a continuance of the terms and conditions of the Lasker
loan, except for the deletion of a provision providing for acceleration upon
termination of Mr. Lasker's employment by the Company.

On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest rate
which is to be paid on repayment of the loan. This is an unsecured loan due on
demand.

      Debt Obligations: As of June 30, 2004, the Company had the following debt
obligations (all short-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 $200,000 due Samson Exploration N.L. Under the
terms of the agreement all outstanding amounts are due on May 4th, 2005 and bear
interest at 10% per annum. The Loan was transferred from Barry D. Lasker, the
Company's former President and CEO.


On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest rate
which is to be paid on repayment of the loan. This is an unsecured loan due on
demand.

      Reserves and Future Cash Flows: For the fiscal year ended June 30, 2004,
the Company's proved oil reserves increased approximately 57,000 bbls. to
367,700 bbls., or 18% from 310,700 in 2003. The Company's proved gas reserves
decreased 17 Mmcf to 4,742 Mmcf, or less than one percent, from 4,759 Mmcf in
2003. The decrease in proved gas reserves is attributable primarily to the
recommendation by the Company's independent engineering consultants, Sproule
Associates, Inc. ("Sproule"), to make the maximum well life no more than fifty
years. In the past, some of the Company's wells had a life expectancy of more
than 50 years, therefore, increasing the reserves.

The Company's undiscounted net future cash flows have been estimated by Sproule
to be approximately $27,505,200 as of June 30, 2004. This compares to
$21,667,000 as of June 30, 2003. The increase in the current year is the result
of higher oil and natural gas prices offset against revisions of previous
quantity estimates.


                                       10





      Gas Balancing: At June 30, 2004, the Company held no under-produced or
over-produced properties. The Company at June 30, 2003 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, 2004, the
Company estimated that, for United States federal income tax purposes, it had
net operating loss carryforwards of approximately $13,240,000. The utilization
of approximately $178,000 of these carryforwards are limited to an estimated
$80,000 annually. Of the balance of the loss carryforwards, $13,062,000 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 2024.

RESULTS OF OPERATIONS

FISCAL 2004 VS. FISCAL 2003

      Net Earnings: The Company reported net earnings of $60,977 in fiscal 2004
compared to a net loss of $2,335,980 in fiscal 2003, which was net gain of
$2,396,957. In fiscal 2004, the Company recorded abandonment and impairment 
expenses of $52,438 versus $1,238,214 in fiscal 2003, depreciation and depletion
expenses of $124,002 versus $339,002 in 2003 and no loss on sale of
available-for-sale securities versus a loss of $575,893 in fiscal 2003.

      Revenue: Revenue from oil and gas sales increased in fiscal 2004 by
$347,215, or 27%, to $1,651,796. Average prices per barrel of oil increased 12%
to $27.05 from $24.10 a year ago. Average prices received per Mcf of gas
increased 32% to $4.10 from $3.18 a year ago. Sales volumes for oil increased
13% to 19,300 barrels from 17,100 barrels a year ago. Sales volumes for gas
decreased 4% to 255 Mmcf from 267 Mmcf a year ago.

In July 2003, the Company recorded a gain on sale of property and equipment of
$21,538 as it 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. In fiscal 2003, the Company also disposed of 30,100,000
shares of common stock of Victoria Petroleum, NL. 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.

      Lease Operating Expenses: Lease operating expenses increased $88,564, or
14%, to $733,315 from $644,751 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 increased
15% to $485,963 from $421,148 a year ago. Workover costs decreased 78% to $7,038
from $32,141 last year. Gas handling fees increased 7% to $50,655 from $50,156 a
year ago. Production taxes increased 22% to $157,147 from $128,864 a year ago.
The increase in direct lease expenses is attributable to the increase in the
number of wells producing at the Hilight CBM wells located in Campbell Co.,
Wyoming. The decrease in workover expenses is attributable to lower 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 10% to
$11.51 from $10.45 a year ago.

      Exploration Expenses: Exploration expenses increased $39,965, or 63%, to
$103,642 from $63,677 in 2003. The increase in exploration expense reflects the
Company's interest in continued development at core properties.


                                       11





      Dry Holes, Abandoned and Impaired Properties: The Company had no dry
holes, abandoned and impaired property in fiscal 2004 as compared to $1,238,214
a year ago.

      General and Administrative Expense: General and administrative expenses
decreased $174,637, or 22%, to $622,645 as compared to $797,282 a year ago. The
decrease in general and administrative expenses is attributable to lower
accounting, legal, rent, travel and insurance costs. The Company continues to
review ways to reduce overhead expenses.

      Interest Expense and Loan Fees: Interest expense totaled $73,536 for the
fiscal year ended June 30, 2004 versus $115,690 a year ago. The interest is
attributable to the line of credit the Company had with Barry D. Lasker, short
term borrowings from Victoria Petroleum N.L., and long term borrowings from R&M
Oil and Gas LTD and Samson Exploration NL. The Barry D. Lasker line of credit
has been satisfied in full, however, $50,000 remains owed to VP N.L., $400,000
to R&M, and $200,000 to Samson Exploration.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The Company believes the following critical accounting policies affect our
most significant judgments and estimates used in the preparation of our
Consolidated Financial Statements.

RESERVE ESTIMATES:

Our estimates of oil and natural gas reserves, by necessity, are projections
based on geologic and engineering data, and there are uncertainties inherent
in the interpretation of such data as well as the projection of future rates
of production and the timing of development expenditures.  Reserve
engineering is a subjective process of estimating underground accumulations
of oil and natural gas that are difficult to measure.  The accuracy of any
reserve estimate is a function of the quality of available data, engineering
and geological interpretation and judgment.  Estimates of economically
recoverable oil and natural gas reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and assumptions governing future oil and natural gas prices, future operating
costs, severance and excise taxes, development costs and workover and
remedial costs, all of which may in fact vary considerably form actual
results.  For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom may vary
substantially.  Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves, which could affect
the carrying value of our oil and gas properties and/or the rate of depletion
of the respect to our reserves will likely vary from estimates, and such
variances may be material.

Many factors will affect actual future net cash flows, including:

- the amount and timing of actual production;
- supply and demand for natural gas;
- curtailments or increases in consumption by natural gas purchasers; and
- changes in governmental regulations or taxation.


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.

Proved oil and gas properties are assessed for impairment on a well by well
basis or a field-by-field basis where unitized.  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.

ASSET RETIREMENT OBLIGATIONS:

We recognize the future cost to plug and abandon wells over the estimated
useful life of the wells in accordance with the provision of SFAS No.143.
SFAS No.143 requires that we record a liability for the present value of the
asset retirement obligation increase to the carrying value of the related
long-lived asset.  We amortize the amount added to the oil and gas properties
and recognize accretion expense in connection with the discount liability
over the remaining lives of the respective gas wells. Our liability estimate
is based on our historical experience in plugging and abandoning wells,
estimated well lives based on engineering studies, external estimates as to
the cost to plug and abandon wells in the future and federal and state
regulatory requirements.  The liability is discounted using a credit-adjusted
risk-free rate.  Revisions to the liability could occur due to changes in
well lives, or if federal and state regulators enact new requirements on the
plugging and abandonment of wells.

ITEM 7.  FINANCIAL STATEMENTS.

         See pages F-1 through F-19 for this information.

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

         None

ITEM 8A. CONTROLS AND PROCEDURES

         Disclosure Controls and Procedures:

At the time of the period reported in 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 all material respects with respect to the recording, processing,
summarizing and reporting, with the time periods specified in the SEC's rules
and forms, of information required to be disclosed in the reports the Company
files or submits under the Exchange Act.

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.

ITEM 8B. OTHER INFORMATION

         Reports on Form 8-K.

         A Form 8-K under Item 12 dated May 17, 2004 was filed with the
         Commission on May 28, 2004.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the names of all directors and executive officers of the
Company, their ages, all 


                                       12





positions and offices held by each such person, the period during which he has
served as such, and the principal occupations and employment of such persons
during at least the last five years.

TIMOTHY L. HOOPS, age 48, has been President of the Company since May 15, 2004
and a Director since June 1, 1992. He also previously served as President and
Chief Executive Officer of the Company from June 1, 1992 until August 15, 2001,
when he resigned from those positions, but he remained as a consultant to the
Company. On July 1, 2002, Mr. Hoops was hired as the Company's Operations
Manager, and on May 15, 2004, the board of Directors named him President, Chief
Executive Officer, Chief Financial Officer and Secretary of the Company. Mr.
Hoops is a petroleum geologist with 25 years experience in the continental USA
and Australia. Mr. Hoops was the President and a Director of the Company's
wholly owned subsidiary, Victoria Exploration, Inc., an independent oil and gas
producer, where he had served as an officer and Director since 1987 until it was
merged into the Company in June 2001. He was a Director and President of Kestrel
Energy California, Inc. ("KEC"), a former wholly owned subsidiary and oil and
gas producer, from March 1997 until it was acquired by Victoria Petroleum N.L.
in May 2000. After the acquisition, he remained as a Director and he became Vice
President and Assistant Secretary. He has also been a Director of Victoria
International Petroleum N.L., an Australian oil and gas company, and of Victoria
Petroleum N.L., its parent, since 1987. Mr. Hoops was Exploration Manager for
Royal Resources Corporation, a publicly held Denver based company engaged in the
exploration and development of oil and gas, from 1984 to 1987. Prior to 1984,
Mr. Hoops was employed by Amoco Production, Cities Service and Santa Fe Energy.
Mr. Hoops is a 1979 graduate of the Colorado School of Mines, with a degree in
geology.

ROBERT J. PETT, age 57, was appointed as a Director on June 1, 1992 and Chairman
of the Board on January 16, 1995. Mr. Pett served as Secretary, Treasurer and
Vice President of the Company during various periods from June 1992 to January
1995. Mr. Pett has been a director of Victoria International Petroleum N.L.
since 1986 and he has been Chairman of Victoria Petroleum N.L. for 20 years. He
is currently Chairman of Kestrel Energy California, Inc. After the acquisition
of Kestrel Energy California in May 2000, Mr. Pett was also appointed as its
President. Mr. Pett was a Director of Victoria Exploration, Inc. until it was
merged into the Company in June 2001. Mr. Pett holds a Masters Degree in
Economics (Queens University, Canada).

JOHN T. KOPCHEFF, age 56, was appointed as a Director on January 16, 1995. He
served as Vice President - International from January 16, 1995 until June 30,
2002. He also held the same positions at Victoria Exploration, Inc. until it was
merged into the Company in June 2001. He was also the Vice President -
International and a Director at Kestrel Energy California, Inc. until it was
merged in May 2000. He remained as a Director and became its Secretary. Mr.
Kopcheff is a geologist with 34 years experience in petroleum in Australia,
Southeast Asia, United States, South America and the North Sea, both in field
geological operations and management. Mr. Kopcheff has been a Director of
Victoria International Petroleum N.L. since 1986, and a Director of Victoria
Petroleum N.L. since 1984. Prior to his appointment with the Company, he
provided various services to the Company relating to its international
exploration activities on a consulting basis. He received a Bachelor of Science
degree with honors from the University of Adelaide in 1970.

KENNETH W. NICKERSON, age 84, is an independent petroleum and mineral geologist
with over 54 years experience. He was appointed as a Director on December 16,
1992. From 1981 until 1988, Mr. Nickerson served as President, Director and
Chief Operating Officer of Royal Resources Corporation, a publicly held Denver
based company engaged in the exploration and development of oil and gas. Since
then Mr. Nickerson has worked as a consulting geologist for various energy
companies. Mr. Nickerson is a 1948 graduate of the Colorado School of Mines with
a degree in geological engineering.

MARK A.E. SYROPOULO, age 52, was appointed as a Director on January 14, 1998.
Mr. Syropoulo has been an independent corporate consultant since 1994 and has
during that time provided services to various entities in the natural resources,
information technology and investment sectors, principally in Australia. He also
acted as a consultant to the Company from May 1997 until January 1998. From 1987
to 1993, Mr. Syropoulo was managing director of Anglo Pacific Resources Limited,
a United Kingdom mining and oil company associated with Anglovaal Holdings
Limited, a major South African mining house. 


                                       13





Mr. Syropoulo is a graduate of mathematics and economics and an honors graduate
in economics of the University of Natal Durban, South Africa.

NEIL T. MACLACHLAN, age 62, was appointed as a Director on September 27, 2000.
He is the Chairman and major shareholder in Markham Associates, a London based
corporate investment and advisory business. He is also a non-executive director
of Samson Exploration N.L. and Titan Resources Ltd., both publicly traded
Australian mining companies, and Golden Prospect Plc, a publicly traded United
Kingdom mining investment company listed in London on the Alternative Investment
Market. Golden Prospect is one of the principal shareholders of the Company,
holding, directly and indirectly, approximately 30% of its stock. Samson
Exploration N.L. is another principal shareholder of the Company holding
approximately 24% of the Company's stock. Because Golden Prospect owns 29.95% of
Samson, the 24% held by Samson is included in the 30% held by Golden Prospect.
Mr. MacLachlan has over 28 years investment banking experience gained in Europe,
Southeast Asia and Australia. Mr. MacLachlan was employed by Barrick Gold
Corporation as Executive Vice President Asia from 1993 to 1997. He was a former
director of Wardley Holdings and James Capel & Co. Limited, investment banking
subsidiaries of the Hong Kong and Shanghai Banking Corporation. Mr. MacLachlan
graduated from Manchester University in 1964 with a Bachelor of Science in
Biochemistry and he took the post graduate Business Studies course at London
Polytechnic at Rutherford College.

BARRY D. LASKER, age 44, was appointed President, Chief Executive Officer and
Director on August 16, 2001, and he was appointed Chief Financial Officer and
Secretary on February 15, 2002. Mr. Lasker resigned from those positions on May
15, 2004, and resigned as a Director on July 12, 2004. Mr. Lasker was the
President and Chief Executive Officer of TransAtlantic Petroleum Corp., an oil
and gas exploration company located in Calgary, Alberta, Canada with offices in
Houston, Texas, from December 1998 until August 2001. From January 1997 to
December 1998, he was the President and Chief Executive Officer of GHP
Exploration located in Houston, Texas of which he was a co-founder. It became a
publicly held company in April 1997 and was acquired in September 1998 by Profco
Resources, a Toronto, Canada listed company, which then changed its name to
TransAtlantic Petroleum Corp in December 1998. Prior to that time, Mr. Lasker
was the Asset Manager of GOM Shelf/Flex Trend for BHP Petroleum, an oil and gas
exploration and production company in Houston, Texas, from January to December
1996. From 1993 to January 1996, Mr. Lasker was an Exploration Manager in
Southern Australia, New Zealand and Western Australia for BHP Petroleum. He also
worked in various positions as a geophysicist and geoscientist from 1982 to
1992. Mr. Lasker received his Bachelor of Science in Geology and Geophysics from
Macquarie University in Sydney, Australia in 1981.

AUDIT COMMITTEE FINANCIAL EXPERT

The Company does not have a "financial expert", as defined by the SEC's rules
promulgated under section 407 of Sarbanes-Oxley Act of 2002, serving on the
Committee because the Board of Directors believes that all of the members of the
Board, including but not limited to those serving on the Audit Committee, have
sufficient financial knowledge, experience and sophistication to comprehend and
critically analyze the Company's financial statements and the audit thereof.
Accordingly, the Board has determined that adding a "financial expert" to the
Board and the Audit Committee at this time is not a necessary or productive
expenditure of the Company's limited resources.

CODE OF ETHICS

The Company has not yet adopted a code of ethics for its principal executive
officer and principal financial officer since he is the only executive officer
of the Company. The Board of Directors will continue to evaluate, from time to
time, whether a code of ethics should be developed and adopted. If the Company
does adopt a code of ethics in the future, in light of the Company's moderate
size, it is likely to apply to all employees rather than only executive
officers.


                                       14





SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's executive officers and
directors, and persons who own more than ten percent of the Common Stock of the
Company, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the exchange on which the Common Stock is
listed for trading. Those persons are required by regulations promulgated under
the Exchange Act to furnish the Company with copies of all reports filed
pursuant to Section 16(a). Barry D. Lasker, one of the Company's former officers
and a director, failed to make a timely filing of three ownership reports to
report three transactions. Two of the Company's principal shareholders, Victoria
International Petroleum N.L. and Samson Exploration N.L., each failed to make a
timely filing of one ownership report to report one transaction. To the
Company's knowledge, as of the date hereof, all Section 16(a) ownership reports
have been filed.

ITEM 10.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

The following sets forth in summary form the compensation received during each
of the Company's last three completed fiscal years by the Chief Executive
Officer of the Company, the former Chief Executive Officer, and one other
non-executive officer of the Company who received salary, bonus or other annual
compensation in total from the Company, in excess of $100,000 during the same
period.


-------------------------------------------------------------------------------
                                        Annual Compensation
-------------------------------------------------------------------------------
            NAME AND                                   Other Annual
       PRINCIPAL POSITION          Fiscal     Salary   Compensation  Options
                                    Year       ($)         ($)         (#)
-------------------------------------------------------------------------------
Timothy L. Hoops, President,        2004     $72,000        $0          0
Chief  Executive  and  Financial    2003     $72,000     $23,639        0
Officer(1)                          2002     $43,754     $57,847      20,000
-------------------------------------------------------------------------------
Barry    D.    Lasker,    former    2004    $55,500(2)  $22,500(3)      0
President,                          2003    $180,000(4)     $0          0
Chief  Executive  and  Financial    2002    $165,000(5)     $0       320,000
Officer
-------------------------------------------------------------------------------
Ira   Pasternack,   former  Vice    2004        $0          $0          0
President -Exploration(6)           2003     $15,000      $4,080        0
                                    2002     $86,250        $0        20,000
-------------------------------------------------------------------------------


(1) Besides his salary, Mr. Hoops received fees as a director of Victoria
    Petroleum N.L. in the amount of Australian $5,000 for fiscal 2004, roughly
    US$3,475 based on a June 30, 2004 exchange rate, and expects to receive the
    same amount in fiscal 2005. Mr. Hoops resigned as President and Chief
    Executive Officer on August 15, 2001, but remained as a consultant. On 
    July 1, 2002, Mr. Hoops was also hired as the Company's Operations Manager,
    and on May 15, 2004, he was elected President, Chief Executive Officer and
    Chief Financial Officer. As a consultant, Mr. Hoops accrued no consulting
    fees in fiscal 2004 through his employer, Peak Resource Management, Inc.,
    of which $809 was deferred until fiscal 2005. In fiscal 2003 he received
    $23,639 in consulting fees through Peak Resource. In fiscal 2002, Mr. Hoops
    received $57,847, of which $13,962 remains unpaid as of the date of this
    Report.
(2) Includes $7,500 for accrued salary which was rolled into a line of credit to
    the Company by Mr. Lasker. See "Certain Relationships and Related
    Transactions."
(3) Mr. Lasker resigned as President and Chief Executive Officer on May 15,
    2004, but has remained as a consultant.
(4) Includes $60,000 for accrued salary which was rolled into a line of credit
    to the Company by Mr. Lasker. See "Certain Relationships and Related
    Transactions."
(5) Includes $10,000 for accrued salary which was rolled into a line of credit
    to the Company by Mr. Lasker. See "Certain Relationships and Related
    Transactions."


                                       15





(6) Mr. Pasternack resigned as an officer effective June 30, 2002, but continued
    as an employee until October 15, 2002. Since that date, Mr. Pasternack
    remained as a consultant. The other annual compensation received in fiscal
    2003 is related to those consulting activities.

None of the named officers received additional compensation other than noted
above the aggregate amount of which was the lesser of either $50,000 or 10% of
the total of annual salary, bonus and consulting fees reported for such officer.
The Company reimburses its officers and directors for ordinary and necessary
business expenses incurred by them on behalf of the Company.



                               OPTION GRANTS FOR FISCAL YEAR ENDED JUNE 30, 2004
-----------------------------------------------------------------------------------------------------------------------------------
                                Number Of          % of Total                                       Potential Realizable Value at
                               Securities       Options Granted     Exercise or                        Assumed Annual Rates of
                               Underlying         to Employees       Base Price     Expiration         Stock Price Appreciation
                                 Options         in Fiscal Year      ($/share)         Date                For Option Term
            Name                 Granted                                                                  5%($)(1) 10%($)(2)
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
                                                                                                           
Timothy L. Hoops                   -0-                 0%               N/A             N/A            N/A               N/A
  President, Chief
  Executive and
  Financial Officer and
  Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Barry D. Lasker                    -0-                 0%               N/A             N/A            N/A               N/A
  former President,
  Chief Executive and
  Financial Officer
  and Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Ira Pasternack                     -0-                 0%               N/A             N/A            N/A               N/A
  former Vice President
  - Exploration
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Robert J. Pett                     -0-                N/A               N/A             N/A            N/A               N/A
  Chairman of the
  Board and Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
John T. Kopcheff                   -0-                N/A               N/A             N/A            N/A               N/A
  Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Kenneth W. Nickerson            5,000(3)              N/A              $0.319         9-30-13         $2,598            $4,137
  Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Mark A.E. Syropoulo             5,000(3)              N/A              $0.319         9-30-13         $2,598            $4,137
  Director
--------------------------- ------------------ ------------------- --------------- -------------- --------------- -----------------
Neil T. MacLachlan                 -0-                N/A               N/A             N/A            N/A               N/A
  Director
-----------------------------------------------------------------------------------------------------------------------------------


(1)  This column represents the potential realizable value of each grant of
     options, based on the assumption that the market price of shares of Common
     Stock underlying the options will appreciate in value from the date of the
     grant to the end of the option term at the annual rate of five percent.
(2)  This column represents the potential realizable value of each grant of
     options, based on the assumption that the market price of shares of Common
     Stock underlying the options will appreciate in value from the date of the
     grant to the end of the option term at the annual rate of ten percent.
(3)  Of this grant, all were nonqualified stock options.


                                       16







                              AGGREGATED OPTION EXERCISES FOR FISCAL YEAR ENDED JUNE 30, 2004
                                                 AND YEAR END OPTION VALUES
----------------------------------------------------------------------------------------------------------------------------------
                                                                      Number of Securities             Value of Unexercised
                              Shares Acquired on     Value           Underlying Unexercised            In-the-Money Options
                                 Exercise(#)        Realized        Options at June 30, 2004             at June 30, 2004
             Name                                     ($)                     (#)                             ($)(1)
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
                                                                   Exercisable/Unexercisable         Exercisable/Unexercisable
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
                                                                                                     
Timothy L. Hoops                      0               N/A                  228,754/0                           $0/$0
  President and Chief
  Executive and Financial
  Officer and Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Barry D. Lasker                       0               N/A                  320,000/0                           $0/$0
  former President, Chief
  Executive and Financial
  Officer and Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Ira Pasternack, Former Vice           0               N/A                  120,000/0                           $0/$0
President - Exploration
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Robert J. Pett                        0               N/A                  113,795/0                           $0/$0
  Chairman of the
  Board and Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
John T. Kopcheff                      0               N/A                  167,589/0                           $0/$0
  Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Kenneth W. Nickerson                  0               N/A                   65,081/0                         $3,255/$0
  Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Mark A.E. Syropoulo                   0               N/A                  170,000/0                         $3,255/$0
  Director
----------------------------- ------------------- ------------- --------------------------------- --------------------------------
Neil T. MacLachlan                    0               N/A                   35,000/0                           $0/$0
  Director
----------------------------------------------------------------------------------------------------------------------------------


(1)  For all unexercised options held as of June 30, 2004, the aggregate dollar
     value is the excess of the market value of the stock underlying those
     options over the exercise price of those unexercised options. The price
     used to calculate these figures is the closing price as of June 30, 2004
     as reported on the OTC Bulletin Board, which was $0.65 per share.


                                       17







                                       EQUITY COMPENSATION PLAN INFORMATION
                                        AS OF FISCAL YEAR END JUNE 30, 2004

----------------------------------------------------------------------------------------------------------------------
                                         Number of                                           Number of Securities
                                     Securities to be                                         Remaining Available
                                        Issued Upon               Weighted Average            for Future Issuance
                                        Exercise of               Exercise Price of              Under Equity
                                    Outstanding Option,         Outstanding Options,           Compensation Plan
                                    Warrants and Rights          Warrants and Rights         (Excluding Securities
                                                                                            Reflected in Column A)
------------------------------- ---------------------------- ---------------------------- ----------------------------
                                             A                            B                            C
------------------------------- ---------------------------- ---------------------------- ----------------------------
                                                                                               
Equity compensation plan                 1,540,667                      $1.38                       276,287
approved by shareholders
----------------------------------------------------------------------------------------------------------------------


DIRECTORS' REMUNERATION

Any director who serves on the Compensation Committee automatically receives
5,000 options on the last trading day in September pursuant to the Company's
Stock Option Plan. Accordingly, on September 30, 2003, both Messrs. Nickerson
and Syropoulo, as members of the Compensation Committee, received fully vested
ten year options to purchase 5,000 shares of Common Stock at an exercise price
of $0.319 per share, the closing price on the date of grant.

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

The following table sets forth, as far as is known to the Board of Directors or
the management of the Company, the only persons owning on September 28, 2004
more than five percent of the outstanding shares of the Company's Common Stock.
For purposes of this disclosure, the amount of the Company's Common Stock
beneficially owned by each person or entity is the aggregate number of shares of
the Common Stock outstanding on such date plus an amount equal to the aggregate
amount of Common Stock which could be issued upon the exercise of stock options
and a convertible note within 60 days of such date.


                                       18







--------------------------------------------------------------------------------------------------------------------
                             Number of Shares of Common Stock Beneficially Owned
--------------------------------------------------------------------------------------------------------------------
                                         Voting and Investment Power
--------------------------------------------------------------------------------------------------------------------

         Name and Address                Direct             Indirect          Total Shares         Percent Owned
----------------------------------- ------------------ ------------------- -------------------- --------------------
                                                                                                
Victoria International Petroleum      2,006,517(1)            ---               2,006,517              19.8%
N.L.
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
Victoria Petroleum N.L.                    ---           2,006,517 (1)          2,006,517              19.8%
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
Timothy L. Hoops                       256,664(2)        2,006,517 (3)          2,263,181              21.8%
1726 Cole Blvd., Suite 210
Lakewood, CO 80401
----------------------------------- ------------------ ------------------- -------------------- --------------------
Robert J. Pett                         123,795(4)        2,006,517 (5)          2,130,312              20.8%
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
John T. Kopcheff                       181,589(6)        2,006,517 (7)          2,188,106              21.2%
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
Golden Prospect Plc                      949,000          2,507,500(8)          3,456,500              32.5%
1st Floor
143-149 Great Portland St.
London W2N 5FB
England
----------------------------------- ------------------ ------------------- -------------------- --------------------
Samson Exploration N.L.               2,507,500(9)            ---               2,507,500              23.6%
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
Nieuport Pty Ltd                        1,005,000             ---               1,005,000              9.9%
PO Box 332
Greenwood 6924
Western Australia
----------------------------------- ------------------ ------------------- -------------------- --------------------
The Equitable Life Assurance             840,000              ---                840,000               8.3%
Society
City Place House
55 Basinghall St.
London EC2V 5DR
England
--------------------------------------------------------------------------------------------------------------------


(1)  Victoria International Petroleum N.L. ("VIP"), the record holder of the
     shares, is a wholly owned subsidiary of Victoria Petroleum N.L. ("VP"),
     which is therefore deemed to be another beneficial owner of the shares.
(2)  Includes vested options to purchase up to 228,754 shares.
(3)  Mr. Hoops is a director of VIP and of VP. As a result, all shares held by
     VIP directly and VP indirectly are listed as indirectly held by Mr. Hoops.
(4)  Includes vested options to purchase up to 113,795 shares.
(5)  Mr. Pett is the Chairman and a director of VIP and a director of VP. As a
     result, all shares held by VIP directly and VP indirectly are listed as
     indirectly held by Mr. Pett.


                                       19





(6)  Includes vested options to purchase up to 167,589 shares.
(7)  Mr. Kopcheff is a director of VIP and VP. As a result, all shares held by
     VIP directly and VP indirectly are listed as indirectly held by Mr.
     Kopcheff.
(8)  Golden Prospect Plc owns 29.95% of Samson Exploration N.L. and is
     therefore deemed to be a beneficial owner of the shares held by Samson.
(9)  Includes a $200,000 convertible promissory note initially convertible into
     500,000 shares.

The following table sets forth the number of shares beneficially owned on
September 28, 2004 by the Company's executive officers and directors, and by all
of the executive officers and directors as a group. For purposes of this
disclosure, the amount of the Company's Common Stock beneficially owned is the
aggregate number of shares of the Common Stock outstanding on such date plus an
amount equal to the aggregate amount of Common Stock which could be issued upon
the exercise of stock options and a convertible note within 60 days of such
date.



--------------------------------------------------------------------------------------------------------------------
                                            Position(s)            Number of Shares of
                                             With the                 Common Stock
          Name and Address                    Company              Beneficially Owned            Percent Owned
------------------------------------- ------------------------ ---------------------------- ------------------------
                                                                                              
Timothy L. Hoops                      President, Chief               2,263,181(1)(2)                 21.8%
1726 Cole Blvd., Suite 210            Executive and
Lakewood, CO 80401                    Financial Officer and
                                      Director
------------------------------------- ------------------------ ---------------------------- ------------------------
Robert J. Pett                        Chairman of the Board          2,130,312(3)(4)                 20.8%
2 The Esplanade, 36th Flr.            and Director
Perth 6000
Western Australia
------------------------------------- ------------------------ ---------------------------- ------------------------
John T. Kopcheff                      Director                       2,188,106(5)(6)                 21.2%
2 The Esplanade, 36th Flr.
Perth 6000
Western Australia
------------------------------------- ------------------------ ---------------------------- ------------------------
Kenneth W. Nickerson                  Director                          65,081(7)                     <1%
10780 Hanson St.
Johannesburg, MI 49751
------------------------------------- ------------------------ ---------------------------- ------------------------
Mark A.E. Syropoulo                   Director                         208,000(8)                     2%
Lot 42 Gumboil Road
Cooroy Queensland 4563
Australia
------------------------------------- ------------------------ ---------------------------- ------------------------
Neil T. MacLachlan                    Director                         189,800(9)                    1.9%
1 Victoria Square
London SWIW OQY
England
------------------------------------- ------------------------ ---------------------------- ------------------------
All Directors and Executive                                          3,031,446(10)                  27.8%
Officers as a Group (6 persons)
--------------------------------------------------------------------------------------------------------------------


(1)  Mr. Hoops is a director of Victoria International Petroleum N.L. ("VIP")
     and of Victoria Petroleum N.L. ("VP"). As a result, all shares held by 
     VIP directly and by VP indirectly are listed as beneficially owned by 
     Mr. Hoops.
(2)  Includes vested options to purchase up to 228,754 shares.
(3)  Mr. Pett is the Chairman and a director of VIP and a director of VP. As a
     result, all shares held by VIP directly and VP indirectly are listed as
     held by Mr. Pett.
(4)  Includes vested options to purchase up to 113,795 shares.
(5)  Mr. Kopcheff is a director of VIP and VP. As a result, all shares held 
     by VIP directly and VP indirectly are listed as beneficially owned by
     Mr. Kopcheff.
(6)  Includes vested options to purchase up to 167,589 shares. 
(7)  Consists of vested options to purchase up to 65,081 shares.


                                       20





(8)  Includes vested options to purchase up to 170,000 shares, and 38,000
     shares owned indirectly by Syrops & Co. Pty. Ltd.
(9)  Includes vested options to purchase up to 35,000 shares, and 55,000
     shares owned indirectly by a trust.
(10) Includes vested options to purchase up to 780,219 shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As of June 30, 2002, the Company owed approximately $516,000 on its line of
credit with Wells Fargo Bank, which line was secured by deeds of trust on
various of the Company's oil and gas producing properties. On August 6, 2002 the
Company borrowed $500,000 from Samson Exploration N.L., a principal shareholder,
and used the proceeds of the loan to pay off the Wells Fargo loan. Interest
under the Samson loan was 10% per annum in addition to an up front financing fee
of 10%.

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. at that time and reduce the Company's accounts payable position. The R&M
loan was approved unanimously by the Board of Directors, with Mr. Hoops
abstaining, which evaluated its fairness as an arms length transaction.

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.

On May 5, 2003, the Company entered into a Line of Credit Agreement with Barry
D. Lasker, President, CEO and a Director of Kestrel for a maximum loan to the
Company of $200,000. Under the terms of the agreement all outstanding amounts
were due on May 4, 2005 and bore interest at 10% per annum. The loan could also
be converted, at Mr. Lasker's election, into shares of Common Stock at $0.40 per
share. The initial proceeds of the loan consisted of $40,000 cash and
forgiveness of approximately $152,000 of unpaid wages and unreimbursed business
expenses owed to Mr. Lasker by the Company. The Lasker loan was 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 24, 2004, the Lasker loan was assigned by Mr. Lasker to Samson
Exploration N.L. for $200,000, the current outstanding principal balance. After
the assignment, the terms and conditions of the loan are the same as the terms
and conditions of the Lasker loan, except for the deletion of a provision
providing for acceleration upon termination of Mr. Lasker's employment.

On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest rate
which is to be paid on repayment of the loan. This is an unsecured loan due on
demand.

ITEM 13. EXHIBITS

     (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 


                                       21





                      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.

            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.


                                       22





            10.9      Mortgage, Deed of Trust, Security Agreement, Assignment
                      of Production and Financing Statement with Barry D.
                      Lasker dated May 5, 2003 filed as Exhibit 99.2 to the
                      Registrant's Form 8-K dated May 5, 2005 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 filed as exhibit 10.10 to the
                      registrant's form 10KSB for the period ended June 30,
                      2003 and incorporated herein by reference.

            10.11     Amendment 2 revolving credit loan agreement with 
                      Barry D. Lasker dated February 24, 2004 filed as 
                      exhibit 10.1 to the registrant's 10QSB for the period 
                      ended March 31, 2004 and incorporated herein by reference.

            10.12     Assignment of mortgage from Barry D. Lasker to Samson
                      Exploration N.L. dated Feb 24, 2004 filed as exhibit
                      10.2 to the registrant's for 10QSB for the period ended
                      March 31, 2004 and incorporated herein by reference.

            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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

FEES PAID TO WHEELER WASOFF, P.C.

For the fiscal years ended June 30, 2003 and June 30, 2004, Wheeler Wasoff, P.C.
provided services in the following categories and amounts:

                                 Fiscal Year Ended
                          June 30, 2003     June 30, 2004
                          -------------     -------------
     Audit Fees(1)        $   32,837.37     $   36,453.50
     All Other Fees(2)    $    2,750.00     $         950

(1)  Represents the aggregate fees billed for professional services rendered
     for the audit and/or reviews of the Company's financial statements and in
     connection with the Company's statutory and regulatory filings or
     engagements.
(2)  Represents fees for audit-related services for registration statement
     filings made with the Securities and Exchange Commission,

There were not any non-audit services rendered to the Company by Wheeler Wasoff
P.C., in fiscal 2003 and 2004. While the Audit Committee has not established
formal policies and procedures concerning pre-approval of audit or non-audit
services, the Company's executive officer has been informed that all audit and
non-audit services must be approved in advance by the Audit Committee. The
establishment of any such formal policies or procedures in the future is subject
to the approval of the Audit Committee.


                                       23





                                   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 13, 2004                By: /s/TIMOTHY L. HOOPS          
                                          -------------------------------------
                                          Timothy L. Hoops, 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 13, 2004                 By: /s/TIMOTHY L. HOOPS
                                          -------------------------------------
                                          Timothy L. Hoops, President,
                                          Chief Executive Officer, Principal
                                          Financial  Officer and Director

Date: October 13, 2004                 By: /s/ROBERT J. PETT
                                          -------------------------------------
                                          Robert J. Pett, Chairman of the Board


Date: October 13, 2004                 By: /s/KENNETH W. NICKERSON
                                          -------------------------------------
                                           Kenneth W. Nickerson, Director


Date: October 13, 2004                 By: /s/JOHN T. KOPCHEFF
                                          -------------------------------------
                                           John T. Kopcheff, Director


Date: October 13, 2004                 By: /s/MARK A. E. SYROPOULO
                                          -------------------------------------
                                           Mark A. E. Syropoulo, Director


Date: October 13, 2004                 By: /s/NEIL T. MACLACHLAN
                                          -------------------------------------
                                           Neil T. MacLachlan, Director


                                       24




                              KESTREL ENERGY, INC.

                              Financial Statements

                             June 30, 2004 and 2003

  (With Report of Independent Registered Public Accounting Firm Report Thereon)



                          INDEX TO FINANCIAL STATEMENTS


        Report of Independent Registered Public Accounting Firm............F-3

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

        Statements of Operations...........................................F-5

        Statement of Stockholders Equity...................................F-6

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

        Notes to Financial Statements..............................F-8 to F-19




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders
Kestrel Energy, Inc.

We have audited the accompanying balance sheet of Kestrel Energy, Inc. as of
June 30, 2004, and the related statements of operations, 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 standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, 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 30, 2004

                                      F-3



                               KESTREL ENERGY INC.

                                  BALANCE SHEET

                                  June 30, 2004

                    ASSETS
Current assets
   Cash and cash equivalents (note 1)                   $     162,507
   Accounts receivable                                        366,278
   Other current assets                                        12,171
                                                         ------------
         Total current assets                                 540,956
                                                         ------------

Property and equipment, at cost
   Oil and gas properties, successful efforts
   method of accounting (note 10 and 11)
       Unproved                                               260,355
       Proved                                              11,081,664
   Pipeline and facilities                                    807,851
   Furniture and equipment                                     54,207
                                                         ------------
                                                           12,204,077
   Accumulated depreciation, depletion and
     amortization                                          (9,754,427)
                                                         ------------
         Net property and equipment                         2,449,650
                                                         ------------
                                                        $   2,990,606
                                                         ============

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Notes payable-related party (note 5)                 $     650,000
   Accounts payable-trade                                     245,198
   Accrued liabilities                                         85,582
                                                         ------------
         Total current liabilities                            980,780
                                                         ------------

Long-term liabilities
   Asset retirement obligation (note 4)                       177,126
                                                         ------------
         Total long-term liabilities                          177,126
                                                         ------------

   Total Liabilities                                        1,157,906
                                                         ------------

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; 10,133,200 shares outstanding      20,562,085
   Accumulated (deficit)                                  (18,729,385)
                                                         ------------
         Total stockholders' equity                         1,832,700
                                                         ------------

                                                        $   2,990,606
                                                         ============


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

                                      F-4



                               KESTREL ENERGY INC.

                            STATEMENTS OF OPERATIONS

                       YEARS ENDED JUNE 30, 2004 AND 2003

------------------------------------------------------------------------------
                                                       2004         2003

Revenue

  Oil and gas sales                                $ 1,651,796   $ 1,304,581
                   
                                                    ----------    ----------
     Total revenue                                   1,651,796     1,304,581
                                                    ----------    ----------

Costs and expenses
  Lease operating expenses                             733,315       644,751
  Dry holes, abandoned and impaired properties          52,438     1,238,214
  Exploration expenses                                 103,642        63,677
  Depreciation, depletion and amortization             124,022       339,002
  General and administrative                           622,645       797,282
                                                    ----------    ----------
     Total costs and expenses                        1,636,062     3,082,926
                                                    ----------    ----------
Other income (expense)
   Interest expense and financing costs                (73,536)     (115,690)
  Gain on sale of property and equipment                    --        21,538
  Loss on sale of available-for-sale securities             --      (575,893)
  Interest income                                          891         1,953
  Other, net                                           117,888        99,567
                                                    ----------    ----------
     Total  other  income (expense)                     45,243      (568,525)
                                                    ----------    ----------

Income (loss) before income taxes and cumulative
effect of change in accounting principle                60,977    (2,346,870)

Provision for income tax                           $    13,000   $        --
                                                    ----------    ----------

Tax benefit of net operating loss carryforward          13,000            --

Cumulative effect of change in accounting
  principle                                                 --        10,890
                                                    ===========   ==========

Net income (loss)                                  $    60,977   $(2,335,980)
                                                    ----------    ----------

Basic earnings per share                           $       .01   $      (.25)
                                                    ===========   ==========

Diluted earnings per share                         $       .01   $      (.25)
                                                    ===========   ==========

Basic weighted average number of common shares
outstanding                                          9,802,777     9,288,325
                                                    ===========   ==========

Diluted weighted average number of common shares
outstanding                                          9,809,256     9,288,325
                                                    ===========   ==========


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

                                      F-5




                              KESTREL ENERGY, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                       YEARS ENDED JUNE 30, 2004 AND 2003



                                                                               Accumulated
                                          Common stock                             other
                                    ------------------------    Accumulated    Comprehensive
                                      Shares        Amount       (deficit)     Income (loss)
                                    ----------    ----------   -----------------------------

                                                                         
Balance July 1, 2002                 9,115,200   $20,043,907   $(16,454,382)    $ (523,358)

Common shares issued (note 4)          670,000       335,000             --             --

Warrants exercised                      13,000        16,250             --             --

Less cost of warrant exercise               --          (572)            --             --

Realized (loss) on securities               --            --             --        523,358
classified as available for sale            --            --             --             --

Net (loss)                                  --            --     (2,335,980)            --
                                    ----------    ----------    -----------      ---------

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

Warrants exercised                     335,000       167,500             --             --

Net income                                  --            --         60,977             --
                                    ----------    ----------    -----------      ---------

Balance June 30, 2004               10,133,200   $20,562,085    (18,729,385)    $       --
                                    ==========    ==========    ===========      =========



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

                                      F-6



                               KESTREL ENERGY INC.

                            STATEMENTS OF CASH FLOWS

                       YEARS ENDED JUNE 30, 2004 AND 2003


                                                                           2004           2003
                                                                       -----------    -----------
                                                                                        
Cash flows from operating activities
  Net income (loss)                                                    $    60,977    $(2,335,980
  Adjustments to reconcile net loss to net cash
     used in operating activities
      Cumulative effect of change in accounting
        principle                                                               --        (10,890)
      Depreciation and depletion                                           124,022        339,002
      Dry holes, abandoned and impaired properties                              --      1,238,214
      Loss on sale of available-for-sale securities                             --        575,893
      Gain on sale of property and equipment                                    --        (21,538)
      Debt for services and costs - related                                  1,584        141,594
      Other                                                                     --         10,098
      Changes in operating assets and liabilities, net of
        dispositions                                                            --             --
         (Increase) in accounts receivable                                 (11,708)      (145,554)
         (Increase) decrease in other current assets                         6,229        (17,132)
         Increase  (decrease) in accounts payable - trade                 (184,463)       189,309
         Increase  (decrease) in accounts payable -
           related party                                                        --        (51,813)
         (Decrease) in accrued liabilities                                  15,584        (11,270)
                                                                       -----------    -----------
  Net cash provided (used) in operating activities                          12,225       (100,067)
                                                                       -----------    -----------
Cash flows from investing activities
  Capital expenditures                                                    (195,822)      (426,162)
  Proceeds from sale of securities                                              --         56,241
  Proceeds from sales of property and equipment                                 --         20,017
                                                                       -----------    -----------
  Net cash (used) provided by investing activities                        (195,822)      (349,904)
                                                                       -----------    -----------
Cash flows from financing activities
  Loans from related parties                                                50,000        940,000
  Repayment of notes - related parties                                          --       (252,651)
  Repayments of borrowings                                                      --       (516,000)
  Proceeds from issuance of common stock and warrants                           --        351,250
  Proceeds from warrant exercise                                           167,500             --
  Payment of offering costs                                                     --           (572)
                                                                       -----------    -----------
  Net cash provided by financing activities                                217,500        522,027
                                                                       -----------    -----------
Net (decrease) in cash and cash equivalents                                 33,903         72,056
Cash and cash equivalents, beginning of year                               128,604         56,548
                                                                       -----------    -----------
Cash and cash equivalents, end of year                                 $   162,507        128,604
                                                                       ===========    ===========
Supplemental cash flow information - cash paid
  for interest                                                         $    69,883    $    48,287
                                                                       ===========    ===========
Supplemental disclosure of noncash investing and
  financing activities
  Repayment of debt through securities                                 $        --        247,349
                                                                       ===========    ===========

  Asset Retirement Obligation                                          $    13,791    $   117,147
                                                                       ===========    ===========



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

                                      F-7




                               KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

(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, 2004,
          $54,163 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. See also note (2).

          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, 2004 AND 2003

          Proved oil and gas properties are assessed for impairment on a well by
          well basis or a field-by-field basis where unitized. 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 no impairment for its
          proved oil and gas properties for the year ended June 30, 2004 and
          $903,214 for the year ended June 30, 2003.

     (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, 2004, 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 carry-forwards. 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 income
          (loss) and income (loss) per share would have been increased to the
          pro forma amounts indicated below:

                                      F-9



                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003



                                                                         Years ended June 30,
                                                                  ---------------------------------
                                                                      2004                2003
                                                                  -------------      --------------
                                                                                          
         Net earnings (loss):
                                             As reported           $  60,977          $ (2,335,980)
                                             Pro forma                57,778            (2,341,995)

         Basic Earnings per share:
                                             As reported                 .01                  (.25)
                                             Pro forma                   .01                  (.25)
         Diluted Earnings per share:
                                             As reported                 .01                  (.25)
                                             Pro forma                   .01                  (.25)


     (h)  NET EARNINGS (LOSS) PER SHARE

          Basic earnings per share are computed by dividing earnings available
          to common shareholders by the weighted average number of common shares
          outstanding during the period. Diluted earnings per share reflect per
          share amounts that would have resulted if dilutive potential common
          stock had been converted to common stock. The following reconciles
          amounts reported in the financial statements.

          At June 30, 2003, 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.

          The following is a reconciliation of the numerators and denominators
          used in the calculations of basic and diluted earnings per share for
          2004:

                                                 2004
                                 --------------------------------------
                                                              Per Share
                                  Net Income      Shares        Amount
                                 ------------  -------------  ---------
             Basic earnings per
             share:

             Net income and      $    60,977       9,802,777   $     .01
             share amounts

             Dilutive
             securities
             Stock options                             6,479
                                 ------------   -------------  ---------

             Diluted earnings
             per share

                                 ------------   -------------  ---------
             Net income and      $    60,977       9,809,256   $     .01
             assumed share
             conversion

                                      F-10



                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003


     (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)  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.

     (l)  CONCENTRATION OF CREDIT RISK

          Financial instruments which potentially subject the Company to
          concentrations of credit risk consist of cash and accounts receivable.
          The Company maintains cash accounts at three 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 related industries. The
          creditworthiness of customers and other counter parties is subject to
          continuing review.

     (m)  RECENT ACCOUNTING PRONOUNCEMENTS

          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.

          In December 2003, the FASB issued a revised Interpretation No 46,
          "Consolidation of Variable Interest Entities." The interpretation
          clarifies the application of Accounting Research Bulletin No. 51,
          "Consolidated Financial Statements," to certain types of entities. The
          Company does not expect the adoption of this interpretation to have
          any impact on its financial statements.

     (o)  RECLASSIFICATION

          Certain amounts in the 2003 financial statements have been
          reclassified to conform to the 2004 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 

                                      F-11




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

          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 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. There is no component of comprehensive
          income reported for years ended June 30, 2003 or June 30, 2004.

     (r)  ALLOWANCE FOR BAD DEBTS

          The Company considers accounts receivable to be fully collectible as
          recorded as of June 30, 2004, therefore, no allowance for doubtful
          accounts is required. The Company reviews the credit worthiness and
          historical collection of accounts receivable in assessing whether an
          allowance for doubtful accounts is required.

(2)  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, 2003              $ 216,009
       Liabilities incurred                                          13,791
       Liabilities settled                                               --
       Revision to estimate (included in depreciation,
         depletion and amortization)                                (52,674)
                                                                   --------
     Asset retirement obligations as of June 30, 2004             $ 177,126
                                                                   ========

                                      F-12




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

(3)  NOTES PAYABLE

     On February 14, 2002, the Company borrowed $97,940 from Victoria Petroleum
     N.L. ("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. 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 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 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.

     On January 24, 2003, the Company borrowed $400,000 from R&M Oil and Gas,
     Ltd. ("R&M"), of which Timothy L. Hoops, one of the Company's directors and
     its President and CEO, 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. at that time and
     reduce the Company's accounts payable position. 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 former President and CEO, for a maximum loan
     to the Company of $200,000. Under the terms of the agreement all
     outstanding amounts were due on May 4, 2005 and bore 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 owed to Mr. Lasker by the Company. The
     Lasker loan was 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. On February 5, 2004, Mr. Lasker assigned the $200,000
     Lasker Loan to Samson Exploration N.L. (a related party) and Mr. Lasker was
     paid off in full. The terms and conditions of the Samson loan are a
     continuance of the terms and conditions of the Lasker loan, except for the
     deletion of a provision providing for acceleration upon termination of Mr.
     Lasker's employment by the Company.

     On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest
     rate which is to be paid on repayment of the loan. This is an unsecured
     loan due on demand.

(4)  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.

                                      F-13




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

     (b)  COMMON STOCK

          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 were
          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. In June 2004, the warrants associated with this placement
          were exercised and the Company received proceeds of $167,500.

     (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 2004 and 2003, the Board of Directors granted options to
          purchase shares of common stock to the Company's Compensation
          Committee pursuant to the Plan. The exercise prices of the options are
          $.32 to $.33 per share for 2004 and 2003, respectively. 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 2004 and 2003 respectively: no
          dividend yield for all years; expected volatility of 232% and 97%;
          weighted average risk-free interest rates of 4.25% and 4.375%; and
          expected lives of ten years.

                                      F-14




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

          A summary of the status of the Company's fixed stock options plan as
          of June 30, 2004 and 2003, and changes during the years then ended is
          presented below:



                                                          2004                2003
                                                  ------------------   ------------------
                                                             Weighted             Weighted
                                                             average              average
                                                             exercise             exercise
                 Fixed options                      Shares    price     Shares     price
                                                   --------  --------  ---------  --------

                                                                           
          Outstanding  at beginning of year       1,607,984     1.40    1,693,96   $  1.39
          Granted                                    10,000      .32      10,000       .33
          Exercised                                      --                   --        --
          Cancelled                                      --                   --        --
          Expired                                   105,133     2.19      95,980      1.13
                                                   --------  -------   ---------   -------

          Outstanding at end of year              1,512,851     1.34    1,607,98   $  1.40
                                                  =========            ========

          Options  exercisable at year end        1,512,851            1,607,984
          Weighted average fair value
            of options granted during the year   $      .32           $      .30
            the year
          Weighted average remaining
          contractual life                             5.03                  5.6



(5)  INCOME TAXES

     At June 30, 2004 and 2003, the Company's significant deferred tax assets
     and liabilities are as follows:

                                                       2004      2003
                                                    ---------------------
      Deferred tax assets:
         Net operating loss carry-forwards        $ 5,094,000      4,060,000
         Depletion carry forwards                     273,000        282,000
         Oil and gas properties, principally
           due to differences                              --       603,000
                                                   -------------------------
                                                    5,367,000      4,945,000
      Deferred liabilities:
         Oil and gas properties, principally
           due to differences                        (537,000)      (569,000)
                                                   -------------------------
                                                     (537,000)      (569,000)
                                                   -------------------------
      Valuation allowance                          (4,830,000)    (4,376,000)
                                                   -------------------------
         Net deferred tax assets                  $        --    $        --
                                                   =========================

     The valuation allowance for deferred tax assets as of June 30, 2004 was
     $4,830,000. The net change in the valuation allowance for the year ended
     June 30, 2004 was an increase of $454,000.

     At June 30, 2004, the Company had net operating loss carry-forwards of
     approximately $13,240,000. The utilization of approximately $178,000 of
     these carryforwards are limited to an estimated $80,000 annually. Of the
     balance of the loss carryforwards, $13,062,000 is available to offset
     future taxable income of the Company. If not utilized, the tax net
     operating losses will expire during the period from 2004 through 2024.

                                      F-15




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

     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
     carry-forwards.

(6)  LEASE COMMITMENTS

     The Company has non-cancelable operating leases, primarily for rent of
     office facilities that expire over the next five years. Rental expense for
     operating leases was $45,181and $72,980 for the years ended June 30, 2004
     and 2003, 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.

     Future minimum rental commitments under non-cancelable operating leases as
     of June 30, 2004 are as follows:

                     Fiscal year:
                       2005                        $     39,988
                       2006                              41,167
                       2007                               3,439
                                                    -----------
                                                   $     84,594
                                                    ===========

    The Company has a commitment to pay delay rentals for June 30, 2005 of 
    approximately $75,000 for the right to explore those properties.

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

     Capitalized costs related to oil and gas producing activities at June 30,
     2004 and 2003, are as follows:

                                                    June 30,
                                             2004            2003

      Unproved - Domestic               $    260,355    $    215,892
      Proved                              11,081,664      10,918,017
                                         -----------     -----------

                                          11,342,019      11,133,909

      Accumulated depletion and
       impairment                         (9,549,716)     (9,420,570)
                                         -----------     -----------

                                        $  1,792,303    $  1,713,339
                                         ===========     ===========


     Costs incurred in oil and gas producing activities for the years ended June
     30, 2004 and 2003 were approximately as follows:

                                            2004             2003
                                        ------------    ------------

      Unproved property acquisition
        costs                           $     44,463         335,000
      Proved property acquisition costs           --              --
      Development costs                      149,855          83,162
      Exploration costs                      103,642          63,677

                                      F-16




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

     During fiscal 2004, the Company had three major customers. Sales to those
     customers accounted for approximately 33%, 19% and 18% of fiscal 2004 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 2003, the Company had
     three major customers. Sales to these customers accounted for approximately
     27%, 11% and 11% of fiscal 2003 oil and gas sales.

     During fiscal 2004, the Company spent approximately $58,000 converting
     proved undeveloped reserves at Hilight field (8 wells) into proved
     producing reserves. During fiscal 2003, the Company spent approximately
     $41,500 converting proved undeveloped reserves at Hilight field into proved
     producing reserves.

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

     The information presented below regarding the Company's oil and gas
     reserves were prepared by the Company's independent petroleum engineering
     consultants, Sproule & Associates, Inc. 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, 2004 and 2003, are as follows:

                                      F-17




                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003

                                        2004                     2003
                                ---------------------   ----------------------
                                  Oil          Gas         Oil          Gas
                                 (BBLS)       (MCF)       (BBLS)       (MCF)
                                --------   ----------   ---------   ----------

     Beginning of year           310,700    4,758,700     273,000   12,069,000
     Revisions of previous
       quantity estimates         76,300       77,600      43,000   (7,274,300)
     Extensions, discoveries
       and improved recovery          --      161,000      11,800      231,100
     Sales of reserves in place       --           --          --           --
     Production                  (19,300)    (255,400)    (17,100)    (267,100)
                                --------   ----------   ---------   ----------

     End of year                 367,700    4,741,900     310,700    4,758,700
                                ========   ==========   =========   ==========

     Proved developed
     reserves - end of year      289,000    2,264,600     232,100    2,351,200
                                ========   ==========   =========   ==========

     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.

                                                   2004           2003
                                             ------------- -------------

    Future cash inflows                      $ 41,365,000   $ 33,352,000
    Future costs:
      Production                               (8,796,000)   (10,295,000)
      Development                              (1,509,000)    (1,390,000)
                                              -----------    -----------

    Future net cash flows                      31,060,000     21,667,000

    10% discount factor                       (17,001,000)   (11,070,000)
                                              -----------    -----------
       Standardized measure of discounted
         future net cash flows               $ 14,059,000   $ 10,597,000
                                              ===========    ===========

     To achieve the 2005 future cash inflows reported, the capital expenditure
     of approximately $0.67 mm in fiscal 2005, $0.73 mm in fiscal 2006 and $0.11
     mm in fiscal 2007 will be required to develop existing proved undeveloped
     reserves. The capital expenditure of approximately $0.67mm in fiscal 2005
     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, 2004 and 2003, are as
     follows:
                                      F-18



                              KESTREL ENERGY INC.

                          NOTES TO FINANCIAL STATEMENTS

                             JUNE 30, 2004 AND 2003



                                                             2004            2003
                                                        ------------    ------------

                                                                           
    Beginning of year                                   $ 10,597,000    $  8,898,000
    Sales of oil and gas produced during the
      period, net of production costs                       (913,000)       (629,000)
    Net change in prices and production costs                     --      12,766,000
    Changes in estimated future development costs           (119,000)      2,910,000
    Extensions, discoveries and improved recovery            498,000         628,000
    Revisions of previous quantity estimates and other     3,032,700     (14,866,000)
    Sales of reserves in place                                    --              --
    Purchase of reserves in place                                 --              --
    Accretion of discount                                    963,400         890,000
                                                         -----------     -----------

    End of year                                         $ 14,059,000    $ 10,597,000
                                                         ===========     ===========



     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
     carry-forwards 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-19