Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

March 11, 2008 09:00 ET

Defiant Resources Corporation Announces Its Year Ended December 31, 2007 Financial and Operating Results

CALGARY, ALBERTA--(Marketwire - March 11, 2008) - Defiant Resources Corporation (TSX:DFR) ("Defiant" or the "Company") is pleased to report its operational and financial results for the year ended December 31, 2007.

As previously announced on January 18, 2008, Defiant and Profound Energy Inc. ("Profound"), an oil and gas company listed on the Toronto Stock Exchange, entered into an agreement whereby Profound will acquire, by way of a Plan of Arrangement, all of the outstanding shares of Defiant. Under the terms of the agreement Profound will issue approximately 12.4 million common shares to shareholders of Defiant based on an exchange ratio of 0.55 of a Profound common share for each outstanding Defiant common share. The agreement requires the approval of Defiant's shareholders along with the customary regulatory, court and other approvals.

On February 20, 2008, the Company mailed the Information Circular and Proxy Statement, with respect to the Plan of Arrangement with Profound Energy Inc., to shareholders. The Special Meeting of shareholders is scheduled to be held on March 28, 2008. Copies of these documents are available within Defiant's SEDAR profile at www.SEDAR.com. The Special Committee of the Board of Directors and the Board of Directors have each concluded that the Plan of Arrangement is fair to Defiant Shareholders, that it is in the best interests of Defiant and the Defiant Shareholders and that it should be placed before the Defiant Shareholders for their approval. The Special Committee of the Board of Directors and the Board of Directors of Defiant unanimously recommended that Defiant Shareholders vote in favour of the Plan of Arrangement.



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FINANCIAL AND OPERATING HIGHLIGHTS

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FINANCIAL Year ended
December 31, December 31, %
$M unless otherwise indicated 2007 2006 Change
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Petroleum and natural gas sales 22,525 16,519 36
Funds from operations 10,312 8,012 29
Per share - basic ($) 0.48 0.42 14
Per share - diluted ($) 0.48 0.38 26
Net loss (577) (694) -17
Per share - basic and diluted($) (0.03) (0.04) -25
Capital expenditures 18,139 28,283 -36
Net debt including bank debt 19,501 13,215 48
Common shares outstanding (000s) 22,611 21,393 6

OPERATING HIGHLIGHTS
Average daily production
Natural gas (mcf/d) 4,811 3,996 20
Crude oil & NGLs (bbls/d) 365 243 50
Barrels of oil equivalent (boe/d) 1,166 908 28
Wells drilled
Gross 10 17 -41
Net 8.1 14.3 -43
Success (%) 100 39 156

Reserves mboe
Proved 2,461 1,481 66
Probable 2,167 1,690 28
Total 4,628 3,170 46
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HIGHLIGHTS

During the fourth quarter 2007 Defiant placed new discoveries at Karr and Clairmont on production which increased our average production for the quarter to 1,353 boe per day, representing an increase of 35% over the average production in the fourth quarter of 2006.

For fiscal 2007, Defiant's average daily production increased 28% to 1,166 boe per day over the prior year average of 908 boe per day. Production for the first quarter of 2008 is estimated to average 1,200 boe per day. This average daily rate is within Defiant's internal budget forecasts and reflects the fact that the Company has not spent significant capital since October 2007.

Funds from operations for the year totalled $10.3 million or $0.48 per diluted share, an increase of 26% from funds from operations of $0.38 per diluted share in the prior year. The increase is largely attributable to increases in production. The Company's sales price per boe was $52.91, an increase of 7% over the previous year.

Net loss for the year decreased slightly to $0.6 million or $0.03 per diluted share, a decrease of $0.01 from the net loss of $0.04 per diluted share in the prior year. This was due to increased production volumes and associated sales revenues.

Capital expenditures decreased by 36% to $18.1 million from $28.3 million in 2006. The Company drilled 8.1 net wells this year with a 100% success rate. The Company's capital expenditures were funded through a combination of funds from operations, bank debt and share equity. Year end net debt increased 48% to $19.5 million or 1.6 times fourth quarter 2007 annualized funds from operations. The Company has not drilled any new wells since October of 2007 as it has focused its efforts on completing the strategic review process.

During 2007, proved reserves, net of production, increased 95% while proved producing reserves increased 60% as Defiant was able to drill, equip and commission its new oil and gas discoveries at Karr, Clairmont and Grande Prairie East.

The Company's finding and development cost for 2007, including future development costs and revisions, was $15.78 per boe for proved reserves and $11.78 per boe for proved plus probable reserves. Using our field net back for 2007 of $29.93 per boe, Defiant's recycle ratio was 1.9 for total proved reserves additions and 2.5 for total proved plus probable reserves additions.
Defiant's reserve life index is 5.6 years proved and 10.6 years proved plus probable based on a current production rate of 1,200 boe per day.

Operations Update

During the fourth quarter the Company drilled 2 (1.6 net) gas wells in the Grande Prairie area. No additional wells or significant operations have been undertaken since October. The Company has focused on completing the strategic review process and the previously announced plan of arrangement with Profound Energy Inc. Plans are now underway to recomplete and stimulate a well at Grande Prairie. Drilling additional development locations at Karr, Clairmont and Grande Prairie East is expected to occur in the late spring and early summer.

Reserves

In 2007, Defiant added 1,458 mboe to its proved plus probable reserves, a net increase of 46% over 2006 reserves. Reserves additions comprised of significant Dunvegan oil and gas discoveries were largely in the greater Grande Prairie area at Karr, Clairmont and Grande Prairie East.

Summary of Oil and Natural Gas Reserves Company Interest before Royalty

In this press release "Company Interest before Royalty" is the working interest reserves before royalty burdens payable are deducted. The following table summarizes year end proved and probable reserves for the Company interest using forecast prices.



December 31 2007
Natural Gas
Reserve Category Natural Gas Light Oil Liquids Total
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Proved mmcf mbbl mbbl mboe

Developed producing 6,882 481 196 1,824
Developed non-producing 1,929 9 27 357
Undeveloped 778 103 47 280
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Total proved 9,589 593 270 2,461
Probable 8,857 428 263 2,167

Total proved plus probable 18,447 1,020 533 4,628
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Net Present Value of Reserves

The prices used in the reserve report were Sproule's Forecast Prices as at December 31, 2007. The estimated future net revenues are presented before deducting future estimated site restoration costs, and are reduced for estimated future abandonment costs and future capital costs associated with non-producing, undeveloped and probable additional reserves.

The Company's Statement of Reserves Data and Other Oil and Gas Information, as required under NI 51-101, includes presentation of oil and gas net interests reserves and future net revenue before and after income taxes using forecast prices and costs. It will be included in the Company's Annual Information Form which will be filed on SEDAR later this month.



Summary of Future Net Revenue before Income Taxes

December 31, 2007

Discounted at 0% 5% 10% 15%
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Proved $m $m $m $m

Developed producing 58,355 47,739 40,764 35,822
Developed non-producing 8,228 6,055 4,772 3,927
Undeveloped 8,219 6,381 5,072 4,103
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Total Proved 74,802 60,175 56,607 43,852
Probable 64,388 42,158 30,442 23,300
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Total Proved plus Probable 139,190 102,333 81,049 67,152
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In closing I would like to thank our employees and directors for their efforts in making 2007 a very successful year. The discoveries that were made at Karr, Clairmont and Grande Prairie East, together with our exciting high impact prospects in other areas, provide a solid base for continued growth. We believe our shareholders will benefit from the plan of arrangement with Profound through a larger, financially stronger company with a proven and dedicated management team that will use its drilling and operating expertise to exploit the combined companies' significant land base and seismically defined prospect inventory.

Respectfully,

Rick J. Ironside, President and Chief Executive Officer

About the Company

Defiant is a junior oil and gas, exploration and production company. We are geographically focused in two core areas where our management and technical team have considerable experience. The south east Peace River Arch and West Pembina areas have multiple targets that yield high gravity oil and liquid-rich, high heat value natural gas. Defiant typically operates, maintains a high working interest, utilizes best practices including 3D seismic and fracture stimulations and places wells on production within a few months of drilling. Risk is managed by maintaining a portfolio of low to medium risk opportunities augmented with higher risk, higher reward exploration.

Forward Looking Statements - Certain information regarding Defiant Resources Corporation set forth in this document, including management's assessment of Defiant Resources Corporation's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Defiant Resources Corporation's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Defiant Resources Corporation's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Defiant Resources Corporation will derive therefrom.

MANAGEMENT'S DISCUSSION and ANALYSIS

ADVISORIES

This Management's discussion and analysis ("MD&A"), prepared effective March 10, 2008 should be read in conjunction with the Defiant Resources Corporation ("Defiant" or the "Company") audited financial statements for the year ended December 31, 2007 and 2006.

Basis of Presentation - The financial data presented has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The reporting and measurement currency in the financial statements and in this discussion and analysis is the Canadian dollar, unless otherwise stated.

Non-GAAP Measure - Defiant evaluates performance based on net income, funds from operations and funds from operations per share. Funds from operations and funds from operations per share are not measurements defined by GAAP, but are financial terms commonly used in the oil and gas industry. Measurement of the Company's funds from operations is detailed on the Statement of Cash Flows and may not be comparable to other companies. Defiant calculates funds from operations as cash flow prior to changes in non-cash working capital and per share amounts using the same method and shares outstanding which are used in the determination of net earnings per share. The Company considers it a key measure as it demonstrates the ability of the Company to generate the funds necessary to finance future capital investments.

Field Netback - Defiant also uses field netback as a key performance indicator. Field netback does not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Field netback is determined by deducting royalties, operating and transportation expenses from petroleum and natural gas sales revenue.

Funds from operations and field netback are not intended to represent operating profits, nor should they be viewed as an alternative to other measures of financial performance calculated in accordance with GAAP.

Boe Conversion - Certain natural gas volumes have been converted to barrels of oil equivalent ("boe"), whereby six thousand cubic feet (mcf) of natural gas is equal to one barrel (bbl) of oil, unless otherwise stated. This conversion ratio is based on an energy equivalent conversion applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information - Certain information regarding Defiant set forth in this document, including management's assessment of the Company's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Defiant's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, the lack of, or availability of qualified technical personnel or management, stock market volatility and ability to access capital from internal and external sources. Defiant's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact it would have on Defiant.

Internal Controls

The Company has implemented a system of internal controls that it believes adequately protects the assets of the Company and is appropriate for the nature of its business and the size of its operations. These internal controls include disclosure controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of December 31, 2007, that our disclosure controls and procedures are effective to provide reasonable assurance that material information related to the Company is made known to them except as noted below. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that the system of internal controls are sufficient, they do not guarantee that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

The Chief Executive Officer and Chief Financial Officer of the Company are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. We have designed controls for this process and have conducted an evaluation which has identified certain weaknesses in our controls. Due to the limited number of staff at the Company, there is an inherent weakness in the system of internal controls due to our inability to achieve appropriate segregation of duties. The limited number of staff may also result in material weaknesses with respect to accounting for complex and non-routine accounting transactions as the Company does not have a sufficient number of finance personnel with technical accounting knowledge to address all complex and non-routine accounting matters that may arise. As a result of these weaknesses there is no guarantee that a material misstatement would be prevented or detected. These items have been classified as material weaknesses. Management and Board review are utilized to mitigate the risk of material misstatement; however, we do not have reasonable assurance that this risk can be reduced to a remote likelihood of a material misstatement. Defiant currently has no plans to remediate these weaknesses because the Company believes that an adequate control environment exists at this time.

Environmental Regulation and Risk

All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse gas emissions to specified levels. There has been much public debate with respect to Canada's ability to meet these targets and the Government's strategy or alternative strategies with respect to climate change and the control of greenhouse gases. Implementation of strategies for reducing greenhouse gases whether to meet the limits required by the Protocol or as otherwise determined could have a material impact on the nature of oil and natural gas operations, including those of the Company.

The Federal Government released on April 26, 2007, its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION and which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Regarding large industry and industry related projects the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate the companies' compliance of the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism.

On March 8, 2007, the Alberta Government introduced Bill 3, the Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions, offered by a prospective operation, must be verified by a third party to ensure that the emission reductions are real.

Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition.

Proposed Changes to Alberta Royalty Regime

On October 25, 2007, the Government of Alberta announced proposed changes to the royalties' payable on all Crown mineral rights owned by the province. If enacted on January 1, 2009, as released on October 25, 2007, factors determining the calculation of Crown royalties to be paid will include the rate of production per well, commodity prices and the depth drilled. Management estimates that the net present value of proven and probable reserves before tax, discounted at 10%, as at December 31, 2007, will decrease by $7.5 million or 9% as a result of the proposed royalty changes. Management believes the proposed royalty changes will have a more significant impact on the net present value of future wells.

Business Strategy

The business plan of the Company is to create shareholder value in the exploration for, and the development and production of, natural gas and crude oil in western Canada. Defiant pursues a growth strategy involving exploratory and development drilling augmented by strategic acquisitions on properties where exploitation, development and exploration opportunities exist. The Company's current areas of focus are in the West Central Alberta corridor trending from North West of Edmonton to the South East Peace River Arch.

Defiant's strategy involves acquiring properties, consolidating ownership by buying additional interests in its properties and developing its properties through well and facility optimization. Our management and technical team have expertise and experience in our focus areas. We believe this creates a competitive advantage for the Company.

On January 18, 2008, Defiant and Profound Energy Inc. ("Profound"), an oil and gas company listed on the Toronto Stock Exchange, entered into an agreement whereby Profound will acquire, by way of a plan of arrangement under the Business Corporations Act (Alberta), all of the outstanding shares of Defiant. Under the terms of the agreement Profound will issue approximately 12.4 million common shares to shareholders of Defiant based on an exchange ratio of 0.55 of a Profound common share for each outstanding Defiant common share. The agreement requires the approval of Defiant's shareholders along with the customary regulatory, court and other approvals.

The transaction is subject to certain conditions including the approval of a minimum of 66.7% of the votes cast by Defiant shareholders present in person or by proxy at the meeting. The meeting of Defiant shareholders with respect to the plan of arrangement will be held at Place 800, 2nd Floor, 800 - 6th Avenue SW, Calgary, Alberta, on Friday March 28, 2008 at 9 a.m. Calgary time.

The Information Circular outlining the proposed transaction was mailed to Defiant shareholders on February 21, 2008 and is available on the Company's profile at www.SEDAR.com.

2007 Overview

Highlights of our activity in 2007 include the drilling of 10 (8.1 net) wells with a success rate of 100%. The 2007 drilling program was more developmental in nature as we drilled 4 (2.2 net) wells at Grande Prairie East, 2 (2.0 net) wells at Karr, 2 (1.9 net) wells at Clairmont and 2 (2.0 net) wells at Gold Creek. The successful drilling program enabled the Company to increase its daily production 28%, from 908 boe per day in 2006 to 1,166 boe per day, in 2007. Defiant also increased its proven plus probable reserves by 46% to 4,628 mboe.

Outlook for 2008

Defiant expects to complete the plan of arrangement with Profound on March 31, 2008 and cease to be a reporting issuer early in April 2008. Follow on drilling at Karr, Clairmont and Grande Prairie East is budgeted for late spring or early summer.



OPERATIONS

Sales Volumes

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Year Ended December 31
2007 2006 Change
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Daily sales volumes
Natural gas mcf/d 4,811 3,996 20%
Light oil bbls/d 284 214 33%
Natural gas liquids bbls/d 81 29 178%
Total boe/d 1,166 908 28%
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Sales volumes for the year ended December 31, 2007 averaged 1,166 boe per day, an increase of 28% from 908 boe per day during 2006. Natural gas volumes increased to 4,811 mcf per day, a 20% increase from the 2006 volume of 3,996 mcf per day. This increase in gas production is primarily the result of new wells at Karr and Clairmont being brought on production in the fourth quarter of 2007. Light oil production increased 33% to 284 bbls per day in 2007, compared to 214 bbls per day in 2006. The increase in oil production came from the new oil wells at Grande Prairie East in the Dunvegan formation. Natural gas liquid volumes increased to 81 bbls per day in the year, compared to 29 bbls per day in the 2006 year, due to the increase in gas production and those gas wells having a high heat and liquids content.

For the three months ended December 31, 2007, natural gas production increased 31% to 5,706 mcf per day compared to 4,364 mcf per day in the corresponding period in 2006. Light oil production for the three months ended December 31, 2007 was 290 bbls per day, an increase of 22% over the 237 bbls per day in 2006. Natural gas liquids production of 112 bbls per day represents an increase of 166% over the 2006 production of 42 bbls per day.



Marketing and Revenue

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Year Ended December 31
Commodity pricing 2007 2006 Change
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Benchmark
Alberta Spot (Gas) $/mcf 6.44 6.54 -2%
West Texas Intermediate (Oil) US$/bbl 72.33 66.02 10%
Exchange rate US$ 0.93 0.88 6%
Edmonton Par (Oil) $/bbl 75.14 73.21 3%
Company Prices
Natural gas price $/mcf 7.18 6.94 3%
Oil price $/bbl 77.49 72.95 6%
Liquids price $/bbl 60.21 56.53 7%
Revenue
Natural gas $m 12,615 10,120 25%
Oil $m 8,028 5,691 41%
Liquids $m 1772 593 199%
Royalty income $m 110 115 -4%
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Total $m 22,525 16,519 36%
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Alberta spot gas prices are based on Natural Gas Exchange prices at the AECO Hub. During 2007, all of Defiant's natural gas production was sold on the spot market. Natural gas pricing tends to be volatile and is affected by supply and demand, storage levels, weather conditions and fuel switching to alternative sources of energy. Alberta spot natural gas prices decreased 2% in 2007 compared to 2006. West Texas Intermediate ("WTI") at Cushing, Oklahoma is the benchmark for North American light sweet oil prices and is the crude type against which the NYMEX futures contracts are priced. Alberta crude oil prices are based on refiners' postings at hubs such as Edmonton and Hardisty, Alberta. The Alberta postings generally vary with the WTI price. Alberta crude oil prices include adjustments for transportation differential, the US/Canadian exchange rate, and quality and regional market conditions. Defiant's crude oil is light and sweet, which receives pricing close to the Edmonton benchmark price. The Company's natural gas receives a higher than average price due to the higher heat content whereby we have more gigajoules per mcf.

The Company monitors the impact of commodity price exposure and may, from time to time, implement hedging measures to mitigate such price risk. The objective of this hedging strategy is to reduce the Company's risk exposure to changes in cash flow resulting from changes in commodity prices, thereby ensuring our ability to complete the planned capital program. The Company may utilize derivative instruments from time to time such as swaps, puts or collars to implement this hedging strategy. In February 2007, the Company hedged 1,000 gigajoules per day of gas production for the April 2007 through October 2007 period via a "three way costless collar". The collar was priced with floors of $5.40 and $7.25 per gigajoule and a ceiling of $9.00 per gigajoule. The contract was settled on August 31, 2007 and the sales revenue for the year ended December 31, 2007 includes the $219,243 realized gain on this contract which increased our gas price for the year by $0.12 per mcf.

The oil and gas revenues for the year ended December 31, 2007 were $22.5 million, an increase of 36% over the $16.5 million for the corresponding period in 2006. The Increase in revenue is largely a result of higher sales volumes which increased 28% as compared to the Company's sales price per boe which increased 7%.

Sales revenues for the three months ended December 31, 2007 increased 34% to $6.35 million from $4.7 million in 2006 as a result of the increase in production volumes. The higher gas volumes are attributable to the new wells at Karr and Clairmont which were placed on production in mid October while the increase in oil sales is a result of the new wells at Grande Prairie East which were placed on production through out 2007.



Royalties

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Year Ended December 31
2007 2006 Change
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Royalties, net of ARTC $m 4,087 2,940 39%
Royalties per boe $ 9.60 8.87 8%
Royalty rate 18% 18% 0%
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Defiant's producing wells are subject to Crown, freehold and gross overriding royalties which are payable to the owners of the mineral rights. Royalty rates can vary based on a number of factors including reference pricing, royalty holidays and production rates. Crown royalty holidays are available to certain oil and gas production from new pool discoveries. In 2006 the Company was still receiving ARTC payments from the Alberta Government; this program was eliminated effective January 1, 2007. The elimination of the ARTC has been offset by a large increase in the gas cost allowance received from the Crown which reduces Crown royalties. The gas cost allowance increased because of our infrastructure spending in 2006 to tie in gas wells.

Royalties for 2007 totalled $4.1 million ($9.60 per boe) compared to $2.9 million ($8.87 per boe) for 2006. The royalty rate during the year was 18% of sales the same rate as 2006. On royalty per boe basis, the 8% increase to $9.60 per boe in 2007 from $8.87 per boe in 2006, is because of a corresponding increase in our commodity prices.

For the three months ended December 31, changes in royalties per boe were consistent with our annual results as they increased 7% from $7.19 per boe in 2006 to $7.68 in 2007 while royalties as a percentage of revenue increased slightly from 14% in 2006 to 15% in 2007.



Operating expenses

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Year Ended December 31
2007 2006 Change
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Operating expenses $m 5,292 3,523 50%
per boe $ 12.43 10.63 17%
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Operating expenses were $5.3 million, or $12.43 per boe, for the year ended December 31, 2007, compared to $3.5 million, or $10.69 per boe, during the year ended December 31, 2006. The increased costs per boe are attributable to a wet spring in the Grande Prairie area leading to higher than expected lease and road maintenance charges, a workover on our Majeau gas well and lower production volumes. The workover and maintenance charges amounted to approximately $2.24 per boe.

The operating expenses for the three months ended December 31, 2007 increased 80% to $1.7 million ($13.91 per boe) from $0.9 million ($10.34 per boe) during the corresponding period in 2006. The increase is due to higher production and a third party, thirteenth month, processing fee adjustment related to the year ended December 31, 2006, which was billed in late 2007.



Transportation expenses

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Year Ended December 31
2007 2006 Change
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Transportation expenses $m 405 324 25%
per boe $ 0.95 0.98 -3%
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Transportation expenses increased for the year ended December 31, 2007 due to increased gas production. On a per boe basis the costs remained virtually unchanged between 2007 and 2006.



Field Netback

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Year Ended December 31
$ per boe 2007 2006 Change
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Sales price 52.91 49.47 7%
Less: Royalties, net of ARTC 9.60 8.87 8%
Operating and transportation expenses 13.38 11.61 15%
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Field netback 29.93 28.99 3%
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Defiant's field netback per boe for the year ended December 31, 2007 increased 3% to $29.93 from $28.99 per boe for the year ended December 31 2006. The increase in sales price was offset by an increase in the operating expenses and slightly higher royalties in 2007.

For the three months ended December 31, the field netback decreased 4% from $29.35 in 2006 to $28.08 in 2007 due to higher operating expenses in the quarter.



General and Administrative ("G&A") Expense and Stock Based Compensation
("SBC")

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Year Ended December 31
2007 2006 Change
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Gross G&A $m 3,158 2,895 9%
Capitalization & recoveries $m (1,678) (1,569) 7%
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Net G&A expense $m 1,480 1,326 12%
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Gross SBC $m 764 946 -19%
Capitalization $m (343) (260) 32%
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Net SBC expense $m 421 686 -39%
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Per boe:
Gross G&A $ 7.42 8.74 -15%
Capitalization & recoveries $ (3.94) (4.73) -17%
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Net G&A expense $ 3.48 4.01 -13%
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Gross SBC $ 1.79 2.85 -37%
Capitalization $ (0.80) (0.78) 3%
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Net SBC expense $ 0.99 2.07 -52%
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For the year ended December 31, 2007, G&A expenses per boe, after capitalization and recoveries, decreased 13% to $3.48 per boe compared to $4.01 in 2006 as a result of the increased production in 2007. Gross G&A expenses were up due to costs of approximately $0.4 million associated with the strategic review process announced in June, 2007.

For the three months ended December 31, 2007 the net G&A of $0.5 million was a 326% increase from the $0.1 million in 2006, due to the costs discussed above associated with the strategic review process. On a per boe basis the $4.28 per boe represents a 35% increase from the $3.17 per boe during the same period of 2006 as the increase in G&A was offset by higher sales volumes.

Interest Expense

Interest expense for the year ended December 31, 2007 was $0.8 million compared to $0.4 million for 2006. The increase in interest expense is due to an increase in bank debt as a result of capital spending during the year being greater than funds from operations.

For the three months ended December 31, interest expense increased 88% from $0.2 million in 2006 to $0.3 million consistent with the increase in bank debt through out 2007.



Depletion, Depreciation and Accretion

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Year Ended December 31
2007 2006 Change
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Depletion, depreciation and accretion $m 11,643 8,733 33%
per boe $ 27.35 26.35 4%
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For the year ended December 31, 2007, depletion, depreciation and accretion increased 33% to $11.6 million ($27.35 per boe) from $8.7 million ($26.35 per boe) for the same period in 2006. The increase in the provision is the result of increased production volumes and a slightly higher depletion rate.

For the three months ended December 31, 2007, depletion, depreciation and accretion increased 3% to $3.1 million ($24.74 per boe) from $3.0 million ($32.54 per boe) for the same period in 2006. The increase in the provision is the result of increased production volumes. The 24% decrease in the rate per boe was a result of the significant increase in the Company's proven reserves.

Income Taxes

Future income tax for the year ended December 31, 2007 was a reduction of $1.1 million versus a reduction of $0.7 for 2006 due to lower corporate tax rates in 2007.

For the three months ended December 31, the future tax reduction was $0.7 million compared to $0.6 million in 2006.

At December 31, 2007, the Company had tax pools of $54.8 million compared to $60.3 million at December 31, 2006. During the first quarter of 2007, Defiant renounced $13.5 million of its tax deductions as a result of the flow through shares issued in 2006.



Year Ended December 31
$m 2007 2006
----------------------------------------------------------------------------

Canadian exploration expense 16,864 26,802

Canadian development expense 9,483 6,256

Canadian oil and gas property expense 15,363 16,290

Undepreciated capital cost 11,603 9,244

Other 1,496 1,736
----------------------------------------------------------------------------

Total 54,809 60,328
----------------------------------------------------------------------------


Funds from Operations and Loss

----------------------------------------------------------------------------
Year Ended December 31
2007 2006 Change
----------------------------------------------------------------------------
Funds from operations $m 10,312 8,012 29%
Basic per share $ 0.48 0.42 14%
Diluted per share $ 0.48 0.38 26%
Net loss $m (577) (694) 17%
Basic per share $ (0.03) (0.04) -25%
Diluted per share $ (0.03) (0.04) -25%
Weighted average shares outstanding
Basic m 21,462 19,302 11%
Diluted m 21,462 20,951 2%
----------------------------------------------------------------------------


For the year ended December 31, 2007, net loss decreased 17% to $0.6 million from $0.7 million in 2006.

For the three months ended December 31, 2007 we had net income of $0.3 million compared to nil in same period in 2006.

For the year ended December 31, 2007, funds from operations increased 29% to $10.3 million from $8.03 million in 2006. The increase in funds flow for the year was due to increased sales volumes and slightly higher commodity prices.
For the three months ended December 31, 2007, funds from operations was $2.7 million which was unchanged from the $2.7 million in 2006. During the quarter funds from operations were impacted by higher natural gas production, which was offset by a decrease in natural gas prices and higher general and administrative costs in 2007.



Capital Expenditures

----------------------------------------------------------------------------
Year Ended December 31
$m 2007 2006 Change
----------------------------------------------------------------------------
Land and lease retentions 918 4,538 -80%
Seismic 409 3,039 -87%
Drilling and completions 12,226 14,696 -17%
Facilities, pipelines, and equipment 3,380 4,740 -29%
Capitalized G&A expenses 1,206 1,270 -5%
----------------------------------------------------------------------------
Total 18,139 28,283 -36%
----------------------------------------------------------------------------


Capital expenditures were down 36% to $18.1 million for the year ended December 31, 2007, compared to $28.3 million in 2006. The decrease was the result of the Company drilling 8.1 net wells versus 14.3 net wells in 2006, together with significantly lower expenditures on land, as the Company focused its activities on its existing land base.

For the three months ended December 31, 2007, capital expenditures were down 52% to $3.7 million in 2007 as compared to $7.7 million in 2006. The decrease in capital expenditures was largely a result of the Company drilling fewer wells in 2007 as compared to 2006.



Drilling Activity

For the year ended December 31, 2007, Defiant drilled 10 (8.1 net) wells for
a net success rate of 100%.

----------------------------------------------------------------------------
Gross Wells Net Wells
Gas Oil D&A Total Gas Oil D&A Total
----------------------------------------------------------------------------

Peace River Arch 7.0 3.0 - 10.0 6.6 1.5 - 8.1
West Pembina - - - - - - - -
----------------------------------------------------------------------------

Total 7.0 3.0 - 10.0 6.6 1.5 - 8.1
----------------------------------------------------------------------------

Exploratory wells 4.0 - - 4.0 4.0 - - 4.0

Development wells 3.0 3.0 - 6.0 2.6 1.5 - 4.1
----------------------------------------------------------------------------

Total 7.0 3.0 - 10.0 6.6 1.5 - 8.1
----------------------------------------------------------------------------


For the three months ended December 31, 2007 the Company drilled 2 (1.8 net) wells as compared to 6 (4.8 net) wells in 2006.

Liquidity and Capital Resources

Oil and gas exploration and development is a capital intensive business. Periodic infusions of additional capital may be required to accelerate or sustain the rate of the Company's growth. Defiant chooses to finance its ongoing capital expenditure program through a combination of reinvesting funds from operations, bank borrowing and additional equity. The Company's current bank facility and funds from operations are capable of funding future operations and capital expenditures.

The Company had drawn $17.3 million against its $20 million credit facility at December 31, 2007. The Company's credit facility, renewable annually, is with a Canadian chartered bank in the form of a revolving loan and bears interest at the bank's prime lending rate. The loan is secured by all of the Company's assets. Principal repayments are required only if the borrowing base is exceeded. The Company also had a working capital deficiency of $2.2 million (excluding bank debt) as at December 31, 2007.

As at December 31, 2007, there were 22,611,986 common shares and 1,454,500 stock options, with an average exercise price of $3.40 per share, outstanding. On March 10, 2008 there remained 22,611,986 common shares and 1,454,500 stock options outstanding.

Contractual Obligations

Defiant has various contractual obligations and commitments arising in the normal course of operations and financing activities. These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet financial arrangements.



Selected Quarterly Information

----------------------------------------------------------------------------
2007 2006
Unit Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

----------------------------------------------------------------------------
Financial

Petroleum
and natural
gas sales $m 6,268 4,539 6,200 5,408 4,669 5,102 3,226 3,377

Funds from
operations $m 2,667 1,822 3,271 2,552 2,665 2,290 1,492 1,528

Per share
- basic $ 0.12 0.09 0.15 0.12 0.13 0.12 0.08 0.09
Per share
- diluted $ 0.12 0.08 0.15 0.12 0.11 0.11 0.08 0.08

Net
earnings
(loss) $m 274 (199) (197) (455) (5) (522) (88) (79)

Per share
- basic $ 0.01 (0.01) (0.01) (0.02) - (0.04) - -

Per share
- diluted $ 0.01 (0.01) (0.01) (0.02) - (0.04) - -

Capital
expenditures $m 3,741 6,534 1,346 6,518 7,860 5,632 7,543 7,248

Bank debt
and working
capital
deficiency
(surplus) $m 19,501 19,956 15,244 17,169 13,215 10,967 7,592 11,335

Operations
Production

Natural
gas mcf/d 5,706 3,931 4,737 4,871 4,364 5,464 3,018 3,109

Light oil bbls/d 290 265 321 259 237 249 185 183

Natural gas
liquids bbls/d 112 69 94 47 42 35 20 18
Total
sales boe/d 1,353 989 1,205 1,118 1,006 1,195 708 719

Average price

Natural
gas $/mcf 6.07 6.15 8.33 8.23 7.69 6.07 6.52 7.81
Light oil $/bbl 90.43 79.42 72.28 67.25 65.14 80.58 78.41 67.10

Natural gas
liquids $/bbl 65.46 59.51 57.86 53.16 49.55 62.01 64.66 53.20

Boe $/boe 50.35 50.00 57.01 53.68 50.77 46.41 50.10 52.19

Field
Netback $/boe 28.08 26.46 34.36 30.17 29.35 25.59 30.79 30.20

Weighted average
shares outstanding
Basic m 21,462 21,412 21,412 21,412 20,632 20,515 18,032 17,986
Diluted m 21,462 21,979 22,133 21,913 23,050 22,145 19,711 19,813


Change in Accounting Policies

Financial Instruments

Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855 "Financial Instruments - Recognition and Measurement," section 1530 "Comprehensive Income," section 3865 "Hedges" and section 3861 "Financial Instruments - Disclosure and Presentation". The standards deal with the recognition and measurement of financial instruments and comprehensive income. These standards have been adopted prospectively. Adoption of these standards did not impact January 1, 2007 opening balances. See Note 2 to the consolidated financial statements.

Future Accounting Changes

On December 1, 2006, the CICA issued three new accounting standards: Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation. These new standards will be effective on January 1, 2008. Section 1535 specifies the disclosure of an entity's objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with any capital requirements, and if it has not complied, the consequences of such non-compliance. This section is expected to have minimal impact on the Company's financial statements. Sections 3862 and 3863 specify a revised and enhanced disclosure on financial instruments. These sections will require the Company to increase disclosure on the nature and extent of risks arising from financial instruments and how the entity manages those risks.

Critical Accounting Estimates

The preparation of the Company's financial statements requires management to adopt accounting policies that involve the use of significant estimates and assumptions. These estimates and assumptions are developed based on the best available information and are believed by management to be reasonable under the existing circumstances. New events or additional information may result in the revision of these estimates over time.

Revenues, Royalties and Operating Costs

The Company estimates revenues, royalties and operating costs on production as at specific reporting dates for which actual revenues and costs have not been received.

Capital Expenditures

The Company estimates capital expenditures incurred on projects that are in progress.

Ceiling Test

The carrying amount of property, plant and equipment is reviewed quarterly for impairment. Impairment occurs when the carrying value of the assets is not recoverable by the future undiscounted cash flows. The ceiling test calculation is based on estimates of proved and probable reserves, production rates, oil and natural gas prices, royalty rates, future costs and other relevant assumptions. The Company's December 31, 2007 ceiling test was prepared using cash flows that incorporated the Alberta government's New Royalty Framework as interpreted by management and the Company's reserve evaluators. Changes to the New Royalty Framework could significantly impact future cash flows. By their nature, these estimates are subject to measurement uncertainty and the effects of changes in such estimates in future periods on financial statements could be significant. Any impairment would be charged to earnings.

Depletion, Depreciation and Accretion

The Company follows CICA accounting guideline AcG-16 on full cost accounting in the oil and natural gas industry to account for oil and natural gas properties. Under this method, all costs associated with the acquisition of, exploration for and the development of crude oil and natural gas reserves are capitalized and costs associated with production are expensed. The capitalized costs are depleted using the unit-of production method based on estimated proved reserves using management's best estimate of future prices. Reserves estimates can have a significant impact on earnings, as they are a key component in the calculation of depletion.

Asset Impairment

Producing properties and unproved properties are assessed for impairment annually, or as economic events dictate. The cash flows used in the impairment assessment require management to make estimates and assumptions as to recoverable reserves, future commodity prices and operating costs. Changes in any of the estimates or assumptions could result in an impairment of the carrying value of producing properties and unproved properties.

Asset Retirement Obligations

Asset retirement obligations require that management make estimates and assumptions regarding future liabilities and cash flows involving environmental reclamation and remediation. Estimates of future liabilities and cash flows are subject to uncertainty associated with the method of reclamation and remediation, environmental legislation, the timing of reclamation and remediation activities and the cost of reclamation and remediation activities.

Accounting for Stock Options

The Company recognizes compensation expense on options granted pursuant to its stock option plan.

Compensation expense is based on the theoretical fair value of each option at its grant date, the estimation of which requires management to make assumptions about the future volatility of the Company's stock price, future interest rates and the timing of optionee's decisions to exercise the options. The effects of a change in one or more of these variables could result in a materially different fair value.

Future Income Taxes

The Company records future income tax liabilities and future income tax assets based on the differences between the carrying amount of assets and liabilities in the consolidated balance sheet and their tax basis using income tax rates substantively enacted at the balance sheet date. As substantively enacted tax rates decline between 2008 and 2012, the determination of the income tax rate to apply to temporary differences requires management to forecast the reversal of temporary differences over the five year period.

Additional Information

Additional information regarding Defiant Resources Corporation, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com or on the Company's website at www.defiantresources.com.

MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL STATEMENTS

The accompanying financial statements are the responsibility of the Management of Defiant Resources Corporation. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain estimates that reflect Management's judgment.

Management has overall responsibility for the reliability and integrity of the financial statements, notes to the financial statements and other financial information contained in this report. Estimates are sometimes necessary in the preparation of these statements because a precise determination of some assets and liabilities depends on future events. Management has based these estimates on careful judgments and believes they are properly reflected in the accompanying financial statements. Management is also responsible for maintaining a system of internal controls designed to provide reasonable assurance that assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information.

The Board of Directors of Defiant is responsible for ensuring that Management fulfills its responsibilities for financial reporting and internal controls through its Audit Committee which is comprised of independent Directors and meets at least every quarter. The Board also meets with Management to ensure that Management's responsibilities are fulfilled, to review the financial statements and to recommend approval of the financial statements. The Board of Directors has approved the financial statements. An independent auditor, KPMG LLP, has audited the financial statements of Defiant in accordance with Canadian generally accepted auditing standards and has provided an independent opinion.

"Signed"

Rick J. Ironside

President & Chief Executive Officer

"Signed"

Robert H. Solinger

Vice President, Finance & Chief Financial Officer

March 10, 2008

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the balance sheets of Defiant Resources Corporation as at December 31, 2007 and 2006 and the statements of operations and retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.



KPMG LLP
Chartered Accountants

Calgary, Canada

March 10, 2008


Balance Sheets

----------------------------------------------------------------------------
December 31 December 31
2007 2006
----------------------------------------------------------------------------

Assets

Current assets
Accounts receivable $ 4,140,219 $ 4,370,596
Prepaid expenses and deposits 737,779 214,870
----------------------------------------------------------------------------
4,877,998 4,585,466

Property, plant and equipment (note 4) 72,746,887 65,461,096

----------------------------------------------------------------------------
$ 77,624,885 $ 70,046,562
----------------------------------------------------------------------------

Liabilities and Shareholders'
Equity

Current liabilities
Accounts payable and accrued
liabilities $ 7,085,115 $ 9,968,949
Bank debt (note 5) 17,293,446 7,831,653
----------------------------------------------------------------------------
24,378,561 17,800,602

Asset retirement obligations (note 6) 1,350,480 1,166,934

Future income taxes (note 7) 4,214,294 1,208,682

Shareholders' equity
Share capital (note 8b) 45,368,654 47,159,122
Warrants (note 8c) - 1,291,690
Contributed surplus (note 9) 2,527,478 1,057,000
Retained earnings (deficit) (214,582) 362,532
----------------------------------------------------------------------------
47,681,550 49,870,344
Commitments (note 12)
Subsequent event (note 13)
----------------------------------------------------------------------------
$ 77,624,885 $ 70,046,562
----------------------------------------------------------------------------

See accompanying notes to financial statements.

On behalf of the Board:

-----------------------Director

-----------------------Director


Statements of Operations and Retained Earnings (Deficit)

----------------------------------------------------------------------------
Year Ended December 31
2007 2006
----------------------------------------------------------------------------

Revenue
Petroleum and natural gas sales $ 22,415,492 $ 16,403,688
Royalties, net of Alberta royalty
tax credit (4,086,615) (2,939,820)
Royalty income 109,775 115,460
Interest income 8,901 27,318
----------------------------------------------------------------------------
18,447,553 13,606,646

Expenses
Operating 5,292,252 3,523,271
Transportation 405,410 323,693
General and administrative 1,479,981 1,326,195
Stock based compensation 421,000 686,000
Interest 834,659 369,805
Depletion, depreciation and
accretion 11,642,933 8,733,133
----------------------------------------------------------------------------
20,076,235 14,962,097

Loss before taxes (1,628,682) (1,355,451)

Future income tax reduction (note 7) (1,051,568) (661,716)
----------------------------------------------------------------------------

Net loss for the year (577,114) (693,735)
Retained earnings, beginning of year 362,532 1,056,267
----------------------------------------------------------------------------
Retained earnings (deficit), end of
year $ (214,582) $ 362,532
----------------------------------------------------------------------------

Loss per share (note 8)
Basic and diluted ($0.03) ($0.04)
----------------------------------------------------------------------------

See accompanying notes to financial statements.


Statements of Cash Flows

----------------------------------------------------------------------------

Year Ended December 31
2007 2006
----------------------------------------------------------------------------

Cash provided by (used in)

Operating activities
Net loss for the year $ (577,114) $ (693,735)
Items not affecting cash
Depletion, depreciation and
accretion 11,642,933 8,733,133
Stock-based compensation 421,000 686,000
Future income tax reduction (1,051,568) (661,716)
Asset retirement obligations paid (122,950) (52,164)
----------------------------------------------------------------------------
Funds from operations 10,312,301 8,011,518
Changes in non-cash working
capital (note 11) (3,446,042) 4,944,847
----------------------------------------------------------------------------
6,866,259 12,956,365
----------------------------------------------------------------------------

Financing activities
Issuance of common shares 1,553,995 13,580,661
Share issue costs (12,592) (847,139)
Increase in bank debt 9,461,793 7,831,653
----------------------------------------------------------------------------
11,003,196 20,565,175
----------------------------------------------------------------------------

Investing activities
Additions to property, plant and
equipment (18,139,131) (28,283,418)
Changes in non-cash working
capital (note 11) 269,676 (9,015,987)
----------------------------------------------------------------------------
(17,869,455) (37,299,405)
----------------------------------------------------------------------------

Decrease in cash - (3,777,865)
Cash, beginning of year - 3,777,865
----------------------------------------------------------------------------
Cash, end of year $ - $ -
----------------------------------------------------------------------------

Supplemental Information
----------------------------------------------------------------------------
Cash interest paid $ 913,778 $ 369,805
----------------------------------------------------------------------------

See accompanying notes to financial statements.


Notes to Financial Statements

For the years ended December 31, 2007 and December 31, 2006

----------------------------------------------------------------------------

1. Description of Business

Defiant Resources Corporation ("Defiant" or the "Company") is a junior oil and gas exploration and production company based in Calgary, Alberta. All of the Company's operations are located in Western Canada. The financial statements of Defiant have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP").

2. Significant Accounting Policies and Basis of Presentation

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The amounts recorded for depletion and depreciation of property and equipment and the provision for asset retirement obligations and the ceiling test are based on estimates of gross proved reserves, production rates, oil and gas prices, royalties, future costs and other relevant assumptions. These estimates are reviewed regularly and changes in such estimates in future years could be significant. As adjustments become necessary, they are reported in earnings in the periods in which they become known.

Full cost accounting and ceiling test

The Company follows the full cost method of accounting whereby all costs associated with the exploration for and development of petroleum and natural gas reserves are capitalized in a single Canadian cost centre. Such costs include land acquisition, geological and geophysical, general and administrative overhead directly related to exploration and development activities, lease rentals on non-producing properties, both productive and unproductive drilling and production equipment and facilities.

Gains or losses are not recognized upon disposition of petroleum and natural gas properties unless such dispositions would change the rate of depletion by more than 20%.

An impairment loss is recognized when the carrying amount of the oil and gas assets exceeds its fair value. The carrying amount is assessed to be recoverable if the sum of the undiscounted future cash flows expected from proved reserves plus the cost of unproved property interests, net of impairments, exceeds the carrying amount of the cost centre. If the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted future cash flows expected from the production of proved and probable reserves plus the cost of unproved property interests. The cash flows are estimated using forecast prices and costs and are discounted using a risk-free interest rate.

Depletion and depreciation

The accumulated costs are depleted and depreciated using the unit of production method based on total proved reserves before royalties as determined by independent reserve engineers. Natural gas reserves and production are converted into equivalent barrels of oil ("boe") using a boe conversion ratio of 6 mcf of natural gas equal to 1 bbl of oil. The depletable cost base includes capitalized costs plus estimated future development costs less estimated future salvage values, net of impairments, of unproved properties.

The costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion until it is determined whether or not proved reserves are attributable to the properties. These properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of impairment is added to the costs subject to depletion.

Joint interest activities

A portion of the exploration, development and production activities is conducted jointly with others. These financial statements reflect only the Company's proportionate interest in such activities.

Asset Retirement Obligation

The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of long-lived tangible assets that result from the acquisition, construction and development of the assets. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depleted and depreciated using a unit of production method over estimated gross proved reserves. Subsequent to the initial measurement of the asset retirement obligation, the obligations are adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. Actual costs incurred upon settlement of the obligation are charged against the obligation to the extent of the liability recorded and any recovering difference is recognized as a gain or loss to earnings in the period in which the settlement occurs.

Income taxes

The Company provides for income taxes using the asset and liability method. Under this method income taxes are recognized for the estimated income taxes payable for the current year and future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are likely to be realized. Future income tax liabilities and assets are measured using tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net future income tax assets and liabilities is included in operations in the year it occurs.

Stock based compensation

The Company follows the fair value method of accounting for the stock-based compensation plan described in note 8. The fair value is measured at the grant date and charged to earnings over the vesting period with a corresponding increase in contributed surplus. Consideration paid on exercise of options is credited to share capital.

Revenue recognition

Revenues associated with the sales of crude oil, natural gas liquids and natural gas are recorded when title passes to the customer. Revenues from crude oil and natural gas production from properties in which the Company has an interest with other producers are recognized on the basis of the Company's net working interest.

Flow-through common shares

The Company finances a portion of its petroleum and natural gas exploration activities with flow-through common share issues. The exploration and development expenditures funded by flow-through common share expenditures are renounced to investors in accordance with tax legislation. Shareholders' equity is reduced and future income taxes are increased by an estimate of the future tax cost of the renounced expenditures. The tax effect is recorded at the date of the renouncement.

Per share amounts

Basic per share amounts are computed by dividing the net earnings by the weighted average number of common shares outstanding during the period. Diluted per share amounts are calculated giving effect to the potential dilution that would occur if stock options were exercised and the warrants were converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options. The treasury stock method assumes that proceeds received from the exercise of options for which exercise price is less than market price are used to repurchase common shares at the prevailing market rate.

Financial instruments

The Company may use from time to time, financial derivative instruments to hedge its exposure to the fluctuations in oil and natural gas prices. The Company does not enter into derivative financial instruments for trading or speculative purposes. For those transactions accounted for using hedge accounting, gains and losses arising from these instruments are reported as adjustments to the oil and natural gas sales over the term of the financial instrument. Premiums paid or received are deferred and amortized to earnings over the term of the contract. There are specific conditions necessary for a transaction to qualify for hedge accounting, the formal documentation required to enable the use of hedge accounting and the requirements to assess the effectiveness of the hedging relationship. Financial instruments that are not designated as hedges are recorded at fair value on the balance sheet with changes in the fair value recognized in earnings.

Change in Accounting Policies

Effective January 1, 2007 the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"); "Financial Instruments - Recognition and Measurement", "Comprehensive Income", "Hedges" and "Financial Instruments - Disclosure and Presentation". These new standards have been adopted prospectively. Adoption of these standards did not impact January 1, 2007 opening balances.

i) Financial instruments

All financial instruments must be initially recognized at fair value on the balance sheet date. The Company has classified each financial instrument into the following categories: held for trading financial assets and liabilities, loans or receivables, held to maturity investments, available for sale financial assets, and other financial liabilities. Subsequent measurement of the financial instruments is based on their classification. Unrealized gains and losses on held for trading financial instruments are recognized in earnings. Gains and losses on available for sale financial assets are recognized in other comprehensive income and transferred to earnings when the asset is derecognized. The other categories of financial instruments are recognized at amortized costs using the effective interest rate method.

Upon adoption and with any new financial instrument, an irrevocable election is available that allows entities to classify any financial asset or financial liability as held for trading, even if the financial instrument does not meet the criteria to designate it as held for trading. The Company has not elected to classify any financial assets or financial liabilities as held for trading unless they meet the held for trading criteria. A held for trading financial instrument is not a loan or receivable and includes one of the following criteria:

- it is a derivative, except for those derivatives that have been designated as effective hedging instruments;

- it has been acquired or incurred principally for the purpose of selling or repurchasing in the near future; or

- it is part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Upon adoption of these new standards, the Company designated its accounts receivable as loans and receivables, which are measured at amortized cost. Bank debt, accounts payable and accrued liabilities are classified as other financial liabilities which are also measured at amortized cost. The Company had no available for sale assets or held for trading instruments.

ii) Derivative instruments and hedging activities

The hedging standard establishes criteria for how hedges are accounted for. Hedging is an activity used by a company to change an exposure to one or more risks by creating an offset between changes in the fair value of a hedged item and a hedging item, changes in the cash flows attributable to a hedged item and a hedging item, or changes resulting from a risk exposure relating to a hedged item and a hedging item. Hedge accounting ensures that all gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the income statement in the same period.

iii) Comprehensive Income

Comprehensive income consists of net earnings and other comprehensive income ("OCI"). OCI comprises the change in the fair value of the effective portion of the derivatives used as hedging items in a cash flow hedge and the change in fair value of any available for sale financial instruments. Amounts included in the OCI are shown net of tax. Accumulated other comprehensive income is a new equity category comprised of the cumulative amounts of OCI.

The Company had no "other comprehensive income" transactions during 2007 and no opening or closing balances for accumulated other comprehensive income.

Pending Accounting Pronouncements

i) Financial instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AsSB") issued new standards relating to "Financial Instruments - Disclosures" and "Financial Instruments - Presentation", which replaces the current standard "Financial Instruments - Disclosure and Presentation". The new standard outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, it requires disclosure of the significance of financial instruments for a company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

The presentation requirements are relatively unchanged and are effective for the Company on January 1, 2008. The Company is currently determining the impact of these additional disclosure requirements.

ii) Capital Disclosures

New standards were issued for Capital Disclosures requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what the company manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the company's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how the company is meeting its objectives for managing capital. In addition, quantitative data about capital and whether the company has complied with all capital requirements are also required. The standard is effective for the Company on January 1, 2008. The Company is currently determining the impact of these additional disclosure requirements.



4. Property, plant and equipment

----------------------------------------------------------------------------
Accumulated
Property Plant and depletion and
Equipment depreciation Net Book Value
----------------------------------------------------------------------------

Balance, December 31, 2005 $47,508,607 $2,287,838 $45,220,769
Additions 28,875,730 8,635,403 20,240,327
----------------------------------------------------------------------------
Balance, December 31, 2006 76,384,337 10,923,241 65,461,096
Additions 18,802,356 11,516,565 7,285,791
----------------------------------------------------------------------------
Balance, December 31, 2007 $95,186,693 $22,439,806 $72,746,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the year ended December 31, 2007, the Company capitalized a total of $1.5 million (December 31, 2006 - $1.5 million) of general and administrative expenses including $0.3 million (December 31, 2006 - $0.3 million) of stock based compensation relating to exploration and development activities.

In calculating the depletion and depreciation provision for the year ended December 31, 2007, $16.6 million (2006 - $18.8 million) of costs relating to the undeveloped land, seismic and other costs were excluded from costs subject to depletion and depreciation. Estimated future development costs of $3.7 million (2006 - $1.1million) were included in the calculation of depletion and depreciation for the year ended December 31, 2007.

The following table summarizes the benchmark prices used in the ceiling test calculation for the impairment test.



Oil Edmonton Cromer
WTI Par Price Medium Natural Gas
Cushing 40 degrees 29.3 degrees AECO Gas
Oklahoma API API Prices
Year ($US/bbl) ($Cdn/bbl) ($Cdn/bbl) ($Cdn/MMBtu)
----------------------------------------------------------------------------
Forecast
2008 89.61 88.17 75.83 6.51
2009 86.01 84.54 72.71 7.22
2010 84.65 83.16 71.52 7.69
2011 82.77 81.26 69.89 7.70
2012 82.26 80.73 69.43 7.61
Thereafter Various Escalation Rates



Pentanes
Plus Butanes
F.O.B. F.O.B. Inflation Exchange
Field Gate Field Gate Rate Rate
Year ($Cdn/bbl) ($Cdn/bbl) (%/Yr) ($US/$Cdn)
----------------------------------------------------------------------------
Forecast
2008 90.30 65.72 2.0 1.00
2009 86.58 63.01 2.0 1.00
2010 85.17 61.98 2.0 1.00
2011 83.23 60.57 2.0 1.00
2012 82.68 60.17 2.0 1.00
Thereafter Various Escalation Rates


5. Bank Debt

At December 31, 2007 the Company had a $20 million revolving demand credit facility with a Canadian chartered bank, of which $17.3 million was drawn. The credit facility bears interest at the bank's prime rate. The credit facility is subject to a review each year. Borrowings under the credit facility are limited to a borrowing base determined by the bank. Principal repayments are required only if the borrowing base is exceeded. The facilities are secured by a floating charge over all of the Company's assets. The scheduled date for the review of this facility is April 30, 2008.



6. Asset Retirement Obligations

----------------------------------------------------------------------------
Balance, December 31, 2005 $ 895,055
Liabilities incurred 226,313
Liabilities settled (52,164)
Accretion expense 97,730
----------------------------------------------------------------------------
Balance, December 31, 2006 1,166,934
Liabilities incurred 180,128
Liabilities settled (122,950)
Accretion expense 126,368
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 1,350,480
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company's asset retirement obligations are based on the net ownership interests in wells and facilities. Management estimates the costs to abandon and reclaim the wells and facilities and the estimated time period during which these costs will be incurred in the future. These costs are expected to be incurred over the next 15 years with the majority of the costs being incurred between 2015 and 2020. The undiscounted amount of the estimated costs at December 31, 2007 was $3.4 million (2006 - $2.8 million). The estimated costs have been discounted at a credit adjusted risk free rate of nine percent and an inflation rate of two percent.

7. Future Income Taxes

Future income taxes differ from the amount that would be computed by applying the basic combined federal and provincial statutory income tax rate of 32.12% (2006 - 34.50%) to loss before taxes. The reasons for the differences are as follows:



----------------------------------------------------------------------------
Year Ended December 31
2007 2006
----------------------------------------------------------------------------
Expected income tax reduction $ (523,133) $ (467,631)
Add (deduct)
Non-deductible crown payments - 200,828
Resource allowance - (227,045)
Non-deductible stock-based compensation 110,172 236,670
Effect of reduction in tax provision rate (617,948) (307,731)
Other (20,659) (96,807)

----------------------------------------------------------------------------
Future income tax reduction $ (1,051,568) $ (661,716)
----------------------------------------------------------------------------

The tax effects of temporary differences that give rise to the future
income tax liability are as follows:

----------------------------------------------------------------------------
Year Ended December 31
2007 2006
----------------------------------------------------------------------------
Tax liabilities
Property, plant and equipment $ (4,849,013) $ (1,961,395)
Tax assets
Share issue costs 297,099 414,302
Asset retirement obligations 337,620 338,411
----------------------------------------------------------------------------
Net future income tax liability $ (4,214,294) $ (1,208,682)
----------------------------------------------------------------------------


8. Share Capital

a) Authorized

Unlimited number of common shares; issuable in series

b) Common shares



----------------------------------------------------------------------------
Number of Shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 17,971,617 $ 35,926,131
Issue of common shares on exercise
of warrants 48,078 62,501
Fair value of warrants on exercise - 23,076
Tax effect of flow-through share
renouncements - (1,781,000)
Issue of flow-through common shares
for cash 3,373,100 13,518,160
Share issue costs, net of future
income taxes of $ 257,392 - (589,746)

----------------------------------------------------------------------------
Balance, December 31, 2006 21,392,795 47,159,122
Issue of common shares on exercise
of warrants 1,219,191 1,553,995
Fair value of warrants on exercise - 585,212
Tax effect of flow-through share
renouncements - (3,920,266)
Share issue costs, net of future
income taxes of $ 3,183 - (9,409)

----------------------------------------------------------------------------
Balance, December 31, 2007 22,611,986 $ 45,368,654
----------------------------------------------------------------------------


On June 29, 2006, the Company completed a private placement issue of 2,500,000 flow-through shares at a price of $4.15 per share for gross proceeds of $10.4 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $10.4 million of Canadian exploration expense deductions and recorded the future tax adjustment of $3,008,750 associated with this renouncement in the first quarter of 2007.

On December 19, 2006, the Company completed a private placement issue of 873,100 flow-through shares at a price of $3.60 per share for gross proceeds of $3.1 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $3.1 million of Canadian exploration expense deductions and recorded the future tax adjustment of $911,516 associated with this renouncement in the first quarter of 2007.

c) Common share purchase warrants

Each common share purchase warrant entitled the holder to acquire one common share of the Company for $1.30 per share.



Number of warrants Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 2,739,099 $ 1,314,767

Warrants exercised (48,078) (23,077)

----------------------------------------------------------------------------
Balance, December 31, 2006 2,691,021 $ 1,291,690

Warrants exercised (1,219,191) (585,212)
Warrants expired (note 9) (1,471,830) (706,478)

----------------------------------------------------------------------------
Balance, December 31, 2007 - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


d) Options

The Company has a stock option plan under terms of which it will grant options to acquire common shares to certain officers, directors, employees and consultants. Under terms of the plan, options totaling up to 10% of the common shares outstanding from time to time are issuable, and no more than 5% of the outstanding options may be issued to any one person as defined by the plan.



Weighted Weighted
average average
Number of exercise remaining
options price term (years)
----------------------------------------------------------------------------

Balance, December 31, 2005 550,000 $ 3.17 1.29
Granted 1,249,500 $ 3.46 2.10
Forfeited (60,000) $ 3.50 1.17
----------------------------------------------------------------------------

Balance, December 31, 2006 1,739,500 $ 3.36 1.88
Forfeited (285,000) $ 3.16 1.38
----------------------------------------------------------------------------

Balance, December 31, 2007 1,454,500 $ 3.40 0.88
----------------------------------------------------------------------------


Options have a term of three years and vest over a 34 month period starting on the first anniversary date of the grant. Options granted to non-management Directors have a term of three years and vest quarterly over a one year period from the date of the grant. The options granted have exercise prices ranging from $2.75 to $3.71 per share. At December 31, 2007, 1,063,832 options were exercisable, with exercise prices ranging from $2.75 to $3.71 with a weighted average exercise price of $3.40.

e) Per share amounts

The weighted average numbers of shares outstanding for the determination of basic and diluted per share amounts are as follows:



----------------------------------------------------------------------------

Year Ended December 31
2007 2006
----------------------------------------------------------------------------
Basic 21,462,324 19,302,316
Diluted 21,462,324 20,951,199
----------------------------------------------------------------------------


As at December 31, 2007, 1,454,500 (2006 - 1,244,500) options were excluded from the dilution calculation as they were anti-dilutive.



9. Contributed Surplus

----------------------------------------------------------------------------
Contributed Surplus Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 $ 111,000

Stock-based compensation expense 946,000

----------------------------------------------------------------------------
Balance, December 31, 2006 1,057,000

Stock-based compensation expense 764,000
Expiration of warrants (note 8c) 706,478

----------------------------------------------------------------------------
Balance, December 31, 2007 $ 2,527,478
----------------------------------------------------------------------------


The stock-based compensation expense is calculated based on the fair value of the stock options and warrants on the date of grant using the Black-Scholes option pricing model. The following assumptions were applied by the Company in this calculation:



----------------------------------------------------------------------------

Year Ended December 31
2007 2006
----------------------------------------------------------------------------
Weighted average fair value per option n/a $1.17
Dividend yield n/a nil
Volatility n/a 49%
Risk-free rates n/a 3.50%
Expected life (years) n/a 3
----------------------------------------------------------------------------


No options or warrants were granted during the year ended December 31, 2007.

10. Financial instruments

In February 2007, the Company hedged 1,000 gigajoules per day of gas production for the April 2007 through October 2007 period via a "three way costless collar". The collar was priced with floors of $5.40 and $7.25 per gigajoule and a ceiling of $9.00 per gigajoule. The contract was settled on August 31, 2007 and the sales revenue for the year ended December 31, 2007 includes the $219,243 realized gain on this contract.



11. Changes in non-cash working capital

----------------------------------------------------------------------------
Year Ended December 31
2007 2006
----------------------------------------------------------------------------
Accounts receivable $ 230,377 $ (815,053)
Prepaid expenses and deposits (522,909) (52,440)
Accounts payable and accrued liabilities (2,883,834) (3,203,647)
----------------------------------------------------------------------------
(3,176,366) (4,071,140)
Less: change in non-cash working capital related
to investing 269,676 (9,015,987)
----------------------------------------------------------------------------
Change in non-cash working capital related to
operations $ (3,446,042) $ 4,944,847
----------------------------------------------------------------------------


12. Commitments

The Company has commitments with respect to the lease of its office space as follows:



Gross Sub-Lease Net
Rent Recoveries Rent
----------------------------------------------------------------------------
2008 $ 576,393 $ 36,975 $ 539,418
2009 433,515 - 433,515

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13. Subsequent event

On January 18, 2008, Defiant and Profound Energy Inc. ("Profound"), an oil and gas company, entered into an agreement whereby Profound will acquire, by way of a plan of arrangement under the Business Corporations Act (Alberta), all of the outstanding shares of Defiant. Under the terms of the agreement Profound will issue approximately 12.4 million common shares to shareholders of Defiant based on an exchange ratio of 0.55 of a Profound common share for each outstanding Defiant common share. The agreement requires the approval of Defiant's shareholders along with the customary regulatory, court and other approvals.

Contact Information

  • Defiant Resources Corporation
    Rick J. Ironside
    President & C.E.O.
    (403) 218-4104
    or
    Defiant Resources Corporation
    Rob H. Solinger
    V.P. Finance & C.F.O.
    (403) 218-4106