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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–K

(Mark One)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to  _______________

Registrant's telephone number, including area code:  (604) 913-1462

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

None

Name of each exchange on which registered:

None

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

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES [X]  NO [  ]     

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the last sale price of the common stock as of the last business day of the registrant’s most recently completed second quarter was approximately $13,500,000, or $0.115 per share.

As of April 30, 2004, the registrant had  171,712, 635 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

#

TABLE OF CONTENTS TO FORM 10-K

PAGE

PART I

Item 1.

Business

3

Item 2.

Property

11

Item 3.

Legal Proceedings

11

Item 4.

Submission of Matters to a Vote of Security Holders

13

PART II

Item 5

Market for Registrant's Common Stock and Related Stockholder Matters

13

Item 6.

Selected Financial Data

14

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operation

15

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 8.

Financial Statements and Supplementary Data

18

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

18

PART III

Item 10.

Directors and Executive Officers of the Registrant

19

Item 11.

Executive Compensation

20

Item 12.

Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

23

Item 13.

Certain Relationships and Related Transactions

25

Item 14.

Controls and Procedures

25

PART IV

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

25

Documents Filed

1. Financial Statements

2. Financial Statement Schedule

3. Exhibit List

Reports on Form 8-K

Exhibits

Financial Statement Schedules

SIGNATURES

32

CERTIFICATIONS.

33

2

PART I

This Annual Report on Form 10-K for the year ended December 31, 2003 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties.  The reader is cautioned that the actual results of EuroGas, Inc. and its consolidated subsidiaries will differ (and may differ materially) from the results discussed in these forward-looking statements. Statements considered to be forward-looking by the Company include statements in which the Company discloses its beliefs, expectations or anticipations, and statements using the words “may,” “should,” “might,” “could,” “might,” “would,” “expect,” “believe” and “an ticipate.”  Factors that could cause or contribute to such differences include those factors discussed herein under “Factors That May Affect Future Results” and elsewhere in this Form 10-K generally.  The reader is also encouraged to review other filings made by the Company with the Securities and Exchange Commission (the “SEC”) describing other factors that may affect future results of the Company.

Item 1.

Business

General

We are primarily engaged in the acquisition of rights to explore for and exploit natural gas, coal bed methane gas, crude oil, talc and other minerals.  We have acquired interests in several large exploration concessions and are in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production.  Unless otherwise indicated, all dollar amounts in this Form 10-K are reflected in United States dollars.

When used herein, “we”, the “Company” and “EuroGas” includes EuroGas, Inc., and its wholly owned subsidiaries, EuroGas (UK) Limited, Danube International Petroleum Company, EuroGas GmbH Austria, EuroGas Polska Sp. zo.o., and Energy Global A.G., and the subsidiaries of each of these subsidiaries, including GlobeGas B.V., Pol-Tex Methane, Sp. zo.o., McKenzie Methane Jastrzebie Sp. zo.o., Energetyka Lubuska and Danube International Petroleum Holding B.V.

Activities in Slovakia

On January 1, 1993, the Czech Republic and Slovakia emerged as separate independent nations.  Slovakia is bordered on the north by Poland, on the east by Ukraine, on the south by Hungary, and on the west by Austria and the Czech Republic.  Slovakia has an area of approximately 19,000 square miles and a population of approximately 5.5 million people.  Slovakia has not been as quick to adopt free market reforms as Poland and the Czech Republic and the former communist party remains a major political force.  Slovakia is a member of the International Monetary Fund, the European Bank for reconstruction and development, and an associate member of the European Union.  Bratislava is the capital of Slovakia and its largest city.

Gemerska Talc Deposit.  During 1998, we acquired a 24% interest in an undeveloped talc deposit located near Roznava in Eastern Slovakia through an indirect investment in Rozmin s.r.o.  Oxbridge Ltd., a related party, paid $879,000 on behalf of the Company in 1998 as part of the purchase of the 24% interest in the talc deposit. On March 19, 1998, we reimbursed Oxbridge Ltd. for its payment and accounted for the payment to Oxbridge Ltd. as a reduction of a separate promissory note payable to Oxbridge Ltd.  In 2000, Oxbridge Ltd. made a demand for payment of the promissory note.  EuroGas reclassified the payment to Oxbridge Ltd. as an increase in the cost of the 24% interest in the talc deposit and recorded the principal and $272,490 of accrued interest due under the promissory note payable to Oxbridge Ltd.  In November 2000, EuroGas issued 2,391,162 shares of common stock, valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in satisfaction of the principal and accrued interest due on the promissory note. Through December 31, 2000 and 1999, EuroGas had invested $2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and $915,913 (excluding the payment to Oxbridge Ltd.), respectively, in the acquisition and development of the talc deposit and related equipment.

On April 17, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from Belmont Resources, Inc. ("Belmont"), in exchange for EuroGas issuing 12,000,000 common shares, paying Belmont $100,000 in cash, and modifying the exercise price of existing stock options. EuroGas further agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in the ten-day average OTC Bulletin Board quoted trading price of the Company's common shares below $0.30 per share through April 17, 2002. During April 2002, EuroGas was obligated to issue 3,830,000 common shares to Belmont under the terms of the agreement. Additionally, EuroGas agreed to issue additional common shares to Belmont if Belmont did not realize approximately $1,218,000 from the resale of the original 12,000,000 common shares by April 17, 2002, and provided notice of the deficiency, to compensate Belmo nt for the shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. Because Belmont has not provided notice of the sale of the shares and the resulting deficiency, EuroGas is not able to calculate the shares that may be issuable, but estimates it may be obligated to issue approximately 12,000,000 additional common shares, based on recent market prices for the Company's common stock, to Belmont under this provision of the agreement.

In connection with the purchase by EuroGas, Rozmin s.r.o. granted an overriding royalty to Belmont of two percent of gross revenues from any talc sold. EuroGas agreed to pay Belmont a $100,000 non-refundable advanced royalty payment and agreed to arrange the necessary financing to place the talc deposit into commercial production by April 17, 2002. If the talc deposit was not in commercial production by then, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. As of December 31, 2002 EuroGas has accrued $85,000 in advance royalty due to Belmont because the talc deposit was not in commercial production. EuroGas granted Belmont the right to appoint one member of the EuroGas, Inc., board of directors for not less than one year.

3

The purchase of the interest in Rozmin s.r.o. was recorded at $3,843,560, based on the market value of the common shares issued (including the guarantee of the future stock value), the increase in the fair value from the modification of the stock options, and the cash advance royalty to be paid. The issuance of additional common shares under the guarantee of the future market value of the Company's common shares will not result in additional cost when issued. EuroGas accounted for the acquisition as a purchase and allocated the purchase price to the assets acquired, primarily the interest in talc mineral properties. No goodwill was recognized in the purchase transaction. The operations of Rozmin s.r.o. have been included in the consolidated results of operations from its purchase.

On April 2, 2002, EuroGas exchanged its 55% interest in RimaMuran for the 43% investment in Rozmin held by RimaMuran. As part of the exchange, EuroGas paid approximately $105,000 to the former minority owners of RimaMuran to pay liabilities of RimaMuran and to compensate the former minority owners. RimaMuran agreed to transfer title to two pieces of heavy equipment, which EuroGas had previously financed, to Rozmin. As a result of the exchange, EuroGas has a direct 43% ownership in Rozmin free of encumbrances, and will acquire direct ownership of the remaining 57% interest in Rozmin if the contingency for additional stock issuances to Belmont is resolved. By virtue of its ownership of Rozmin and the talc deposit, EuroGas bears the full responsibility to fund the development costs necessary to bring the deposit to commercial production.  The Company is currently in negotiations with several interested parties to sell a minority interest in Rozmin s.r.o to raise these development funds. In addition the Company is also negotiating a long-term delivery contract for talc from Rozmin.  There is no assurance that these negotiations will be successful.

The Gemerska Talc Deposit is considered to be one of the richest and largest talc deposits in the world. The deposit, according to the Ministry of Environment of the Slovak Republic, contains 146.6 million tons of high-purity talc reserves.  Mine construction, which began in August 2000, is scheduled for completion in 2004, at which time talc production is scheduled to commence. Production is expected to reach 130,000 tons of talc annually.  This would represent approximately 12% of the annual European talc consumption.  We believe the exploitation of the Gemerska Talc Deposit will be particularly favorable due to strong global demand for talc.

Envigeo-Carpathian Flysch Concession.  In September 1998, we acquired a 51% interest in Envigeo s.r.o., a Slovakian private company that owns a 2,300 square kilometer appraisal and survey concession, known as the Medzilaborce concession, in the northeast corner of Slovakia, referred to as the Carpathian Flysch region, is in good standing. Subsequently the Company sold some of its interest and now EuroGas presently holds a 45% interest in Envigeo, McCallan owns 45% and the Envigeo s.r.o. owns the other 10% There are three concessions, all held by Envigeo.  This region extends into Poland and Ukraine and is geologically on trend with extensive major discoveries of oil and gas found in the neighboring countries.  Since 1998 we have undertaken geological reconnaissance work on the Medzilaborce concession to meet the concession requirements.  As we have evaluated the investment we have determined that there is no poten tial for returns in the near future.  Therefore we have decided to impair this project.  Accordingly, the Company recognized a $1,703,000 charge for impairment, which was the carrying value of the Company's investment in the project, during the fourth quarter of 2002.

Slovakian Oil & Gas Joint Venture.  In July 1996, as part of our effort to diversify and expand our interests in Europe, we acquired Danube International Petroleum Company (“Danube”), which held participation rights for natural gas exploration in Slovakia and the Czech Republic.  Since the acquisition, we have focused our efforts on the development of the Slovakian project and abandoned our interest in the Czech Republic.  Danube was a partner in a joint venture agreement (the “Slovakian Oil & Gas Joint Venture”) with NAFTA Gbely A.S. (“NAFTA”).  The principal focus of the Slovakian Oil & Gas Joint Venture is natural gas exploration and development under a license covering 128,000 acres located in the East Slovakian Basin, a northeastern extension of the Pannonian Basin that covers large parts of Hungary and the southeastern part of Slovakia. < /P>

Under the terms of the joint venture agreement, EuroGas was obligated to provide 75% ($4.98 million) of the projected initial test phase (including seismic testing) funding of $6.64 million and 60% ($4.08 million) of the projected capital investment cost for the initial production phase of $6.8 million.  All funds required for the initial test phase were expended.  However, the Company has decided to withdraw from the NAFTA-Danube association and discontinue our involvement in any further exploration in the Trebisov gas field in eastern Slovakia.   In exchange for the Company’s withdrawal, Nafta Gbely a.s. agreed to pay all outstanding obligations and liabilities totaling approximately $750,000 owing to Geophysical Services Ltd. of Hungary.  

4

Activities in Poland

 EuroGas Polska has several oil and gas concessions and projects in Poland, including:

–

a 112 sq. kilometer coal bed methane concession located in the Upper Silesian Coal Basin,

–

a project with Polish Oil and Gas to undertake appraisal and development activities for a large area located in the Carpathian Flysch and Tectonic ForeDeep areas of Poland,

–

exclusive rights to explore for and develop hydrocarbons in an area of over 1,100,000 acres in Southeastern Poland, and

–

a concession to explore and develop oil and gas on over 1,000,000 acres in the Carpathian oil fairway.

Polish Methane Gas Concessions.  Coal bed methane gas production has taken place in the United States for some time, and has drawn attention in Poland due to a study funded by the United States Government.  Methane is a component of natural gas that is used as a fuel in various industries and as a source of residential heating.  Before natural gas is used as a fuel, heavy hydrocarbons such as butane, propane, and natural gasoline are separated to meet pipeline specifications.  The heavy hydrocarbons are typically sold separately. The remaining gas constitutes dry gas, composed of methane and ethane.  Once produced and separated, there is no substantial difference between natural gas and methane.  The demand in Europe for both natural and methane gas has been traditionally high and the price generally runs significantly higher than prices in the United States, although the pri ce for natural gas in Poland is generally lower than in the rest of the European market.  Gas production typically competes with coal and oil but is generally considered to be a preferred product because of recent environmental concerns expressed by governments in Europe.

On October 13, 1997, EuroGas received a concession from the Polish Ministry of Environmental Protection of Natural Resources and Forestry to explore and potentially develop a 112 square kilometer coal bed methane concession located in the Upper Silesian Coal Basin.  We conducted a feasibility study to explore the possibilities of drilling gas wells for a combined heat and power plant project or other uses.  The results of the study suggest that the volume of gas in place can exceed 30 billion cubic meters.  Additional work connected with evaluation of the productivity of the wells is under way.  Although the property is carried in the books at zero value there is a possibility for success if a proper funding of the project can be obtained.  

Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields.  On October 23, 1997, EuroGas Polska completed an agreement with Polish Oil to undertake appraisal and development activities for a large area located in the Carpathian Flysch and Tectonic ForeDeep areas of Poland.  The agreement contemplates total expenditures by EuroGas of $15 million.  To date, EuroGas Polska and Polish Oil have conducted and interpreted a $1.5 million, wide-line seismic work and geological exploration program in the Rymanow-Lesko area of the Carpathian Mountains in southeastern Poland.  Polish Oil has produced a report based on this program, which suggests the potential for substantial oil and gas reserves in the Rymanow-Lesko area.  If subsequent feasibility studies indicate that oil or gas can economically be recovered from this concession, of which there is no assurance, further testing, r egulatory approvals and construction will be required before commercial production can commence, which would take at least two years, and cost at least $2,000,000.  We do not currently have the funds necessary to complete a feasibility study, drill test wells, or develop this concession and will need to bring in a joint venture partner or raise additional capital before such process can commence.

Carpathian New Concession.  On December 20, 1999, we executed a usufruct agreement with the Ministry of Environmental Protection, Natural Resources and Forestry of the Republic of Poland.  This agreement tentatively secured for EuroGas the exclusive rights to explore for and develop hydrocarbons in an area of over 1,100,000 acres in Southeastern Poland.

On September 7, 2000, the Ministry of Environmental Protection, Natural Resources and Forestry of the Republic of Poland granted EuroGas Polska a concession to explore and develop oil and gas on more than one million acres in the Carpathian oil fairway.  In May 2000, a report conducted by independent Polish oil and gas experts indicated potentially producing deposits in 12 exploration leads within this area, with the largest one potentially containing 300 million barrels of oil equivalent.  On October 27, 2000, EuroGas Polska entered into a Joint Operation Agreement with Polish Oil. The agreement calls for Polish Oil to become the operator in the Carpathian Project.  Separately, Polish Oil and the Company have entered into a tentative agreement whereby Polish Oil will acquire 30% of EuroGas Polska.

Our work on the Carpathian Project is at an early exploratory stage.  If subsequent exploration and testing indicates that oil or gas can economically be recovered from this concession, of which there is no assurance, an estimated two years of further testing, obtaining regulatory approvals and construction will be required before commercial production could commence, at an estimated minimum cost of $3,000,000.  We are currently negotiating the possibility of forming partnerships with a few major international oil and gas companies.  

5

Activities in Kazakhstan

By an amended agreement dated November 22, 2001, EuroGas agreed to acquire all of the issued and outstanding shares of Falcon Energy Overseas Inc., a subsidiary of Falcon Energy Holding Corp. (“Falcon  The   venture holds the license to explore and develop proven shallow oil fields in Kazakhstan on an area of approximately 3.2 million acres known as the Sagiski Block. Falcon also holds other oil and gas interests in Kazakhstan outside the joint venture with FIOC. Under the agreement EuroGas was to issue 30,000,000 shares of EuroGas common stock and pay staged cash commitments of $10,000,000.  The Company issued 10,000,000 shares and the parties terminated the relationship as the acquisition was unwound.

EuroGas expected to obtain funding for this project through Oxbridge Ltd., but terms of that funding were never finalized due to the Company’s delisting from the NASD OTC Bulletin Board on December 28, 2001 and Falcon’s inability to provide financial statements to the Company. On February 12, 2002, Falcon notified EuroGas that all agreements between Falcon and EuroGas, both written or verbal were null and void as of February 6, 2002. The Company and Falcon are currently in discussions to negotiate a new agreement; however, any new agreement will contemplate potential properties other than the Sagiski Block.

Activities in Canada

Beaver River Natural Gas Field.  EuroGas owns a 7.5% interest in the Beaver River natural gas project.   The objective of this project is to reestablish commercial production in an abandoned natural gas field in the northeast corner of British Columbia, Canada.  Beaver River is the largest existing gas pool in British Columbia. The prior owners shut down the project because of heavy water influx.  Before shutting down the project, the prior owner produced substantial amounts of natural gas and reported that peak production reached 350 million cubic feet per day from five wells. Independent reservoir studies and government reports show substantial natural gas reserves at Beaver River, ranging between 1.5 and 3 trillion cubic feet.

EuroGas originally held a 15% interest in the Beaver River natural gas project, through a wholly owned subsidiary, Beaver River Resources Ltd. (“BRRL”).  This interest was reduced to 7.5% in the settlement of a lawsuit with the former owners.  In the settlement, the former owners returned 1,200,000 shares of EuroGas common stock to EuroGas in exchange for one-half of BRRL’s interest in the Bear River project.

According to the current operator of the Beaver River project, Questerre Energy ("Questerre"), the A5 re-entry well was reaching gas production levels as high as 17 million cubic feet per day in March of 2001. The well was in production from March through April 2001, when it was shut in.  Due to drilling of a new well and lower pressure in the field pipeline, enhancement of the field pipeline pressure through installation of additional compressor pumping and gas lift systems was necessary.

  The compressor pumping and gas lift systems were installed and operational in early 2002 after which extensive testing of the experimental process upon which the recovery effort is based.

Since mid-March of 2001, BRRL received one-sixth of a 4% overriding royalty from gas production, under its agreement with Questerre. The property owners including BRRL are receiving an overriding royalty of 4% until Questerre has recovered its investment. The total royalties received are expected to substantially increase until Questerre has received up to 600% of its investment. Thereafter the ownership interest will change to a 6.7% working interest.  

During the second quarter of 2002, the Company evaluated its investment in the Beaver River Gas project in British Columbia, Canada. The terms of the related farmout agreement provide that the operator of the project will receive payout of all of its investment prior to any payments to the other interest holders and then the Company would receive 3.33% of the net cash flows, if any. The operator has invested in excess of $16,000,000 in the project at September 30, 2002. Due to the low production from the Beaver River Project and gas prices currently being paid for the production, management has determined that it is unlikely that the Company will receive any cash flows from the project, except for nominal overriding royalty payments.  Accordingly, the Company recognized a $3,937,500 charge for impairment, which was equal to the carrying value of the Company's investment in the project.

Disclosure of Oil and Gas Operations

Reserves Reported to Other Agencies.  No reserves were reported to any other federal agency or authority for the years ended December 31, 2003 or December 31, 2002.

Oil and Gas Production and Production Costs.  Effective with the sale of our interest in Big Horn Resources, Ltd. in January 2001, we have no proven oil and gas reserves.  Accordingly, we are not required to present disclosure of oil and gas operations.

Competition

In the business of exploration, development, and production of oil and gas resources, we compete with some of the largest corporations in the world, in addition to many smaller entities.  Many of the entities that we compete with have access to far greater financial and managerial resources than those available to EuroGas.  As a result of the exclusive nature of certain concessions that we hold, to the extent that we are able to successfully find, develop, and produce hydrocarbon resources, we will be able to exclude any competitor from production of the resources located on the concessions, but we cannot exclude competitors from providing natural gas or other energy sources at prices or on terms that purchasers deem more beneficial.

6

Employees

As of December 31, 2003, we had four administrative employees.  In addition, we use the services of consultants to the Company, who also serve as officers of the Company and its subsidiaries.  These consultants include Wolfgang Rauball, Hank Blankenstein, Michael J. Slater, and Mr. Andrew Andraczke.  Messrs. Rauball, Slater and Andraczke work out of Europe, and Mr. Blankenstein works out of the United States.  None of our employees are represented by a collective bargaining organization, and we consider our relationship with our employees to be satisfactory.  In addition to our employees, we regularly engage technical and other consultants to provide specific geological, geophysical, and other professional services on an as-needed basis.

Operational Hazards and Insurance

We are engaged in the exploration for methane and natural gas and the drilling of wells and, as such, our operations are subject to the usual hazards incident to the industry.  These hazards include blowouts, cratering, explosions, uncontrollable flows of gas or well fluids, fires, pollution, releases of toxic gas, and other environmental hazards and risks.  These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension of activities.  We do not have any hazard insurance. The occurrence of a significant adverse event that is not covered by insurance would have a material adverse effect on EuroGas.

Financial Information About Foreign and Domestic Operations

The information set forth as “Note 8 – Geographic Information” of our consolidated financial statements included in this Form 10-K contains information regarding financial information about foreign and domestic operations of the Company and its subsidiaries.

Factors That May Affect Future Results

This report on Form 10-K contains forward-looking statements.  You can identify forward-looking statements by their use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” or similar words.  These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information.  When considering the forward-looking statements made in this report, you should keep in mind the risks noted in “Factors That May Affect Future Results” below and other cautionary statements throughout this report.  You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control an d on assumptions that may prove to be incorrect.  If one or more risks identified in this report or other filing materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.

Our consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

We have incurred significant losses since inception, which have resulted in an accumulated deficit of $156,838,059 at December 31, 2003.  These losses and this significant deficit raise substantial doubt about our ability to continue as a going concern.  The accompanying audited consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.    

We are dependent upon financing activities to fund our operations and will continue to require significant funds to meet our obligations and to pursue our business plan.

EuroGas has historically been undercapitalized.  Prior to our acquisition of an approximately 50% interest in a Canadian gas production entity (Big Horn) in 1998 (which was fully divested in 2002), we had not earned any significant cash revenues since our incorporation.  Because we divested our interest in Big Horn, we do not currently have a source of revenues, do not anticipate any revenues in the near term and expect to continue to incur operating losses in the foreseeable future.  As a result, we are entirely dependent on financing from the sale of securities or loans in the future and/or amounts made available by industry partners in the future.  We expect to continue to incur significant costs as part of our ongoing and planned projects and do not anticipate that these costs will be offset fully, if at all, by revenues for the foreseeable future.  If we are unable to raise capital from the sale of securities, loans, or industry partnerships in the future, we will have to scale back our operations and may, at some point, become insolvent.

Our projects are highly speculative and generally only at the exploration stage.

Our assets and interests are primarily in methane gas, natural gas, and crude oil exploration and development projects.  These projects are highly speculative, whether we are still at the exploratory stage or have commenced development.  We can provide no assurance that any drilling, testing, or other exploration project will locate recoverable gases or other fuels in sufficient quantities to be economically extracted.  Several test wells are typically required to explore each concession or field.  We may continue to incur significant exploration costs in specific fields, even if initial test wells are plugged and abandoned or, if completed for production, do not result in production of commercial quantities of natural gas or other fuel.  

7

Many of our projects are in locations where the infrastructure is inadequate to support our needs.

Many of the projects in which we have invested are located in areas of the world, primarily Eastern Europe. In most of these areas the necessary infrastructure for transporting, delivering, and marketing any natural gas, methane gas or other fuels that may be recovered is significantly underdeveloped or, in some cases, nonexistent.  Even if we are able to locate natural gas, methane gas, or other valuable fuels in commercial quantities, we may be required to invest significant amounts in developing the infrastructure necessary to support the transportation and delivery of such fuels.  We do not currently have a source of funding available to meet these costs.

Many of our projects are in countries that have fragile and unpredictable political and socio-economic systems.

Our operations in Poland, Slovakia, and other parts of Eastern Europe carry with them certain risks in addition to the risks normally associated with the exploration for, and development of, natural gas and other fuels.  Although recent political and socio-economic trends in these countries have been toward the development of market economies that encourage foreign investment, these countries continue to be subject to the risks of political instability, a change of government, unilateral renegotiation of concessions or contracts, nationalization, foreign exchange restrictions, and other uncertainties.  The terms of the agreements governing our projects are subject to administration by the various governments and are, therefore, subject to changes in the government itself, changes in government personnel, the development of new administrative policies or practices, the adoption of new laws, and many oth er factors.  

Moreover, we may be required to obtain and renew licenses and permits on an ongoing basis in connection with further exploration, the drilling of wells, the construction of transportation facilities and pipelines, the marketing of any fuel that may be produced, and financial transactions necessary for all of the foregoing.  The rules, regulations, and laws governing all such matters are subject to change by the various governmental agencies involved.  We can provide no assurance that the laws, regulations, and policies applicable to our interests in various countries in which our projects are located will not be radically and adversely altered at some future date.

The continuance, completion or renewal of many of our licenses may be subject to the discretion of government authorities and we cannot therefore predict with certainty whether they will be continued or renewed or whether we will be successful in obtaining all permits and licenses required to fully exploit our interests in those countries.

In general, we have the right to conduct basic exploration on all concessions or fields in which we have an interest. However, in order to drill for, recover, transport or sell any gas or other hydrocarbons, we will generally be required to obtain additional licenses and permits and enter into agreements with various landowners and/or government authorities. The issuance of most such permits and licenses will be contingent upon the consent of national and local governments having jurisdiction over the production area, which entities have broad discretion in determining whether or not to grant permits and licenses.  Moreover, even if obtained, such licenses, permits, and agreements will generally contain numerous restrictions and require payment by us of a development/exploration fee, typically based on the market value of the economically recoverable reserves.  The amount of a fee and other terms of an y such license, permit, or agreement will affect the commercial viability of any extraction project.  We can provide no assurance that we will be able to obtain the necessary licenses, permits, and agreements.  Even if we do obtain such items, the associated costs, delays and restrictions may significantly affect our ability to develop the affected project.

Our projects may never begin producing valuable hydrocarbons.

None of the projects in which we own an interest is presently producing gas or other hydrocarbons.  Texaco drilled and abandoned test wells on the concession in Poland in which we own an interest, and we have drilled test wells on our Slovakia concessions.  None of these wells has been developed or commenced production, and we can provide no assurance that any of our projects will at any time commence production of any valuable resource.

We are dependent upon certain officers, key employees, and consultants, the loss of which would adversely affect our ability to continue in business.

We are dependent on the services of Wolfgang Rauball (Chairman and Chief Executive Officer), Hank Blankenstein (Chief Financial Officer), Michael Slater (President), and Andrew K. Andraczke (Vice President and Treasurer of EuroGas Polska).  We are also dependent on certain key employees in connection with our business activities. The loss of one or more of these individuals could materially and adversely impact our operations.  We have not entered into employment agreements with any of these individuals, and do not maintain key-man life insurance on any EuroGas officers or employees.

We are thinly staffed.

We have numerous projects throughout the world, which we attempt to direct and manage with only a few employees.  Unless and until additional employees are hired, our attempt to manage our numerous projects and obligations with such a limited staff could have serious adverse consequences, including without limitation, a possible failure to meet a material contractual, court, or SEC deadline, or a possible failure to consummate investment or acquisition opportunities.  

8

Subsequent evaluation may reveal that our unproved properties are not valuable, and we may need to record an impairment of the value of those properties, which would adversely affect our financial condition.

Severe weather will interrupt, and may adversely affect, our activities in various parts of the world.

Severe weather conditions frequently interrupt much of our exploratory and testing work.  Heavy precipitation sometimes makes travel to exploration sites or drilling locations difficult or impossible.  Extremely cold temperatures may delay or interrupt drilling, well servicing, and production (if commenced, of which we can give no assurance).  The temperatures in all of the regions in which we have exploratory or other operations are extremely cold.  Even if recoverable reserves are discovered in regions prone to severe weather, the above-described adverse weather conditions may limit production volumes, increase production costs, or otherwise prohibit production during extended portions of the year.

The prices of the various hydrocarbons we produce or may produce are volatile and unstable.

The prices of oil, natural gas, methane gas and other fuels have been, and are likely to continue to be, volatile and subject to wide fluctuations in response to numerous factors, including the following:

–

changes in the supply and demand for such fuels;

–

political conditions in oil, natural gas, and other fuel-producing and fuel-consuming areas;

–

the extent of domestic production and importation of such fuels and substitute fuels in relevant markets;

–

weather conditions;

–

the competitive position of each such fuel as a source of energy as compared to other energy sources;

–

the refining capacity of crude purchasers;

–

the effect of governmental regulation on the production, transportation, and sale of oil, natural gas, and other fuels.

Low prices or highly volatile prices for any fuel being explored or produced at one of our projects will adversely affect our ability to secure financing or enter into suitable joint ventures or other arrangements with industry participants.  In addition, if we commence recovery of fuel at any of our projects, a low or volatile price for the fuel being recovered will adversely affect revenue and other operations.

Our operations involve numerous hazards, and we maintain no insurance against such risks.

Exploring for fuel, drilling wells, and producing fuel involves numerous hazards, including the following:

–

fire,

–

explosions,

–

blowouts,

–

pipe failures,

–

casing collapses,

–

unusual or unexpected formations and pressures, and

–

environmental hazards such as spills, leaks, ruptures, and discharges of toxic substances.

If any of these events were to occur we might be forced to cease any or all of our exploration, drilling, or production activities on a temporary or permanent basis.   In addition, these events might lead to environmental damage, personal injury, and other harm resulting in substantial liabilities to third parties.  We do not maintain insurance against these risks.  Even if we were to obtain insurance, we might not be insured against all losses or liabilities that might arise from these hazards because the insurance may be unavailable at economic rates, due to limitations in the insurance policies, or other factors.  Any uninsured loss would likely have a material adverse impact on our business and operations.

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Our operations are subject to numerous environmental laws, compliance with which may be extremely costly.

Our operations are subject to environmental laws and regulations in the various countries in which they are conducted.  These laws and regulations frequently require completion of a costly environmental impact assessment and government review process prior to commencing exploratory and/or development activities.   In addition, environmental laws and regulations may restrict, prohibit, or impose significant liability in connection with spills, releases, or emissions of various substances produced in association with fuel exploration and development.

We can provide no assurance that we will be able to comply with applicable environmental laws and regulations or that those laws, regulations or administrative policies or practices will not be changed by the various governmental entities. The cost of compliance with current laws and regulations or changes in environmental laws and regulations could require significant expenditures.   Moreover, if we violate any governing laws or regulations, we may be compelled to pay significant fines, penalties, or other payments.  Costs associated with environmental compliance or noncompliance may have a material adverse impact on our financial condition or results of operations in the future.

Most of our outstanding shares are free trading and, if sold in large quantities, may adversely affect the market price for our common stock.

Most of the approximately 171,712,635 shares of common stock issued and outstanding as of April 30, 2004 are free trading or are eligible for resale under Rule 144 under the Securities Act.  In addition, we have agreed to file a registration statement to register a significant number of shares for resale.  Although the resale of certain of these shares may be subject to the volume limitations and other restrictions under Rule 144, the possible resale of the remaining shares may have an adverse effect on the market price for our common stock.

We have a substantial number of warrants, options and debentures outstanding, the exercise of which would result in substantial dilution to existing shareholders and the existence of which adversely affects the public market price of our common stock.

As of December 31, 2003, there are outstanding warrants and options to purchase up to 39,342,858 shares of common stock at exercise prices ranging from $0.15 to $0.55 per share.  The existence of these outstanding warrants and options may hinder our future equity offerings, and the exercise of these warrants and options would further dilute the interests of all of our shareholders.  Future resale of the shares of common stock issuable on the exercise of warrants and options may have an adverse effect on the prevailing market price of our common stock.  Furthermore, the holders of warrants and options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

We have the right to, and expect to, issue additional shares of common stock without shareholder approval.

EuroGas has authorized capital of 325,000,000 shares of common stock, par value $0.001 per share, and 3,661,968 shares of preferred stock, par value $0.001 per share.  As of December 31, 2003, there were 171,212,635 shares of common stock and 2,392,228 shares of preferred stock issued and outstanding.  Also at December 31, 2003, there were 39,342,858 shares of common stock reserved for issuance upon the exercise or conversion of outstanding warrants, options, and similar rights to acquire common stock. The timing of the exercise of conversion rights or the purchase rights under options, warrants or similar agreements is outside the control of the Company.  Our board of directors has authority, without action or vote of our shareholders, to issue all or part of the authorized but unissued shares.  Any issuance of shares described in this paragraph will dilute the percentage ownership of our ex isting shareholders and may dilute the book value of the common stock.

We have not paid any dividends on our common stock and do not expect to pay dividends with respect to the common stock in the near future.

We have not paid, and do not plan to pay, dividends on our common stock in the foreseeable future, even if we become profitable.  Earnings, if any, are expected to be used to advance our activities and for general corporate purposes, rather than to make distributions to shareholders.

You should consider this cautionary warning concerning forward-looking statements in this report

Certain statements in this report constitute "forward-looking statements" within the meaning of the rules and regulations promulgated by the SEC. Those forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed above, that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among other things, our lack of revenue and our substantial net losses and accumulated deficit, as well as the continuing uncertainty of profitability, the highly competitive industry in which we operate, changes in or failure to comply with governmental regulation, the uncertainty of third party reimbursement for our products, general economic and business co nditions and other factors referenced above.

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Item 2.  Properties

The Company has a month-to-month lease for approximately 2,230 square feet of office space in Warsaw and Prszczyna, Poland.  The rental amount is approximately $800 per month.  We sublease office space in Vienna, Austria and West Vancouver, Canada, for use by our administrative officers.  Our subsidiary, GlobeGas, maintains office space under an agreement with First Alliance Trust, at Herengracht 466, Amsterdam, The Netherlands.  Under this agreement, First Alliance provides office space, accounting and legal functions for GlobeGas. The agreement calls for payment for these services on an as-needed basis.

Item 3.

Legal Proceedings

  The principal portion of the Company’s active litigation, as described in the following six paragraphs, involves matters relating to the Company’s acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland). This litigation is being brought by Steve Smith, Chapter 7 Trustee (the “Trustee”) for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court, for the Southern District of Texas, Houston Division.

McKenzie Bankruptcy Claim. This litigation is being brought by Steve Smith, Chapter 7 Trustee (the “Trustee”) for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division.

In March 1997, the Trustee commenced the following cause of action:  W. Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division) (hereafter “97-4114”).  The Trustee’s initial claim appears to allege that the Company may have paid inadequate consideration for its acquisition of GlobeGas from persons or entities acting as nominees for the McKenzies, and therefore McKenzies’ creditors are the true owners of the proceeds received from the development of the Pol-Tex Concession in Poland.  The Company has contested the jurisdiction of the Court, and the Trustee’s claim against a Polish corporation (Pol-Tex), and the ownership of Polish mining rights. The Company further contends that it paid substantial consideration for GlobeG as (Pol-Tex’s parent), and that there is no evidence that the creditors of the McKenzies invested any money in the Pol-Tex Concession.

In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc.,  (Adv. No. 97-4155) in each of the three McKenzie individual bankruptcy cases.  In general, the action asserts that the defendants, other than the Company, who acquired an interest in the Polish Project, received a fraudulent transfer of assets belonging to the individual McKenzie bankruptcy estates, or are alter egos or the strawmen for the McKenzies.  As a result, the Trustee asserts that any EuroGas stock or cash received by these defendants should be accounted for and turned over to the Trustee.  As to the Company, the Trustee asserts that as transfer agent, the Company should turn over the preferred stock presently outstandi ng to the defendants or reserve such shares in the name of the Trustee and that any special considerations afforded these defendants should be canceled. It appears the Company was named to this litigation only because of its relationship as transfer agent to the stock in question.  This suit has been administratively consolidated with 97-4114, and is currently pending before the Houston bankruptcy court.  

In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in the consolidated adversary proceedings, seeking to add new parties, including Wolfgang and Reinhard Rauball and assert additional causes of action against EuroGas and the other defendants in this action.  These new causes of action include claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury.  These causes of action claim that the Company and certain of its officers, directors or consultants cooperated or conspired with the McKenzies to secret or conceal the proceeds from the sale of the Polish Concession from the Trustee.  In January 2000, this motion was granted by the bankruptcy court.  The Company is vigorously defending this suit.  On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants). Thes e motions are currently pending before the Court. No trial date has been set.

In June 1999, the Trustee filed another suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O., et al (Adv. No. 99-3287).  That suit sought sanctions against the defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper.  The defendants filed a motion to dismiss the lawsuit, which was granted in August 1999.  In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv. No. 99-3444).  This suit seeks damages in excess of $170,000 for the defendants’ alleged violation of an agreement with the Trustee executed in March 1997.  EuroGas disputes the allegations and has filed a motion to dismiss or alternatively, to abate this suit, which motion is currently pending before the court. On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants).  On September 10, 2002, the Court entered an Order which required the Trustee to specify the causes of action asserted against each Defendant.  A few days prior to this Order, the Trustee filed his Second Motion for Leave to Amend and

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Supplement Pleadings and to Drop Certain Defendants (the “Second Motion”).  On October 21, 2002, EuroGas and other Defendants filed their Response to the Second Motion.  On November 11, 2002, the Trustee filed his Motion and Reply to this Response under which, in part, Trustee sought court approval to file a Third Amended Complaint. On March 13, 2003 the Court entered and Order Granting Trustee’s Motion for Leave to Amend.  On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to EuroGas, the Third Amended Complaint asserts claims for breach of contract, fraud in the inducement, conspiracy, aiding and abetting civil conspiracy, fraudulent transfer and punit ive damages. As to Wolfgang and Reinhard Rauball, the Third Amended Complaint asserts claims for turnover under Sections 542 and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post-petition avoidable transfers, civil conspiracy, aiding and abetting civil conspiracy and punitive damages. The Company has recently filed a Motion to Dismiss the Third Amended Complaint. At present, no trial date has been set.

Kukui, Inc. Claim In November 1996, the Company entered into a settlement agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie bankruptcy case, whereby the Company issued 100,000 common shares and an option to purchase 2,000,000 additional common shares, which option expired on December 31, 1998. The Company granted registration rights with respect to the 100,000 common shares issued. On August 21, 1997, Kukui asserted a claim against EuroGas, which was based upon an alleged breach of the 1996 settlement agreement as a result of the Company's failure to file and obtain the effectiveness of a registration statement for the resale by Kukui of the 100,000 shares delivered to Kukui in connection with the 1996 settlement. In addition, the Estate of Bernice Pauahi Bishop (the “Bishop Estate”), Kukui's parent company, entered a claim for failure to register the resale of common shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any liability and filed a counterclaim against Kukui and the Bishop Estate for breach of contract concerning their activities with the McKenzie Bankruptcy Trustee.

In December 1999, EuroGas signed a settlement agreement with the bankruptcy Trustee, and other parties, including Kukui, Inc., and the Trustees of the Bishop Estate , which had pursued separate claims against EuroGas (the “Settlement Agreement”).  The Settlement Agreement, in part, required EuroGas to pay $900,000 over 12 months and issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000.  The bankruptcy court approved the Settlement Agreement on May 23, 2000.  The claims of Kukui, Inc. and the Trustees of the Bishop Estate have been dismissed pursuant to the terms of the Settlement Agreement.  Under the terms of the Settlement Agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 1999, paid Kukui $782,232 of the settlement obligation in 2000 and accrued an additional settlement obligation liability and expense of $251,741 d uring 2000. During 2000, EuroGas issued the Bishop Estate 100,000 registered common shares, which were valued at $100,000, or $1.00 per share. The resulting accrued settlement obligation of $369,509 for the estimated cost of settling the claim included an estimated default penalty and interest. The Company contends that it has fully performed under the Settlement Agreement and that the Settlement Agreement additionally entitles the Company to a complete release and dismissal of all suits filed by the Bankruptcy Trustee.  The Bankruptcy Trustee contends that EuroGas defaulted under the Settlement Agreement and is not entitled to a release or dismissal.  

Holbrook Claim  On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee and the other parties to the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee, Kukui, Inc., Eurogas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases.  Under this complaint, Holbrook sought a determination of the defendants’ rights in certain EuroGas files that he had received from Kruse Landa and Maycock, former attorneys for EuroGas.  Through this litigation, the Trustee sought turnover of all these files pursuit to the Settlement Agreement.  EuroGas has opposed turnover of privileged materials and filed a cross-claim in the suit asking for a declaratory judg ment that the Settlement Agreement is enforceable and that the Trustee be ordered to specifically perform his obligations under the Settlement Agreement.  The Trustee filed a counterclaim requesting specific performance by EuroGas and other relief.  At the direction of the court, both parties filed motions for summary judgment.  On December 17, 2001, the court entered an order granting Trustee’s Motion for Summary Judgment and denying a related Motion to Strike Affidavit, which EuroGas had filed.  EuroGas has appealed this order to the United States District Court for the Southern District of Texas. On September 25, 2002 the District Court entered its Opinion and Order affirming the Bankruptcy Court’s orders. On October 25, 2002 EuroGas filed a notice of appeal of the District Court’s order to the Fifth Circuit Court of Appeals. The appeal is currently pending before this Court. EuroGas cannot predict the outcome of these appeals, but intends to vigorously pursue the appeal s to completion.

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Settlement of McKenzie Claims — On November 4, 2003, EuroGas signed a settlement agreement with the Bankruptcy Trustee, Kukui, and other parties.  Under the terms of the settlement agreement, EuroGas agreed to make payments totaling $2,800,000, to be paid in installments, with an initial payment of $250,000 paid November 5, 2003, $250,000 to be paid by December 6, 2003 and the terms for payment of the remaining balance will be negotiated between EuroGas, Kukui and the Bankruptcy Trustee in December 2003.  Upon completion of the payments all the cases relating to the McKenzie bankruptcy claim, including the Kukui, claim and the Holbrook claim will be dismissed. Under this settlement EuroGas, its subsidiaries, Wolfgang Rauball and Reinhard Rauball will be released from any further claim by Kukui and the Bankruptcy Trustee.  Since the initial payments were made EuroGas has not been able to make further payments and is in default of the settl ement agreement.  Subsequently EuroGas management has met with the Bankruptcy Trustee, on March 27, 2004 in Houston, Texas.  The discussion centered on revival of the settlement agreement, this discussion is ongoing.

Netherlands Tax Assessment.  For the 1992 tax year, the Kingdom of the Netherlands assessed a tax against GlobeGas in the amount of approximately $911,000, even though Globe Gas had significant operating losses.  On December 17, 2001, the Netherlands issued its final tax assessment, including interest charged from 1998, in the amount of approximately $753,000.  The Company had until December 19, 2001 to make payment of this amount or face possible additional proceedings against the assets of GlobeGas in satisfaction of the assessment.  The tax assessment is payable in Euro, and as a result fluctuates on the Company’s financial statements due to adjustments in exchange rates. However, GlobeGas does not have the ability to pay the assessed obligation and as a result may face forced liquidation and dissolution by the Netherlands tax authority.

Dissolution of Energy Global A.G.  During 2002, the Company’s Liechtenstein Subsidiary, Energy Global A.G., was statutorily liquidated and dissolved by the Principality of Liechtenstein. As a result, the Company lost $615,904 in net assets of that subsidiary and may be subject to additional losses in net assets of Energy Global’s subsidiaries.

In November 2001, Borre Dahl, a former employee of the Company, filed a complaint against the Company and Wolfgang Rauball, the Company’s Chairman and Chief Executive Officer, claiming breach of contract, breach of employment contract, and misrepresentation.  Both Mr. Rauball and the Company have filed answers to the complaint, and intend to defend vigorously the suit.  No trial date has been set.

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

No matters were submitted to a vote of the security holders of the Company during the forth quarter of 2003.  

PART II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters Market for Common Stock

Market Information and Holders

Our common stock is quoted on the OTC Bulletin Board market maintained by the National Association of Securities Dealers under the symbol “EUGS” and is traded on the Frankfurt and Berlin stock exchanges under the symbols EUG.F and EUG.B respectively.  As of April 30, 2003, there were 168,212,635 shares of common stock issued and outstanding, held by approximately 317 holders of record and an estimated 2,100 beneficial owners, including shares of common stock held in street name.   

The following table sets forth the approximate range of high and low bids for the common stock during the periods indicated.  These quotations reflect interdealer prices, without retail markup, markdown, commissions, or other adjustments and may not necessarily represent actual transactions in the common stock.

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The liquidity of our common stock may be limited, and the reported price quotes may not be indicative of prices that could be obtained in actual transactions.  On April 30, 2004, the high and low bids for our common stock on the OTC Bulletin Board were $0.12 and $0.12 respectively.

Dividends

We have not paid dividends on our common stock, and we do not have retained earnings from which to pay dividends.  We have accrued cumulative preferred dividends of $135,198, $135,199 and $139,932 in 2003, 2002 and 2001, respectively.  Of this amount, zero was paid in 2003, zero was paid in 2002, $21,599 was paid in 2001, by the issuance of shares of common stock in connection with the conversion of a portion of the preferred stock.  We must pay cumulative dividends with respect to our preferred stock before we can declare or pay any dividend on our common stock.  Even if we were able to generate the necessary earnings, it is not anticipated that dividends will be paid in the foreseeable future, except to the extent required by the terms of the cumulative preferred stock currently issued and outstanding.

Recent Sales of Unregistered Securities

During the year ended December 31, 2003, the Company issued the following securities without registration under the Securities Act of 1933, as amended, not previously reported on the quarterly reports on Form 10-Q filed by the Company during 2003. In June 2003 the Company sold 3,000,000 shares of unregistered securities to private investor. These securities were sold for $300,000 or $0.10 per share.  During July 2002 EuroGas reached a verbal settlement with a group of stockholders and agreed to issue 1,417,847 common shares and warrants to purchase 6,000,000 common shares within two years at $0.25 per share. The value of the common stock to be issued was estimated to be $141,785, or $0.10 per share, based upon quoted market prices of the Company's common stock on the day of the verbal agreement. The value of the warrants to be issued were estimated to be $388,939 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.5%; expected volatility of 166%; dividend yield of 0%; and expected life of two years. The value of the estimated settlement of $530,724 and was included in accrued settlement obligations and was charged against operations during the current quarter.

These private issuances of securities were affected in reliance upon the exemption for sales of securities not involving a public offering, under Section 4(2) of the Securities Act of 1933, as amended.  In each transaction, the Company observed the following practice:

–

the investors confirmed that they were “accredited investors,” as defined in Rule 501 of Regulation D under the Securities Act,

–

each investor had the background, education, and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities,

–

there was no public offering or general solicitation with respect to the offering,

–

the investors were provided with any and all other information requested by them with respect to the Company,

–

the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and the investors also agreed to transfer the securities only in a transaction registered with the SEC under the Securities Act or exempt from registration under the Securities Act, and

–

a legend was placed on the certificates and other documents representing each security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

Item 6.

Selected Financial Data

The following statement of operations and balance sheet data were derived from our audited consolidated financial statements.  Our consolidated financial statements have been audited by our independent certified public accountants.  The selected financial data below should be read in conjunction with our consolidated financial statements and the notes thereto included with this report and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Statement of Operations Data

Balance Sheet Data

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

General

We are engaged primarily in the acquisition of rights to explore for and exploit oil, natural gas, coal bed methane gas, and mineral mining.  We have also extended our business into co-generation (power and heat) projects. We have acquired interests in a number of large exploration concessions, for oil, natural gas, and coal bed methane gas, and talc, and are in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production.  We currently have several projects in various stages of development, including a coal bed methane gas project in Poland, a natural gas project and several additional undeveloped concession areas in Slovakia, and an interest in a talc deposit in Slovakia.  We also have holdings in oil and natural gas projects in Canada.

Our principal assets consist both of proven and developed properties, as well as unproven and undeveloped properties.  All costs incidental to the acquisition, exploration, and development of such properties are capitalized, including costs of drilling and equipping wells and directly-related overhead costs, which include the costs of equipment we own.  Because we have limited proven reserves and established production, most of our holdings have not been amortized.  If we are ultimately unable to establish production or sufficient reserves on some of these properties to justify the carrying costs, the value of the assets will need to be written down and the related costs charged to operations, resulting in additional losses. We periodically evaluate our properties for impairment and if a property is determined to be impaired, the carrying value of the property is reduced to its net realizable amou nt.

Recent Developments

Outlook

In the past, we have focused our resources on pre-exploration or early-exploration stage natural gas, coal bed methane gas, and other hydrocarbon projects with little short-term revenue potential.  We believe that our investment in these early-stage projects will prove profitable in the long run, and we may invest in additional early-stage projects from time to time in the future.  Nonetheless, management believes that, in order to balance our holdings, the focus of our acquisition, investment and development strategy should be on hydrocarbon projects that have the potential to generate revenues within one to five years of the date of investment.  We are actively seeking investments of that type.  Specifically, we intend to take the following actions over the coming months:  

–

Focus our efforts on projects in Central Europe.  We will concentrate our financial and management resources on Central Europe (Poland and Slovakia);

–

Bring the Gemerska Poloma Talc Deposit into production.

–

Begin an exploration program on our oil and gas concessions covering approximately 4,300 km2 in southeast Poland; POGC is the operator of this venture. EuroGas, in conjunction with POGC, is currently in discussions with a number of international oil and gas companies who are interested in a possible participation in this project.  

–

Continue our efforts to reduce corporate overhead.  We will continue to manage the Company from our West Vancouver, North American Headquarter and our Vienna Central European Headquarters.

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In summary, the outlook, based on our strategic approach, is simple.  We intend to use the proceeds from possibly the sale of other non-core assets to fund development of the Gemerska Poloma Talc project and oil and gas projects in Central and Eastern Europe.  The ultimate goal is to transform the company from an asset-rich exploration concern to a significant cash flow-producing resource company.

Due to lack of funding at this point, in particular the in ability to pay our auditors, we are forced to issue our annual statement with only information that is prepared by the EuroGas management.  The accompanying financial statements have not been audited by an independent certified public accountant and when an audit is completed the Form 10-K will be amended to include audited financial statements.

Results of Operations—Fiscal Years 2003, 2002 and 2001

The following table sets forth consolidated income statement data and other selected operating data for the years ended December 31, 2003, 2002 and 2001.

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Revenues.  Prior to 1998, we had not generated any revenues from oil and gas sales.  As a result of our acquisition of the controlling interest in Big Horn, our results of operations for 2001 reflect oil and gas sales of approximately $88,937 , respectively.  As a result of the Company’s sale of its controlling interest in Big Horn and the non-consolidation of Big Horn thereafter, the Company had no oil and gas sales in 2003.

Operating Expenses.  Operating expenses include general and administrative expenses, depreciation, depletion and amortization, settlement costs, cost of mineral interests and equipment and impairment of mineral interests and equipment.  Oil and gas production expenses were $0 in 2001, and $1,521,471 in 2000.  All of our oil and gas production expenses are from our Big Horn subsidiary.  In 2002 and 2003, we had no oil and gas operating expenses.

General and administrative expenses were $2,087,053 for 2003, compared with $2,536,843 for 2002 and $1,675,746 in 2001.  The decrease of 20% in 2003 from the level of expense in 2002 was due primarily to the reduction of expenses at all locations.  Depreciation, depletion and amortization expenses were $5,105 for 2003, compared to $11,896 for 2002 and $25,511 during 2001.  The decline in depreciation, depletion and amortization expense is attributable to limited assets subject to depreciation, depletion and amortization.   

Impairment of mineral interests and expenses totaled $0.00 for 2003, $5,999,357 in 2002, and $794,444 in 2001.    

Settlement costs for financial statement purposes increased from  $1,690,947 in 2001 to $10,219,117 in 2002 and $140,000 in 2003.  The settlement costs in 2003 resulted from a change in estimate.

Income Taxes.  Historically, we have not been required to pay income taxes, due to our absence of net profits.  For future years, we anticipate being able to utilize a substantial portion of our accumulated deficit, which was approximately $156,838,059 at December 31, 2003, to offset profits, if and when achieved, resulting in a reduction in income taxes payable at such time.

Net Loss.  We incurred net losses from operations of approximately $2.6 million, $18.5 million, and $5.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.  After preferred dividends, the loss applicable to common shares was approximately $2.8 million, $18.7 million and $5.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.  These losses were due in part to the absence of revenues, combined with continued expansion of our activities, primarily as a result of acquisition and the growth of our administrative expenses.   

Due to the highly inflationary economies of the Eastern European countries in which we operate, we are subject to extreme fluctuations in currency exchange rates that can result in the recognition of significant gains or losses during any period.  In 2003 we recognized a loss of $378,521 because of currency transactions.  In 2002, the loss was $86,362.  In 2001, we had a loss of $402,227 as a result of currency transactions.  We had a cumulative foreign currency translation adjustment of $1,720,050 as of December 31, 2003.  We do not currently employ any hedging techniques to protect against the risk of currency fluctuations.

Capital and Liquidity

We had an accumulated deficit of $156,838,059 as of December 31, 2003, substantially all of which has been funded out of proceeds received from the issuance of stock and the incurrence of payables.  As of December 31, 2003, we had total current assets of approximately $.2 million and total current liabilities of approximately $21.8 million resulting in negative working capital of approximately $21.6 million.  As of December 31, 2003, our balance sheet reflected approximately $800,000 in mineral interests in properties not subject to amortization, net of valuation allowance.  These properties are held under licenses or concessions that contain specific drilling or other exploration commitments and that expire within one to three years, unless the concession or license authority grants an extension or a new concession license, of which there can be no assurance.  If we are unable to esta blish production or resources on these properties, obtain any necessary future licenses or extensions, or meet our financial commitments with respect to these properties, we could be forced to write off the carrying value of the applicable property.

Throughout our existence, we have relied on cash from financing activities to provide the funds required for acquisitions and operating activities.  Our financing activities used net cash of approximately $856,000 and $100,000, during the years ended December 31, 2003 and 2002, respectively, and provided $1.2 million during the year ended December 31, 2003.  This net cash has been used principally to fund net operating losses of approximately $2.6 million, $18.5 million and $5.5 million during those three years.  Our operating activities used $1.2 million of net cash during the year ended December 31, 2003 and $1.5 million in the year ended December 31, 2002, and provided net cash of approximately $0.6 million during the year ended December 31, 2000. A portion of our cash was used in acquiring mineral interests, property and equipment, either directly or indirectly through the acquisition o f subsidiaries, with approximately, $0.5 million, $1.6 million, and $3.7 million provided by (used) in investing activities for the years ended December 31, 2003, 2002 and 2001, respectively, of which approximately $0.03 million, $0.5 million and $0.1 million, respectively, was used in acquiring mineral interests.

17

While we had a small amount of cash on hand of as of December 31, 2003, we have short-term and long-term financial commitments with respect to exploration and drilling obligations related to our interests in mineral properties and potential litigation liabilities. Many of our projects are long-term and will require the expenditure of substantial amounts over a number of years before the establishment, if ever, of production and ongoing revenues.  As noted above, we have relied principally on cash provided from equity and debt transactions to meet our cash requirements. We do not have sufficient cash to meet our short-term or long-term needs and we will require additional cash, either from financing transactions or operating activities, to meet our immediate and long-term obligations.  There can be no assurance that we will be able to obtain additional financing, either in the form of debt or equity, or that, if such financing is obtained, it will be available to us on reasonable terms.  If we are able to obtain additional financing or structure strategic relationships in order to fund existing or future projects, existing shareholders will likely experience further dilution of their percentage ownership of the Company.

If we are unable to establish production or reserves sufficient to justify the carrying value of our assets or to obtain the necessary funding to meet our short and long-term obligations or to fund our exploration and development program, all or a portion of the mineral interests in unproven properties will be charged to operations, leading to significant additional losses.

Inflation

The amounts presented in our consolidated financial statements do not provide for the effect of inflation on our operations or our financial position.  Amounts shown for property, plant and equipment and for costs and expenses reflect historical costs and do not necessarily represent replacement costs or charges to operations based on replacement costs.  Our operations, together with other sources, are intended to provide funds to replace property, plant and equipment as necessary. Net income would be lower than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.  Due to inflationary problems in Eastern Europe reflected in currency exchange losses, we have experienced losses on the values of our assets in those countries in prior periods.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

We conduct business in many foreign currencies.  As a result, we are subject to foreign currency exchange rate risk due to effects that foreign exchange rate movements of those currencies have on our costs and on the cash flows that we receive from foreign operations.  We believe that we currently have no other material market risk exposure.  To date, we have addressed our foreign currency exchange rate risks principally by maintaining our liquid assets in interest-bearing accounts in U.S. dollars, until payments in foreign currency are required, but we do not reduce this risk by hedging.  For further discussion of our policies regarding derivative financial instruments and foreign currency translation, see Note 1 to our Consolidated Financial Statements contained in “Item 8.  Financial Statements and Supplementary Data.”

Item 8.  Financial Statements and Supplementary Data

Due to lack of funding at this point, in particular the in ability to pay our auditors, we are forced to issue our annual statement with only information that is prepared by the EuroGas management.  The accompanying financial statements have not been audited by an independent certified public accountant and when an audit is completed the Form 10-K will be amended to include audited financial statements.

The consolidated financial statements of the Company and its subsidiaries, together with note and supplementary data related thereto, are set forth following pages F-1 of this Report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

18

PART III

Item 10.

  Directors and Executive Officers of the Registrant

Certain Information Regarding Executive Officers, Directors and Control Persons

Dr. Gregory Fontana resigned his position as a Director of EuroGas, Inc. in December of 2003.  He stated that other business maters make it impossible to serve as a director at this time.

The following table contains information about each individual who was a director or executive officer of EuroGas as of December 31, 2002, together with all positions and offices of the Company held by each and the term of office and the period during which each has served.

Biographical Information

The following paragraphs set forth brief biographical information for each of the aforementioned directors and executive officers:

Wolfgang Rauball.  Mr. Rauball was appointed director of the Company in November 2000 and President/Chairman in July 2001.  He is also Managing Director of EuroGas Austria GesmbH and Globegas BV.  Mr. Rauball has worked for the Company in various functions since 1994.  Mr. Rauball attended Darmstadt Technical University in Germany from 1967 through 1971.  During the period 1976 through 1986, his consulting activities were primarily for companies conducting exploration for gold ore bodies in Canada, the United States and South America. Wolfgang Rauball arranges financing for business enterprises, primarily public companies engaged in the resource industry.

Hank Blankenstein.  Mr. Blankenstein was appointed a director and chief financial officer of the Company in May of 2002.  Mr. Blankenstein, age 60, served as a director and financial vice president of the Company from 1995 until 2000.  Mr. Blankenstein has more than 30 years experience at various levels of management.  From April 2000 until his appointment to the board and CFO, Mr. Blankenstein was involved in several real estate development projects.  Mr. Blankenstein holds a Bachelor of Science degree in Finance and Banking from Brigham Young University.

Michael J. Slater.  Mr. Slater was appointed as president of the Company in February of 2002.  Mr. Slater has spent the last 25 years working for Texaco in various technical positions.  His most recent responsibility was as Vice-President, Negotiations, Texaco Exploration.  He worked on and developed exploration projects in Europe, the former Soviet Union (“FSU”), the North Sea and Africa with emphasis on Eastern Europe and the FSU. He held that position from October 1995 until joining the Company.  Mr. Slater holds a BS in Geology from Kings College, London and a PhD in geology from Cambridge University.

Andreas Danicek.  Mr. Danicek was appointed a director in December of  2003.  He spent the last several years working extensively with computer graphics, mainly designing web sites for various organizations including EuroGas, Inc.  He spent the previous four years in various marketing positions including as an account executive having to do with the high technology industry.  He holds a  technical degree from a University in Austria.

Key Employees

Andrew K. Andraczke.  Mr. Andraczke has been Vice President, Secretary, and a member of the management committee of Pol-Tex since 1992, and is responsible for business development and coordination of administrative, legal, and political aspects of the Pol-Tex venture.  Mr. Andraczke also directs computer operations and system support for the venture’s exploration and production activities.  Mr. Andraczke holds B.Sc., M.Sc., and Ph.D. degrees in computer science and applications from the Computer Science Institute of Polytechnical University in Warsaw where he also was an Associate Professor.  He served as the General Manager of the Computing Center of the Center for Geological Research in the Central Office of Geology (Ministry of Geology) from 1972 to 1976, where he developed and implemented Poland’s first general database of geological and mineral resources of Poland. He al so implemented computer mapping systems, oil and gas reservoir simulations, and production control for mining operations.  From 1976 to 1982, he worked for several oil and gas and mining firms, including OTC Oklahoma Production in Tulsa, Oklahoma, Kansas Oil Consolidated in Tulsa, Oklahoma, John W. Mecom Company in Houston, Texas, InteResources Group, Inc. in Houston, Texas, and British Sulphur Corporation in London, U.K., performing reservoir modeling of secondary and tertiary oil reservoirs, inorganic polymer floods, and underground coal gasification projects.  During this time, he also developed data acquisition and reserve balance systems for mines in the U.S., Mexico, and Egypt.  Mr. Andraczke joined Tenneco Oil Exploration and Production Company in Houston in 1982 and served as an internal consultant and management advisor on computer applications and emerging technologies until 1987.  

19

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers, directors and certain shareholders to file reports concerning their ownership of our common stock with the SEC and to furnish to us copies of such reports.  Based solely upon our review of the reports required by Section 16 and amendments thereto furnished to us, we believe that all reports required to be filed pursuant to Section 16(a) of the Exchange Act were filed with the SEC on a timely basis.

Audit Committee and Code of Ethics Disclosure

The Company's Board of Directors has not yet appointed an audit committee. The Company expects to form an audit committee and to establish a written code of ethics for its executive officers and directors during 2003.

Item 11.

  Executive Compensation

The following table sets forth information relating to the compensation of all persons who served as the Chief Executive Officer of EuroGas during the year ended December 31, 2003, and other persons serving as executive officers of EuroGas as of December 31, 2003, whose total cash compensation for the 2003 fiscal year exceeded $100,000 (collectively, the “Named Officers”).

Summary Compensation Table

⁽¹⁾

Mr. Rauball was appointed as President and CEO and interim CFO on July 6, 2001.  He also serves as Managing Director of EuroGas Austria GmbH.

⁽²⁾

Mr. Slater became an officer of the Company in February 2002.

⁽³⁾  

Mr. Blankenstein became an officer of the Company in May 2002.

Option Grants in Last Fiscal Year

No options were granted to the Named Officers during 2003.

Executive Employment and Consulting Arrangements

On February 5, 2002, EuroGas entered into an employment agreement with its new President.  The three-year agreement provides for annual compensation of $400,000 to be paid in monthly installments.  The agreement provides for all terms of the agreement to continue for the unexpired term of the agreement should the Company be involved in winding-up or merger transaction.  The agreement may be terminated if either party fails to meet its obligations under the terms of the agreement.

20

Option Exercises and Fiscal Year-End Option Value

The following table sets forth information with respect to the aggregate number and value of unexercised options held by all Named Officers at December 30, 2003.  No options were exercised by the Named Officers during the year ended December 31, 2003.  In accordance with SEC rules, the value of unexercised options is calculated by subtracting the exercise price from $0.73, the closing price of the common stock on the last business day of the year ended December 31, 2003.  The closing sale price of the Company’s stock on April 30, 2004, was $0.115.

Aggregated Option Exercises in Last Fiscal Year

And Fiscal Year-End Option Values

Compensation Plans

The following table sets forth information as of December 31, 2003 with respect to shares of common stock to be issued upon the exercise, and the weighted-average exercise price, of all outstanding options and rights granted under our equity compensation plans, as well as the number of shares available for future issuance under those plans.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

As of December 31, 2003, the Compensation Committee consisted of the Board of Directors. The Board of Directors as of December 31, 2003, included:

–

Andreas Danicek, who is not an employee of the Company;

–

Hank Blankenstein who has served as an officer and member of the Board since May of 2002.

–

Wolfgang Rauball, who since July 2001 has served as President and CEO and interim CFO of EuroGas, and who also serves as Managing Director of EuroGas Austria GesmbH since 1998 and as Managing Director of GlobeGas B.V. Amsterdam since 1996.

21

Compensation Committee Report

Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act or the Exchange Act that incorporates by reference, in whole or in part, subsequent filings, including, without limitation, this Annual Report on Form 10-K, the Compensation Committee Report and the Performance Graph set forth below shall not be deemed to be incorporated by reference in any such filings.

As required by rules promulgated by the SEC, this Compensation Committee Report describes the overall compensation goal and policies applicable to our executive officers, including the basis for determining the compensation of executive officers for the 2003 fiscal year.

General.  Management compensation is overseen by the Board of Directors.  In July 1999, the Board established a Compensation Committee comprised of Dr. Gregory P. Fontana, Dr. Hans Fischer and Rudolph Heinz, who also constituted the Compensation Committee on December 31, 1999.  However, Mr. Fischer, Dr. Gregory P. Fontana and Mr. Heinz have subsequently resigned, and the Compensation Committee has been dissolved.  Accordingly, the following compensation report was prepared by Board members serving as of December 31, 2003.  

Compensation Objectives.  In determining the amount of compensation for our executive officers, the Board is guided by several factors.  Because we have very few employees, compensation practices are flexible in response to the needs and talents of the individual officer and are geared toward rewarding contributions that enhance stockholder value.  Historically, we have compensated senior management based on the perceived contribution to the development of our operations, consisting principally of salaries believed to reflect their contributions.  In addition, because we have only recently begun to generate revenues from operations and have attempted to preserve capital for development of our business and operations, we have used stock options as a form of compensation for executive officers.  The use of stock options is designed to align the interests of the executive officers wi th the long-term interests of EuroGas and to attract and retain talented employees who can enhance our value.  Although certain members of the Board are also executive officers, none participates in the determination of his own compensation.

Compensation Components.  The compensation of our executive officers consists of three components:  base salary, bonuses and long-term incentive awards in the form of stock options.  The Board establishes base salaries based primarily on its objective judgment, taking into consideration both qualitative and quantitative factors.  Among the factors considered by the Board are:

(i)

the qualifications and performance of each executive officer;

(ii)

the performance of EuroGas as measured by such factors as development activities and increased shareholder value;

(iii)

salaries provided by other companies inside and outside the industry that are of comparable size and at a similar stage of development, to the extent known; and

(iv)

our capital position and needs.  The Board does not assign any specific weight to these factors in determining salaries.  

From time to time, we also compensate our executive officers in the form of bonuses.  Because we are presently in an early stage of development and do not have a history of earnings per share, net income, or other conventional data to use as a benchmark for determining the amount or existence of bonus awards, any bonuses granted by the Board in the near term will be based upon its subjective evaluation of each individual’s contribution to EuroGas.  In some cases, however, bonuses payable to executive officers may be tied to specific criteria identified at the time of engagement.  For the years ended December 31, 2001, 2002 and 2003, the Board did not pay bonuses to any executive officers.  The Board’s action was based on its conclusion that, despite the superior personal performance of the executive officers, no cash incentive bonuses should be awarded, due to the Board’s desir e to preserve capital for future growth and development.

The third component of our compensation structure consists of the grant of stock options to compensate executive officers and other key employees.  Having granted all options available under the 1996 Stock Option and Award Plan, on November 20, 1999, the Board determined to grant options outside of any option plan (but on terms and conditions identical to those contained in our 1996 Stock Option and Award Plan), to certain officers, directors and outside consultants.  The purpose of such options is to give each option recipient an interest in preserving and maximizing shareholder value in the long term, to reward option recipients for past performance and to give option recipients the incentive to remain with EuroGas over an extended period.  The right to determine the amount of such grants was delegated to the Compensation Committee based on its assessment of the proposed recipients’ current and expected future performance, level of responsibilities, and the importance of his or her position with, and contribution to, EuroGas.

Chief Executive Compensation.  Mr. Rauball had a salary of $300,000 as a director and CEO. Consistent with the Board’s desire to preserve capital for future growth and development, the Board elected not to pay a bonus to any executive officer for the 2002 and 2003 fiscal years.  

22

Use of Consultants.  We anticipate continuing to rely on executive management and outside consultants in connection with the acquisition of additional projects and the initial development of existing projects.  However, we anticipate that, if able to establish ongoing revenues from production, we will retain management personnel as employees of EuroGas and compensate them on a salary basis, based on comparable compensation packages offered by employers within our general industry and geographical area.

Respectfully submitted,

Wolfgang Rauball

Andreas Danicek

Performance Graph

The following graph shows a comparison of cumulative shareholder return for our common stock for the period beginning December 31, 1998 (the date the common stock was first quoted in the over-the-counter market) and ending December 31, 2003, as well as the cumulative total return for the NASDAQ Composite Index and the Howard Weil, Bloomberg Oilfield Service and Manufacturing Index.  The Peer Group Index is a price-weighted composite index comprised of the cumulative shareholder return for forty-seven companies involved in oilfield services.

The performance graph assumes that $100 was invested at the market close on December 31, 1998 and that dividends, if any, were reinvested for all companies, including those on the NASDAQ Composite Index and the Peer Group Index.

Item 12.

  Security Ownership of Certain Beneficial Owners and Management

The following beneficial ownership table sets forth information regarding beneficial ownership of our common stock as of April 30, 2004 by:

–

each person or entity that is known by us to own beneficially 5% or more of the outstanding shares of our common stock;

–

each of our directors;

–

each of the Named Executive Officers; and

–

all of our executive officers and directors as a group.

Under relevant provisions of the Exchange Act, a person is deemed to be a “beneficial owner” of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security.  A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership in 60 days.  More than one person may be deemed to be a beneficial owner of the same securities.  The percentage ownership of each stockholder is calculated based on the total number of outstanding shares of our common stock as of April 30, 2004, plus those shares of our common stock that the stockholder has the right to acquire within 60 days.  Consequently, the denominator for calculating the percentage ownership may be different for each stockholder.  Unless otherwise indicated, the address of these individuals is the same as the Company’s principal executive offices.

23

The table is based upon information provided by our directors and executive officers.

* Less than one percent.           

_________________________

(1)

Unless otherwise indicated, to our best knowledge, all stock is owned beneficially by the listed shareholder, and each shareholder has sole voting and investment power with respect to our common stock beneficially owned by such person.

(2)

Represents options or warrants exercisable within 60 days of April 30, 2004, held by the individual or entity.

(3)

The percentage indicated represents the number of shares of our common stock, warrants and options exercisable within 60 days held by the indicated stockholder divided by the sum of (a) the number of shares subject to options exercisable by this shareholder within 60 days and (b) which is the number of shares of our common stock issued and outstanding as of December 31, 2002.

(4)

Includes shares in which Mr. Rauball disclaims beneficial ownership and which he temporarily holds as a nominee for other persons.

24

Item 13.

  Certain Relationships and Related Transactions

Wolfgang Rauball currently serves as our CEO and is a director and a significant shareholder of the Company.  Over the past three years, we have entered into several transactions with Mr. Rauball or with entities controlled by him, as outlined in this Item 13.

During June of 2002 the Company issued Mr. Rauball 10,000,000 shares of its common stock and warrants for an additional 10,000,000 shares in a subscription on a private placement.  The 10,000,000 shares of common stock were issued at a price of $0.10 per share, the warrants were issued at an exercise price of $0.125 per share if converted before June 10, 2003 and an exercise price of $0.15 after that but before June 10, 2004.  The Chief Executive Officer and principal shareholder of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their behalf. The resulting receivables and payables were combined and presented in the accompanying financial statements as notes payable to related parties of $416,858 as of December 31, 2001. During the six months ended June 30, 2002 EuroGas made additi onal payments of $535,574 on behalf of the officer.

During June 2002, EuroGas entered into a compensation agreement with Mr. Rauball that provides the officer with $300,000 of compensation for his prior services. The compensation was charged to operations during June 2002. The resulting $381,284 payable to the officer was converted into common stock as further described above.

Additionally, Hank Blankenstein, our Chief Financial Officer, assigned $200,000 of accrued salary, which accrual arose during his service to the Company during 2000, to the Chief Executive Officer.

Item 14.    Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(a)

Evaluation of Disclosure Controls and Procedures.  Within 90 days prior to the date of this report, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

(b)

Changes in Internal Controls.  There were no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

PART IV

Item 15.

  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)

Documents Filed

1.

Financial Statements.  The following Consolidated Financial Statements of the Company  are included immediately following the signature page of this Report.

A.

Consolidated Balance Sheets at December 31, 2003 and 2002

B.

Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001

C.

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002and 2001

D.

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001

E.

Notes to Consolidated Financial Statements

25

2.

Exhibits.

*

Incorporated by reference

(a)

 Reports on Form 8-K

During the last quarter of the fiscal year ended December 31, 2002, we did not file any reports on Form 8K.

(c)

Exhibits

Exhibits to this Report are attached following Page F-1 hereof.

(d)

Financial Statement Schedules

None

31

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.

EUROGAS, INC.

(Registrant)

By  /s/  Wolfgang Rauball

     Wolfgang Rauball

      Chief Executive Officer

By  /s/  Hank Blankenstein

      Hank Blankenstein

      Principal Accounting and Financial Officer

DATE:   May 15, 2004

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

Signature and Title

Date

_/s/  Wolfgang Rauball                      

May 15, 2004

Wolfgang Rauball, Director

    /s/  Andreas Danicek

May 15, 2004

Andreas Danicek, Director

   /s/  Hank Blankenstein

                 May 15, 2004

Hank Blankenstein, Director

32

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Wolfgang Rauball, Chief Executive Officer of EuroGas, Inc., certify that:

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Hank Blankenstein, Chief Financial Officer of EuroGas, Inc., certify that:

EXHIBIT 99.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify that the Annual Report on Form 10-K of EuroGas, Inc. for the year ended December 31, 2003, as filed May 15, 2004 with the Securities and Exchange Commission, to the best of our knowledge fully complies with the requirements of Section 13(a) or 15(d) of The Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the annual report fairly presents, in all material respects, the financial condition and results of operations of EuroGas, Inc.

Due to lack of funding at this point, in particular the in ability to pay our auditors, we are forced to issue our annual statement with only information that is prepared by the EuroGas management. The accompanying financial statements have not been audited by an independent certified public accountant and when an audit is completed the Form 10-K will be amended to include audited financial statements.

EUROGAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

F-1

EUROGAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

EUROGAS, INC. AND SUBSIDIARIES

F-2

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

F-3

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EUROGAS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying condensed consolidated financial statements are unaudited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.  The Company believes that the following disclosures are adequate to make the information presented not misleading.

These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position and results of operations for the periods presented.  

Business Condition — EuroGas has accumulated a deficit of $156,838,059 through December 31, 2003. EuroGas has had no revenue, losses from operations and negative cash flows from operating activities during the years ended December 31, 2002 and 2001 and 2003. At December 31, 2003, the Company had a working capital deficiency of $21,636,889 and a capital deficiency of $10,893,149. The Company has impaired most of its oil and gas properties. These conditions raise substantial doubt regarding the Company's ability to continue as a going concern. Realization of the investment in properties and equipment is dependent upon management obtaining financing for exploration, development and production of its properties. In addition, if exploration or evaluation of property and equipment is unsuccessful, all or a portion of the remaining recorded amount of those properties will be recognized as impairment losses. Payment of current liabilities will require substantial additional financing. Management of the Company plans to finance operations, explore and develop its properties and pay its liabilities through borrowing, through sale of interests in its properties, through advances received against future talc sales and through the issuance of additional equity securities. Realization of any of these planned transactions is not assured.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of EuroGas, Inc., its majority-owned subsidiaries and EuroGas' share of properties held through joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation.

Stock-Based Compensation — At December 31, 2003, the Company had options outstanding that had been previously granted to employees and consultants. The Company accounts for stock options granted to employees under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and accounts for options granted to non-employees at their fair value under SFAS No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation expense is reflected in net loss during the periods presented in the accompanying financial statements as all options had an exercise price equal to the market value of the underlying common stock on the date of grant or the related compensation was recognized in earlier periods. There would not have been any effect to net loss or to basic and diluted loss per common share if the Company had applied the fair value recognition pro visions of SFAS No. 123 to stock-based employee compensation as the related compensation was recognized in earlier periods.

Reclassifications — Certain reclassifications have been made to the accompanying December 31, 2002 and December 31, 2003 financial statements to conform to the current period presentation.

Cumulative Effect of Accounting Change – The Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, effectively on January 1, 2003. In accordance with the transition provisions of SFAS No. 143, the Company recorded asset retirement costs of $140,187, liabilities of $326,177, and recognized the cumulative effect on prior years of $185,990 as an expense during the twelve months ended December 31, 2003, which had no effect on basic and diluted loss per common share.

Recent Accounting Pronouncements — The Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of January 1, 2003. Among other provisions, this statement modifies the criteria for classification of gains or losses on debt extinguishment such that they are not required to be classified as extraordinary items if they do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The adoption of this standard did not have any effect on the Company’s financial position or results of operations.

The Company also adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities as of January 1, 2003. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement did not have any effect on the Company’s financial position or results of operations.

NOTE 2 — INVESTMENT IN SECURITIES

The Company’s primary investment in securities consists of 209,550 shares of Enterra Energy Ltd. The Enterra shares are held as collateral by Oxbridge Limited under a claim, as discussed in Note 3. At June 30, 2003, the Company changed its expectation of realizing proceeds from sale of the Enterra shares to more than one year and reclassified the investment in the Enterra shares as a long-term asset. The Company’s investments in equity securities, including the Enterra shares, are accounted for as available for sale, as defined by SFAS No. 115, as they have readily determinable fair values and are not restricted other than in connection with being pledged as collateral. Accordingly, the investments in securities available for sale are carried at market value with unrealized gains and losses included in accumulated other comprehensive income (loss). The cost of securities sold is determined by the aver age-cost method. The investments in securities consisted of the following:

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EUROGAS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — ACCRUED SETTLEMENT OBLIGATIONS

Oxbridge Settlement — During 1997, Oxbridge Limited requested EuroGas convert 2,391,968 Series 1995 Preferred Stock into EuroGas common shares but was effectively prevented in doing so by an agreed order with the Trustee in the McKenzie bankruptcy case described below. As a result, Oxbridge was unable to receive proceeds from the sale of the conversion shares when the average market prices and trading volume would have resulted in substantial proceeds and has made a claim against EuroGas for its losses. During 2002, EuroGas estimated the cost to settle the Oxbridge claim to be approximately $6,800,000. That amount is included in the accrued settlement obligation as of December 31, 2003.

McKenzie Bankruptcy Claim — This litigation is being brought by Steve Smith, Chapter 7 Trustee (the “Trustee”) for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division.

In March 1997, the Trustee commenced the following cause of action:  W. Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division) (hereafter “97-4114”).  The Trustee’s initial claim appears to allege that the Company may have paid inadequate consideration for its acquisition of GlobeGas from persons or entities acting as nominees for the McKenzies, and therefore McKenzies’ creditors are the true owners of the proceeds received from the development of the Pol-Tex Concession in Poland.  The Company has contested the jurisdiction of the Court, and the Trustee’s claim against a Polish corporation (Pol-Tex), and the ownership of Polish mining rights. The Company further contends that it paid su bstantial consideration for GlobeGas (Pol-Tex’s parent), and that there is no evidence that the creditors of the McKenzies invested any money in the Pol-Tex Concession.

In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc.,  (Adv. No. 97-4155) in each of the three McKenzie individual bankruptcy cases.  In general, the action asserts that the defendants, other than the Company, who acquired an interest in the Polish Project, received a fraudulent transfer of assets belonging to the individual McKenzie bankruptcy estates, or are alter egos or the strawmen for the McKenzies.  As a result, the Trustee asserts that any EuroGas stock or cash received by these defendants should be accounted for and turned over to the Trustee.  As to the Company, the Trustee asserts that as transfer agent, the Company should turn over the preferred stock pre sently outstanding to the defendants or reserve such shares in the name of the Trustee and that any special considerations afforded these defendants should be canceled. It appears the Company was named to this litigation only because of its relationship as transfer agent to the stock in question.  This suit has been administratively consolidated with 97-4114, and is currently pending before the Houston bankruptcy court.  

In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in the consolidated adversary proceedings, seeking to add new parties, including Wolfgang and Reinhard Rauball and assert additional causes of action against EuroGas and the other defendants in this action.  These new causes of action include claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury.  These causes of action claim that the Company and certain of its officers, directors or consultants cooperated or conspired with the McKenzies to secret or conceal the proceeds from the sale of the Polish Concession from the Trustee.  In January 2000, this motion was granted by the bankruptcy court.  The Company is vigorously defending this suit.  On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauba lls (other named defendants). These motions are currently pending before the Court. No trial date has been set.

In June 1999, the Trustee filed another suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O., et al (Adv. No. 99-3287).  That suit sought sanctions against the defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper.  The defendants filed a motion to dismiss the lawsuit, which was granted in August 1999.  In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv. No. 99-3444).  This suit seeks damages in excess of $170,000 for the defendants’ alleged violation of an agreement with the Trustee executed in March 1997.  EuroGas disputes the allegations and has filed a motion to dismiss or alternatively, to abate this suit, which motion is currently pending before the court.

On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants).  On September 10, 2002, the Court entered an Order which required the Trustee to specify the causes of action asserted against each Defendant.  A few days prior to this Order, the Trustee filed his Second Motion for Leave to Amend and Supplement Pleadings and to Drop Certain Defendants (the “Second Motion”).  On October 21, 2002, EuroGas and other Defendants filed their Response to the Second Motion.  On November 11, 2002, the Trustee filed his Motion and Reply to this Response under which, in part, Trustee sought court approval to file a Third Amended Complaint. On March 13, 2003 the Court entered and Order Granting Trustee’s Motion for Leave to Amend.  

On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to EuroGas, the Third Amended Complaint asserts claims for breach of contract, fraud in the inducement, conspiracy, aiding and abetting civil conspiracy, fraudulent transfer and punitive damages. As to Wolfgang and Reinhard Rauball, the Complaint asserts claims for turnover under Section 542 and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post-petition avoidable transfers, civil conspiracy, aiding and abetting civil conspiracy and punitive damages. The Company has filed a Motion to Dismiss the Third Amended Complaint. A trial date set for November 2003 was postponed pending a settlement agreement described below.

Management’s estimate of the amounts due under the claims made by the Trustee and his attorneys have been adequately accrued in the accompanying financial statements.

Kukui, Inc. Claim — In November 1996, the Company entered into a settlement agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie bankruptcy case, whereby the Company issued 100,000 common shares and an option to purchase 2,000,000 additional common shares, which option expired on December 31, 1998. The Company granted registration rights with respect to the 100,000 common shares issued. On August 21, 1997, Kukui asserted a claim against EuroGas, which was based upon an alleged breach of the 1996 settlement agreement as a result of the Company's failure to file and obtain the effectiveness of a registration statement for the resale by Kukui of the 100,000 shares delivered to Kukui in connection with the 1996 settlement. In addition, the Estate of Bernice Pauahi Bishop (the “Bishop Estate”), Kukui's parent company, entered a claim for failure to registe r the resale of common shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any liability and filed a counterclaim against Kukui and the Bishop Estate for breach of contract concerning their activities with the McKenzie Bankruptcy Trustee.

In December 1999, EuroGas signed a settlement agreement with the bankruptcy Trustee, and other parties, including Kukui, Inc., and the Trustees of the Bishop Estate, which had pursued separate claims against EuroGas (the “Settlement Agreement”).  The Settlement Agreement, in part, required EuroGas to pay $900,000 over 12 months and issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000.  The bankruptcy court approved the Settlement Agreement on May 23, 2000.  The claims of Kukui, Inc. and the Trustees of the Bishop Estate have been dismissed pursuant to the terms of the Settlement Agreement.  Under the terms of the Settlement Agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 1999, paid Kukui $782,232 of the settlement obligation in 2000 and accrued an additional settlement obligation li ability and expense of $251,741 during 2000. During 2000, EuroGas issued the Bishop Estate 100,000 registered common shares, which were valued at $100,000, or $1.00 per share. The resulting accrued settlement obligation of $369,509 for the estimated cost of settling the claim included an estimated default penalty and interest. The Company contends that it has fully performed under the Settlement Agreement and that the Settlement Agreement additionally entitles the Company to a complete release and dismissal of all suits filed by the Bankruptcy Trustee.  The Bankruptcy Trustee contends that EuroGas defaulted under the Settlement Agreement and is not entitled to a release or dismissal.  

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EUROGAS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Holbrook Claim — On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee and the other parties to the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee, Kukui, Inc., EuroGas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases.  Under this complaint, Holbrook sought a determination of the defendants’ rights in certain EuroGas files that he had received from Kruse Landa and Maycock, former attorneys for EuroGas.  Through this litigation, the Trustee sought turnover of all these files pursuit to the Settlement Agreement.  EuroGas has opposed turnover of privileged materials and filed a cross-claim in the suit asking for a declar atory judgment that the Settlement Agreement is enforceable and that the Trustee be ordered to specifically perform his obligations under the Settlement Agreement.  The Trustee filed a counterclaim requesting specific performance by EuroGas and other relief.  At the direction of the court, both parties filed motions for summary judgment.  On December 17, 2001, the court entered an order granting Trustee’s Motion for Summary Judgment and denying a related Motion to Strike Affidavit, which EuroGas had filed.  EuroGas has appealed this order to the United States District Court for the Southern District of Texas. On September 25, 2002 the District Court entered its Opinion and Order affirming the Bankruptcy Court’s orders. On October 25, 2002 EuroGas filed a notice of appeal of the District Court’s order to the Fifth Circuit Court of Appeals. The appeal is currently pending before this Court. EuroGas cannot predict the outcome of these appeals, but intends to vigorously pursue the appeals to completion.

Settlement of McKenzie Claims — On November 4, 2003, EuroGas signed a settlement agreement with the Bankruptcy Trustee, Kukui, and other parties.  The settlement agreement called EuroGas to make payments totaling $2,800,000, to be paid in installments, with an initial payment of $250,000 paid November 5, 2003 and $250,000 to be paid by December 6, 2003.  Payment terms for the remaining balance will be negotiated between EuroGas, Kukui and the Bankruptcy Trustee.  Upon completion of the payments all the cases relating to the McKenzie bankruptcy claim, including the Kukui, claim, and the Holbrook claim, as described below, will be dismissed.  Under this settlement EuroGas, its subsidiaries, Wolfgang Rauball and Reinhard Rauball will be released from any further claim by Kukui and the Bankruptcy Trustee.

NOTE 4 — NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties are considered current and consist of:

NOTE 5 — RELATED PARTY TRANSACTIONS

Receivable from a Related Party – The Chief Executive Officer and principal shareholder of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their behalf. The resulting receivables and payables are combined and presented in the accompanying financial statements as receivable from related parties of $234,557 and $101,084 as of December 31, 2003 and December 31, 2002, respectively.

Related party loans are described in Note 4, Notes Payable to Related Parties.

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NOTE 6 – ASSET RETIREMENT OBLIGATION

Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred, which, for the Company, was when the talc mine was opened and as it is mined and when an oil or gas well is drilled or purchased. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset.  The Company’s asset retirement obligations relate primarily to the obligation to relaim property in connection with the talc mine and the obligation to plug and abandon oil and gas wells and support wells at the conclusion of their useful lives.

SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. When the liability is initially recorded, the related cost is normally capitalized by increasing the carrying amount of the related property. However, for assets that have previously been impaired, the related cost is charged to expense.  Over time, the liability is accreted upward for the change in its present value each period until the obligation is settled. The initial capitalized cost, if any, is amortized by the unit-of-production method. At January 1, 2003, the implementation of SFAS No. 143 resulted in a net increase in property and equipment of $140,187. Liabilities increased by $326,177, which represents the establishment of an asset retirement obligation liability. The cumulative effect on prior years of the change in accounting principle of $185,990, or $0.00 per share, was recorded in 2003 as an expense. The effect of adopting this accounting principle was an increase to the loss during the twelve months ended December 31, 2003 of $21,255.

NOTE 7 — PREFERRED AND COMMON STOCK

On June 25, 2003 the Company issued 3,000,000 shares of common stock for $300,000 in cash, or $0.10 per share.

On November 5, 2003, EuroGas issued 3,571,429 common shares and 3,571,429 warrants to a third party investor for cash of $250,000.  The proceeds received were allocated to the shares and warrants issued based upon their relative fair values, with $131,719 allocated to the shares and $118,281 allocated to the warrants. The warrants are exercisable anytime before October 31, 2006 at $0.07 per share had have an estimated fair value of $272,601, or $0.08 per share. The fair value of warrants was determined at the issue date using the Black-Scholes option-pricing model with the following assumptions:  risk-free interest rate of 2.46 percent, dividend yield of 0 percent, estimated future volatility of 181 percent, and an expected life of 3 years.

There are 2,391,968 shares of 1995 Series Preferred Stock (the “1995 Series preferred stock”) issued and outstanding. The 1995 Series preferred stock is non-voting, non-participating and has a liquidation preference of $0.10 per share plus unpaid dividends. The 1995 Series preferred shareholders are entitled to annual dividends of $0.05 per share. Each share of the 1995 Series preferred stock is convertible into two common shares upon lawful presentation of the share certificates. Dividends are payable until converted. EuroGas has the right to redeem the 1995 Series preferred stock on not less than 30 days written notice, at a price of $36.84 per share, plus any accrued but unpaid dividends. Annual dividend requirements of the 1995 Series preferred stock are $119,598.

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There are 260 shares of the 1997 Series A Convertible Preferred Stock (the “1997 Series preferred stock”). The 1997 Series preferred stock is non-voting and accrues dividends at $60.00 per share, or six percent annually. The 1997 Series preferred stock has a liquidation preference of $1,000 per share, plus unpaid dividends before liquidation payments applicable to common shares but after liquidation payments to the 1995 Series preferred stock outstanding. The 1997 Series preferred stock, along with unpaid dividends thereon, are convertible into common shares at the rate of $1,000 divided by the lesser of 125% of the average closing bid price for five trading days prior to issuance or 82% of the average closing bid price for five trading days prior to conversion. The 1997 Series preferred stock has a liquidation preference of $260,000. Annual dividend requirements of the 1997 Series preferred stock are $15,600. The following is a summary of the preferred stock outstanding at December 31, 2003:

Aggregate accrued dividends on preferred stock were $684,160 and $650,824 at December 31, 2003 and December 31, 2002, respectively.

NOTE 8 — ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consisted of the following:

NOTE 9 — SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 10 — CONTINGENCIES AND COMMITMENTS

Purchase of Rozmin – EuroGas acquired a direct 43% interest in Rozmin s.r.o. through a series of transactions from 1998 through April 2002. Rozmin s.r.o. holds a talc deposit in Eastern Slovakia. On April 17, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from Belmont Resources, Inc. ("Belmont"), in exchange for EuroGas issuing 12,000,000 common shares, paying Belmont $100,000 in advance royalties, and modifying the exercise price of existing stock options. EuroGas further agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in the ten-day average OTC Bulletin Board quoted trading price of the Company's common shares below $0.30 per share through April 17, 2002. During 2002 EuroGas issued 3,830,000 common shares to Belmont under the stock price guarantee. In connection with the purchase by EuroGas, Rozmin s.r. o. granted an overriding royalty to Belmont of two percent of gross revenues from any talc sold.

F-8

Additionally, EuroGas agreed to issue additional common shares to Belmont if Belmont did not realize approximately $1,218,000 from the resale of the original 12,000,000 common shares by April 17, 2002, and provide notice of such deficiency to EuroGas, to compensate Belmont for the shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. Because Belmont has not provided notice of the sale of the shares and the resulting deficiency, EuroGas is not able to calculate the shares that may be issuable, but estimates it may be obligated to issue approximately 12,000,000 additional common shares, based on recent market prices for the Company’s common stock, to Belmont under this provision of the agreement.

EuroGas also agreed to arrange the necessary financing to place the talc deposit into commercial production by April 17, 2002 and agreed that if the talc deposit was not in commercial production by then, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. As of September 30, 2003 EuroGas has accrued $175,000 in advance royalty due to Belmont because the talc deposit is not in commercial production.

Litigation – The principal portion of the Company’s active litigation involves matters relating to the Company’s acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland) and is described in Note 3.

Netherlands Tax Liability – EuroGas’ subsidiary, GlobeGas BV, lost its appeal for a reduction of a 1992 income tax liability in the Netherlands with a carrying amount of $929,680 at September 30, 2003. The tax arose from the sale of equipment at a profit by the former owner of GlobeGas to its Polish subsidiary. The liability is reflected in EuroGas’ financial statements; however, GlobeGas does not have the ability to pay the assessed obligation and as a result may face forced liquidation and dissolution by the Netherlands tax authority.

Employment commitments and contingencies – During April 1999, EuroGas entered into a three-year employment contract with a former chief executive officer. The contract provided for an annual salary of $400,000 plus living and other allowances of $28,200. In addition, options to purchase 1,000,000 common shares at $0.95 per share were granted in connection with the employment contract. The officer resigned in January 2001. The options vested on January 1, 2000, and were considered to have expired during 2002 due to the termination of the officer’s employment. EuroGas has accrued salary obligations to the officer in the amount of $230,000, plus certain expenses, which are included in accrued liabilities. EuroGas believes there may be offsets to this amount but has not reduced the accrued amount.

Former officers have made claims for compensation and for reimbursement of expenses against EuroGas, which amounts have been included as accrued liabilities.  

On February 5, 2002 EuroGas entered into an employment agreement with its new President. The three-year agreement provides for annual compensation of $400,000 to be paid in monthly installments. The agreement provides for all terms of the agreement to continue for the unexpired term of the agreement should the Company be involved in a winding-up or merger transaction. The agreement may be terminated if either party fails to meet its obligations under the terms of the agreement. In June 2002, the Company agreed to compensate its Chief Executive Officer and principal shareholder $25,000 per month.

Lease commitments – The Company leases office facilities from various lessors in Poland, Vienna, and Vancouver. Except for Vancouver, the office leases are on month-to-month agreements. EuroGas entered into a lease agreement for its Vancouver office space that required monthly payments of $6,851 through January 2003. Thereafter, the lease is on a month-to-month basis.

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