Madalena Ventures Inc.
CNQ : MAVI
TSX VENTURE : MVN

Madalena Ventures Inc.

April 30, 2007 08:30 ET

Madalena Ventures Inc. Announces Financial and Operating Results and Filing of 2006 Year End Disclosure Documents

CALGARY, ALBERTA--(CCNMatthews - April 30, 2007) - Madalena Ventures Inc. ("Madalena" or the "Company") (CNQ:MAVI)(TSX VENTURE:MVN) today announced its financial and operating results for the fiscal year ended December 31, 2006.

Selected Annual Information

The following table provides a summary of Madalena's financial results for the prior two years:




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(Cdn $'s except boe/d) 2006 2005
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Revenues
Interest Income 286,533 26,396
Gain on disposal of marketable securities 45,016 890,033
Petroleum and natural gas 290,348 -

Income (loss) from continuing operations (4,647,850) 679,284
Basic and diluted per share (0.07) 0.02

Net income (loss) (4,661,496) 467,374
Basic and diluted per share (0.07) 0.01

Total assets 26,426,093 2,457,393

Total liabilities 1,132,761 97,755

Dividends declared per share 0.00 0.03

Total daily production (boe/d) (1) 24 -
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(1) The Boe conversion ratio of 6 mcf:1 bbl may be misleading, particularly
if used in isolation. A Boe conversion ratio of 6 Mcf to 1 bbl is based
on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead.


2006 Highlights and Management Commentary

The year 2006 represented an exciting transition period for the shareholders of Madalena. The Company experienced a complete corporate transformation summarized by the following highlights:

- Change in focus from Canadian mining operations to domestic and international oil and gas exploration and development

- Strategic appointments of new directors with significant experience in domestic and international oil and gas exploration and development

- Announcement of two domestic drilling joint ventures in January and May 2006

- Appointment of experienced international oil and gas management team in April 2006

- Transfer of Corporate head office from Vancouver to Calgary in April 2006

- Announcement of two exploration joint ventures in Tunisia in May and June 2006

- Plan of Arrangement transferring mining properties to Great Bear Resources Ltd. completed in June 2006

- Private placements for approximately $26 million entered into during 2006

- Establishment of strategic alliances with international exploration and development companies yielding a number of prospective opportunities currently under evaluation

- Received listing approval to trade on the TSX Venture Exchange under the symbol "MVN" on February 15, 2007

Attached to this press release are the annual financial statements and management's discussion and analysis for Madalena for the year ended December 31, 2006.

Tunisia

On May 23, 2006 and June 8, 2006 the Company announced two participation agreements in Tunisia with Storm Ventures International Inc.

On May 23, 2005, Madalena announced the execution of a seismic option agreement with Storm on the Hammamet offshore exploration block containing over 1.1 million acres in the Pelagian basin offshore Tunisia. The block contains the previously developed Tazerka oil field which produced 21 million barrels prior to its deactivation. Lundin Petroleum announced in December 2006 that their Oudna block located offshore Tunisia has exceeded production rates of 20,000 boepd. The Oudna block directly offsets the Hammamet block and is surrounded on three sides by the Hammamet acreage. Madalena is participating for a 30% working interest in an extensive seismic program consisting of approximately 400 square kilometers of 3D seismic and 200 kilometers of 2D seismic to commence during the third or fourth quarter of 2007. Upon review of the seismic Madalena will have the option to participate for 30% in the drilling of a test well on the block to earn a 15% working interest and the right to participate in all further development of the block. The 3-D seismic program will be designed to evaluate the potential reactivation of the Tazerka field, delineate seven significant hydrocarbon shows in wells drilled on the block, evaluate three large untested structures previously recognized on the block and high-grade the most prospective test well location on the block.

On June 8, 2006, the Company entered into a second seismic option agreement with Storm on the Remada Sud onshore exploration block containing over 1.2 million acres in the highly prospective Ghadames basin of southern Tunisia. Madalena is participating for a 30% working interest in a 200 kilometer 2-D seismic program which will further delineate structures identified by 2-D seismic data shot during 2005. It is anticipated the seismic program for the onshore Remada Sud block will commence during the second quarter of 2007 and at least one well will be drilled prior to year end. Upon review of the 2-D seismic Madalena will have the option to participate for 30% in the drilling of a test well on the block to earn a 15% working interest in approximately 600,000 acres of land. Madalena will retain the option to drill a second test well on the block to earn an additional 600,000 acres and will have the right to participate in all further development of the block. The Remada Sud block has exploratory potential in the Ordovician, Silurian Acacus and Triassic formations. All three zones are proven commercially productive from adjoining blocks in Libya and Tunisia. In addition to the proven play concepts defined by offsetting production, there are at least two additional trap configurations prospective on the block that could prove to be significantly larger. The Ghadames basin is widely recognized as a world-class oil and gas producing basin.

Canadian Joint Venture

The Company's strategy to grow as an international exploration and development company included participation in a Canadian domestic drilling joint venture in order to generate cash flow to offset ongoing general and administration expenses incurred while the company establishes its presence internationally. The company pursued this initiative during 2006 by participating in two joint venture drilling programs in the Edson and Brazeau areas of Alberta. The Company is not the operator in either of these areas. The Company was not satisfied with the overall outcome of the Canadian joint venture. Drilling difficulties on certain wells within the program resulted in cost overruns and a writedown in value as reflected in the 2006 year end financial statement. The Canadian joint venture has resulted in initial cash flow to the Company from current production of approximately 85 barrels of oil equivalent per day, including production from a well recently tied in at Brazeau.

Set out below is a summary of the oil and gas reserves and net present values of future net revenue of Madalena as at December 31, 2006 based on forecast price and cost assumptions. Madalena's complete reserves data is contained in its Annual Information Form which is being filed on SEDAR concurrently with this press release.



SUMMARY OF OIL AND GAS RESERVES
AND NET PRESENT VALUES OF FUTURE NET REVENUE
at December 31, 2006

FORECAST PRICES AND COSTS

Reserves
-----------------------------------------------------------
Light/Medium
Natural Gas NGL Crude Oil Oil Equivalent
-------------- ------------- -------------- ---------------
Reserves Gross Net Gross Net Gross Net Gross Net
Category (MMcf) (MMcf) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl)
-------------- ------ ------ ------ ------ ------ ------- ------- -------
Proved
Developed
Producing 313 284 13 11 0 0 65 58
Developed
Non-Producing 213 161 9 6 23 19 68 52
Undeveloped 145 120 6 5 0 0 31 25
------ ------ ------ ------ ------ ------- ------- -------
Total Proved 672 564 28 22 23 19 164 135
Probable 424 358 17 13 12 9 100 81
------ ------ ------ ------ ------ ------- ------- -------
Total Proved
Plus Probable 1,096 922 46 34 35 28 263 216
------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------- ------- -------



Net Present Values of Future Net Revenue
------------------------------------------
Before Income Taxes Discounted at (%/year)
------------------------------------------
0 5 10 15 20
Reserves Category (000 $) (000 $) (000 $) (000 $) (000 $)
-------------------------- ------- ------- ------- -------- ---------
Proved
Developed Producing 2,486 1,879 1,533 1,310 1,155
Developed Non-Producing 2,430 1,855 1,476 1,216 1,033
Undeveloped 811 609 467 363 286
------- ------- ------- -------- ---------
Total Proved 5,727 4,344 3,475 2,890 2,474
Probable 3,952 2,111 1,334 928 689
------- ------- ------- -------- ---------
Total Proved Plus Probable 9,679 6,455 4,808 3,818 3,163
------- ------- ------- -------- ---------
------- ------- ------- -------- ---------


------------------------------------------
After Income Taxes Discounted at (%/year)
------------------------------------------
0 5 10 15 20
Reserves Category (000 $) (000 $) (000 $) (000 $) (000 $)
-------------------------- ------- ------- ------- -------- ---------
Proved
Developed Producing 2,486 1,879 1,533 1,310 1,155
Developed Non-Producing 2,430 1,855 1,476 1,216 1,033
Undeveloped 811 609 467 363 286
------- ------- ------- -------- ---------
Total Proved 5,727 4,344 3,475 2,890 2,474
Probable 3,952 2,111 1,334 928 689
------- ------- ------- -------- ---------
Total Proved Plus Probable 9,679 6,455 4,808 3,818 3,163
------- ------- ------- -------- ---------
------- ------- ------- -------- ---------


2007 Outlook

The Management team at Madalena is excited about the wide range of prospects and opportunities currently under evaluation.

Entry as a new junior company into the international oil and gas scene requires considerable planning and technical evaluation. Madalena has focused its attention on South America as a key area of growth and development for our Company. Several high impact opportunities are currently under evaluation and offers are submitted on an ongoing basis. We are committed to providing our shareholders with high quality investment opportunities resulting from the extensive framework we have established within the international oil and gas community over the past year.

Filing of 2006 Year End Disclosure Documents

The audited financial statements and notes, Management's Discussion and Analysis for the year ended December 31, 2006, and the Annual Information Form have been filed and are available on SEDAR at www.sedar.com, and will be available on the Company's website at www.madalena-ventures.com.

The Annual Information Form includes Madalena's reserves data and other oil and gas information for the period ended December 31, 2006 as required by National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators.

Forward-Looking Statements

Certain information set forth in this press release, including a discussion of 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, some of which are beyond management's control, including but not limited to, the impact of general economic conditions, industry conditions, fluctuation of commodity prices, fluctuation of foreign exchange rates, environmental risks, industry competition, availability of qualified personnel and management, stock market volatility, timely and cost effective access to sufficient capital from internal and external sources, as well as risks inherent in operating in foreign jurisdictions, including varying judicial or administrative guidance on interpreting rules and regulations and a higher degree of discretion on the part of governmental authorities. Actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements.



MADALENA VENTURES INC.
Balance Sheets

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As at December 31, 2006 2005
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Assets

Current assets:
Cash and cash equivalents $ 19,059,715 $ 1,751,676
Accounts receivable 279,063 68,637
Prepaid expenses 23,157 869
Marketable securities - 45,755
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19,361,935 1,866,937

Capital assets related to discontinued
operations (note 3) - 590,456
Property and equipment (note 4) 7,064,158 -

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$ 26,426,093 $ 2,457,393
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 1,052,499 $ 97,755

Asset retirement obligations (note 5) 80,262 -

Shareholders' equity:
Share capital (note 6) 31,190,593 4,045,562
Contributed surplus (note 7) 1,392,406 237,145
Deficit (7,289,667) (1,923,069)
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25,293,332 2,359,638

Commitment (note 11)
Subsequent event (note 14)

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$ 26,426,093 $ 2,457,393
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See accompanying notes to the financial statements.

On behalf of the Board:

(signed) "Ray Smith" (signed) "Mike Lock"
-------------------- --------------------
Ray Smith Michael T. Lock
Director Director


MADALENA VENTURES INC.
Statements of Operations and Deficit

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For the years ended December 31, 2006 2005
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Revenue:
Petroleum and natural gas $ 290,348 $ -
Royalties (45,180) -
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245,168 -

Interest 286,533 26,396
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531,701 26,396

Expenses:
Operating 59,712 -
General and administrative 1,013,873 -
Stock based compensation 1,312,249 237,145
Depletion, depreciation and accretion 2,793,717 -
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5,179,551 237,145

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Loss before the undernoted (4,647,850) (210,749)
Gain on sale marketable securities 45,016 890,033
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Income (loss) from continuing operations (4,602,834) 679,284

Loss from discontinued operations (note 3) (58,662) (211,910)
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Net income (loss) for the period (4,661,496) 467,374

Deficit - beginning of the year (1,923,069) (1,436,659)
Distribution of assets (note 3) (653,386)
Dividend paid in kind (51,716) (953,784)
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Deficit - end of the year $ (7,289,667) $ (1,923,069)
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Net income (loss) per common share -
basic and diluted
Continuing operations $ (0.07) $ 0.02
Discontinued operations $ - $ (0.01)
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(0.07) 0.01

Weighted Average number of shares:
Basic and Diluted 67,165,574 36,883,552
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See accompanying notes to the financial statements.


MADALENA VENTURES INC.
Statements of Cash Flows

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For the years ended December 31, 2006 2005
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Cash provided by (used in):
Operations:
Net income (loss) for the period $ (4,661,496) $ 467,374
Add (deduct) Items not involving cash:
Gain on sale of marketable securities (45,016) (890,033)
Stock based compensation expense 1,312,249 237,145
Depletion depreciation and accretion 2,793,717 -
Loss from discontinued operations (note 3) 58,662 185,514
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(541,884) -
Changes in non-cash working capital items
(note 10) (50,018) -
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(591,902) -

Discontinued operations:
Net income (loss) from discontinued operations (58,662) (185,514)
Changes in non-cash working capital items
(note 10) (97,755) (128,493)
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(156,417) (314,007)

Financing:
Issue of common shares 26,959,261 883,228
Withholding tax on dividends paid in kind (3,443) -
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26,955,818 883,228

Investing:
Mineral Resource Properties (20,432) (194,789)
Property and Equipment (9,748,830) -
Change in non-cash working capital items
(note 10) 869,802 -
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(8,899,460) (194,789)

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Change in cash and cash equivalents 17,308,039 374,432

Cash and cash equivalents, beginning of year 1,751,676 1,377,244
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Cash and cash equivalents, end of year $ 19,059,715 $ 1,751,676
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See accompanying notes to the financial statements.


MADALENA VENTURES INC.

Notes to the Financial Statements

Years ended December 31, 2006 and 2005

1. Nature of business and basis of presentation

Madalena Ventures Inc. ("Madalena" or the "Company") was formed under the laws of the Province of British Columbia on September 30, 2004 and was continued under the laws of the Province of Alberta on September 26, 2006. Madalena is in the business of acquiring, exploring for, and developing petroleum and natural gas properties in western Canada and in International market places including Tunisia, and South America. The company has operations in western Canada and a seismic drilling joint venture in Tunisia. Madalena is listed on the TSX Venture exchange under the symbol "MVN".

The financial statements of the Company are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), within the framework of the significant accounting policies summarized below.

2. Significant accounting policies

Measurement uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These financial statements include amounts recorded for depletion, depreciation, accretion, and asset retirement obligations, which are based on estimates of proven reserves, production rates, oil and natural gas prices, future costs, and other relevant assumptions. Accruals for revenues and expenses are based on estimates if actual results are not available, and stock based compensation amounts are calculated using certain assumptions as more fully described in Note 6. Actual results could differ from the assumptions and estimates used in determining these amounts.

Joint interests

Substantially all of the Company's operations are conducted jointly with others, and accordingly, the financial statements reflect only the Company's interest in such activities.

Cash and cash equivalents

Cash and cash equivalents consist of cash deposits and short-term money market instruments with a maturity of less than three months.

Marketable securities

Marketable securities are recorded at the lower of cost and market.

Property and equipment

The Company follows the full cost method of accounting for petroleum and natural gas properties and related expenses. All costs associated with the exploration for and the development of oil and gas reserves in cost centers that are no longer in the pre production stage, are capitalized. Such costs include land and lease acquisition, geological and geophysical, drilling costs, lease rentals on non-producing properties, tangible production equipment, retirement costs, and general and administrative expenses directly attributable to exploration and development activities.

Proceeds on sale or disposition of oil and gas properties are credited to the full cost pool unless this results in a change in the depletion and depreciation rate by 20 percent or more, in which case a gain or loss is recognized.

Capitalized costs, including estimated future costs to develop proved reserves, accumulated within a cost center are depleted and depreciated using the unit of production method, based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of petroleum based on relative energy content of six thousand cubic feet of natural gas to one barrel of petroleum. Costs of acquiring and evaluating significant unproved petroleum and natural gas interests are excluded from the depletion calculation until it is determined that proved reserves are attributable to such interests, or until impairment occurs.

All costs directly attributable to cost centers which are in the pre production stage of development have been capitalized. Costs accumulated in these country-by-country cost centers are evaluated in each reporting period to determine if the costs recorded are recoverable. Costs not likely to be recovered are expensed.

Petroleum and natural gas properties, in cost centers where there are proven reserves, are subject to a ceiling test, to determine if the costs accumulated, are recoverable from the estimated future value of the properties. The costs are considered to be recoverable if the sum of the undiscounted cash flows expected from proved reserves plus the cost of unproved interests net of impairments, exceeds the carrying amount of the cost centre. When the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum of the discounted cash flows from the production of proved and probable reserves. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free interest rate.

Office furniture, equipment and other assets are recorded at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using a 20% declining balance basis for office furniture and equipment, and a straight line basis over the term of the lease for leasehold improvements.

Asset retirement obligations

The Company recognizes an asset retirement obligation ("ARO") in the period in which a well is drilled and a reasonable estimate of the fair value of the future costs associated with removal, site restoration and asset retirement, can be made. The fair value of the estimated ARO is recorded as a long-term liability with a corresponding increase in the carrying amount of property and equipment. Asset retirement costs recorded in property plant and equipment are amortized using the unit of production method and included in depreciation and depletion and accretion. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded. Any difference between the actual costs incurred upon settlement of the ARO and the recorded liability is recognized in the Company's earnings in the period in which the settlement occurs.

Future income taxes

The Company uses the liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on the difference between the financial accounting and tax basis of the Companies assets and liabilities, and measured using the substantively enacted tax rates and laws anticipated to apply to the years in which the differences will reverse. The effect of a change in income tax rates on future tax liabilities and assets is recognized in income in the period that the change is substantively enacted. The Company records a valuation allowance against any future tax assets where it anticipates that the likelihood of realizing the asset is not more likely than not.

Stock based compensation

The Company follows the fair value method of accounting for stock options. Under this method, an estimate of the fair value of the cost of all stock options granted to employees, directors and consultants, is calculated using the Black-Scholes option pricing model, and charged to income over the vesting period of the option, with a corresponding increase recorded in contributed surplus. Upon exercise of the stock option, the consideration received by the company, and the amount previously recorded in contributed surplus is recorded as an increase to the share capital of the Company.

Stock based compensation paid to non-employees is periodically re-measured until counterparty performance is complete, and any change therein is recognized over the period in the same manner as if the Company had paid cash instead of paying with our using equity instruments.

Revenue recognition

Petroleum and natural gas revenues are recognized when the title and risks pass to the purchaser.

Per share amounts

Basic per share amounts are computed by dividing the earnings or loss by the weighted average shares outstanding during the reporting period. Diluted amounts are computed using the treasury stock method. The treasury stock method assumes that the proceeds received from the exercise of options and warrants where market price exceeds exercise price are used to repurchase shares at the average market price for the period. The difference between the number of shares that could have been purchase at market prices in the period and the number of options and warrants is added to the weighted average shares outstanding.

Comparative financial information

Certain prior year's comparative figures have been restated to conform to the current year's presentation.

3. Plan of arrangement and discontinued operations

In March of 2006, the Company adopted a "plan of arrangement" to distribute its' mineral exploration business, and certain marketable securities associated with the business, to a related company. The plan of arrangement was approved by the shareholders of the company at the Annual General Meeting on June
2, 2006 and by the Supreme Court of British Columbia on August 22, 2006, and became effective on August 22, 2006. A summary of the plan of arrangement follows:

(a) each shareholder of Madalena received one-fifteenth of a common share of Great Bear Resources Ltd. ("GBR") for each common share of Madalena owned by such shareholder at August 22, 2006;

(b) each shareholder of Madalena received one new common share of Madalena for each common share of Madalena owned by such shareholder on August 22, 2006;

(c) Madalena and GBR became "reporting issuers" under the B.C. Securities Act;

(d) Madalena retained all cash, accounts receivable, prepaid expenses, and the petroleum and natural gas assets, owned at the time of the plan of arrangement. Madalena is responsible for all accounts payable and accrued liabilities of the company at the time of the plan of arrangement;

(e) GBR acquired the mineral property interests, all shares of Planet Exploration Ltd. ("Planet"), and all shares of Medi-Hut Company, Inc., owned by Madalena at August 22, 2006. GBR assumed all of Madalena's obligations in respect of a dividend in specie declared by the Company on November 15, 2004, payable in the form of Planet shares.

The Company accounted for the disposition of the assets under the plan of arrangement using the continuity of interest method of accounting. Under this method, the accounting basis of the assets distributed under the plan of arrangement is removed from Madalena's balance sheet and charged to retained earnings. The accounting basis of the assets removed from the balance sheet and charged to retained earnings is $653,386, which consisted of mineral resource assets with a carrying value of $610,888, and marketable securities with a carrying value of $42,498.

The carrying value of Madalena's mineral property interests at December 31, 2005, in the amount of $590,456, has been reclassified as capital assets related to discontinued operations. The Company has calculated a loss from discontinued operations in the amount of ($58,662) for the year ended December 31, 2006, and ($211,910) for the year ended December 31, 2005, and has classified these as separate items in the statements of operations and deficit, and cash flows.

4. Property and equipment


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As at December 31, 2006 2005
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Canadian Petroleum and natural gas properties $ 9,223,341 $ -
Argentina Development Costs 490,149 -
Tunisia Development Costs 41,286 -
Furniture, equipment & leaseholds improvements 97,153 -
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9,851,929 -
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-
Accumulated depletion (2,768,341) -
Accumulated depreciation (19,430) -
Net book value $ 7,064,158 $ -
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At December 31, 2006 the above noted cost centers for Argentina and Tunisia were considered to be in the pre production stage and all costs directly attributable to these centers were capitalized and excluded from costs subject to depletion and depreciation. There have been no revenues to date from these cost centers.

General and administrative expenses and stock based compensation totaling $502,381 and $28,781, respectively (2005 - nil) that were directly related to exploration and development activities have been capitalized for the year ended December 31, 2006.

At December 31, 2006, management performed a ceiling test calculation in order to determine if there was impairment in the Canadian cost center. In undertaking the ceiling test calculation the Company relied on the net present value of expected future cash flows from proved plus probable reserves discounted at a risk free interest rate of 5% and calculated using forecast prices as determined by independent petroleum consultants. As a result of the ceiling test calculations, the Company reduced the carrying value of the Canadian cost center to it's expected present value of $6,455,000, and has recorded the write down of $2,480,341 in its expenses for the year.

The benchmark prices for which the ceiling test was based, are as follows:



Light, Sweet Alberta Natural Gas
Crude Oil (40 API, Liquids (Then Current Alberta Natural Gas
0.3%S) at Edmonton Dollars) Edmonton AECO-C Spot Then
Year Then Current $Cdn/bbl Butane $Cdn/bbl Current $Cdn/Mcf)
------ --------------------- ---------------------- --------------------
2007 70.25 58.36 7.88
2008 68.00 52.71 8.19
2009 65.75 51.60 8.58
2010 64.50 50.59 8.63
2011 64.50 50.58 8.69
2012 65.00 50.83 9.03
2013 66.25 51.84 9.20
2014 67.75 53.32 9.46
2015 69.00 54.04 9.68
2016 70.50 55.29 9.85
2017 71.25 56.05 10.08
2018+ +2.0%/yr +2.0%/yr +2.0%/yr
------------------------------------------------------------------------

Note - prices for natural gas and natural gas liquids are based on GLJ
product price and market forecasts at January 1, 2007 adjusted for
transportation and BTU value of the gas.


5. Asset retirement obligations

The Company's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. As at December 31, 2006, the Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $235,746 which will be incurred over the next 15 years. A credit-adjusted risk-free rate of 8% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligations. A reconciliation of the asset retirement obligations is provided below:



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As at December 31, 2006 2005
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Balance, beginning of the year $ - $ -
Accretion expense 5,945 -
Obligations incurred 74,317 -
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Balance, end of the year $ 80,262 $ -
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6. Share capital

Authorized

The authorized share capital of the Company consists of an unlimited number of common shares without nominal or par value.

Issued



------------------------------------------------------------------------
Common shares Number Amount
------------------------------------------------------------------------
Balance, December 31, 2004 35,420,949 $ 3,162,334
Issued for cash 15,750,000 945,000
Issued for mineral resource properties 250,000 25,000
Issue costs - (86,772)
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Balance, December 31, 2005 51,420,949 $ 4,045,562
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Issued for cash 38,155,250 24,904,500
Options exercised 1,700,000 262,000
Warrants exercised 15,115,250 1,257,626
Contributed surplus associated with options
exercised - 185,769
Issue costs - (2,006,564)
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Balance, December 31, 2006 106,391,449 $ 28,648,893
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Warrants - 2,541,700
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- $ 31,190,593
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On November 28, 2004 the Company issued 15,000,000 units at a value of $0.06 per unit for gross proceeds of $900,000, pursuant to a non-brokered private placement. Each unit consists of one common share and one warrant. Each warrant is convertible into a common share of the Company at $0.08 per share until November 28, 2006. The Company did not attribute any value to the warrants issued. All warrants were converted into common shares by November 28, 2006. Finder's fees in the form of 750,000 common shares were issued in connection with the private placement. The value attributed to the finder's fees was $0.06 per share for total fees and share capital of $45,000.

On March 2, 2006 the Company issued 12,000,000 common shares at a price of $0.50 per share for total proceeds of $6,000,000 pursuant to a brokered private placement. The broker of the private placement received a cash commission of 5% or $300,000 and 600,000 warrants. Each warrant is convertible into a common share of the Company at $0.50 per share until March 2, 2007. The estimated fair value of the broker warrants is $64,000 using the Black-Scholes option pricing model. The estimated value was calculated assuming a volatility of 50%, a risk-free interest rate of 4%, and an expected life of one year. The estimated value of the broker warrants and the cash commission is recorded as issue costs.

On May 16, 2006 the Company issued 1,000,000 units at a value of $1.00 per unit for gross proceeds of $1,000,000 pursuant to a brokered private placement. Each unit consists of one common share and one-half of a warrant. Each whole warrant is convertible into a common share of the Company at $1.25 until May 16, 2007. The estimated fair value of the warrants is $134,000 using the Black-Scholes option pricing model. The estimated value was calculated assuming a volatility of 50%, a risk-free interest rate of 4%, and an expected life of one year.

In two separate closings on November 2, 2006 and November 16, 2006, the Company issued 12,530,750 and 93,750 units respectively at a value of $0.80 per unit for gross proceeds of $20,049,200 and $75,000 respectively, pursuant to brokered private placement. Each unit consists of one common share and one-half of a warrant. Each whole warrant is convertible into a common share of the Company at $0.90 until November 2, 2007 and November 16, 2007 respectively. The estimated fair value of the warrants is $2,420,000 using the Black-Scholes option pricing model. The estimated value was calculated assuming a volatility of 50%, a risk-free interest rate of 4%, and an expected life of one year. The broker of the private placement received a cash commission of 6% or $1,207,452 and 1,509,315 warrants. Each broker warrant is convertible into common shares of the Company at $0.80 per share until November 16, 2007. The estimated fair value of the broker warrants is $258,000 using the Black-Scholes option pricing model. The estimated value was calculated assuming a volatility of 50%, a risk-free interest rate of 4%, and an expected life of one year. The estimated value of the broker warrants and the cash commission is recorded as issue costs.

Stock options

Under the Companies stock option plan directors, officers, employees and consultants are eligible to receive options to acquire common stock, with terms not to exceed five years. The exercise price of each stock option is the average market price of the Company's stock for the five trading days prior to the grant date. The Company may only grant options equal to a total of 10% of the issued and outstanding common share of the Company.

Options granted to directors of the Company have a term of five years to expiry and vest immediately upon grant of the option. Options granted to officers, employees, and consultants of the Company have a term of five years to expiry, and vest equally over three years, on each anniversary of the grant date.

The following table provides information with respect to stock option transactions for the year ended December 31, 2006:



----------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price ($)
----------------------------------------------------------------------
Stock options outstanding, beginning of year 6,800,000 0.20
Granted 6,600,000 0.71
Exercised (1,700,000) 0.15
Cancelled or expired (3,300,000) 0.23
----------------------------------------------------------------------
Stock options outstanding, end of year 8,400,000 0.59
----------------------------------------------------------------------
----------------------------------------------------------------------
Stock options exercisable, end of year 2,400,000 0.30
----------------------------------------------------------------------
----------------------------------------------------------------------


The following table provides information on the estimated timing and number of shares that may be issued under the Company's stock option plan:



-----------------------------------------------------------------
Outstanding Exercisable
-----------------------------------------------
Weighted Average
Exercise Price Number Remaining Life (years) Number
-----------------------------------------------------------------
$ 0.12 1,500,000 3.76 1,500,000
$ 0.41 300,000 4.00 300,000
$ 0.66 4,300,000 4.16 300,000
$ 0.73 1,100,000 4.22 300,000
$ 0.85 1,200,000 4.79 0
-----------------------------------------------------------------
8,400,000 4.18 2,400,000
-----------------------------------------------------------------
-----------------------------------------------------------------


The fair value of each option has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions.



-----------------------------------------------------------------
2006 2005
-----------------------------------------------------------------
Expected life (in years) 4.8 5.0
Risk-free interest rate (%) 4.1 3.0
Volatility (%) 50 90
Fair value of options granted $ 0.33 $ 0.14
-----------------------------------------------------------------
-----------------------------------------------------------------


Warrants

During 2005 and 2006 the Company issued the following warrants to shareholders and listing agents to purchase common shares:



-----------------------------------------------------------------
Number of
Expiry Common Price
Date Issued Date Shares ($)
-----------------------------------------------------------------
28-Nov-05 28-Nov-06 15,000,000 0.08
02-Mar-06 02-Mar-07 600,000 0.50
16-May-06 16-May-07 500,000 1.25
02-Nov-06 02-Nov-07 12,530,750 0.90
02-Nov-06 02-Nov-07 1,503,690 0.80
16-Nov-06 16-Nov-07 46,875 0.90
16-Nov-06 16-Nov-07 5,625 0.80

-----------------------------------------------------------------
30,186,940
-----------------------------------------------------------------
-----------------------------------------------------------------


The following table summarizes the warrant activity during for the years ended December 31, 2005 and 2006.



------------------------------------------------------------------------
Number Amount
------------------------------------------------------------------------
Balance, December 31, 2004 - -
Issued 15,000,000 $ 1,200,000
------------------------------------------------------------------------
Balance, December 31, 2005 15,000,000 $ 1,200,000

Issued 15,186,940 13,452,315
Converted to common stock (15,115,250) (1,257,625)
------------------------------------------------------------------------
Balance, December 31, 2006 15,071,690 $ 13,394,690
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Contributed surplus



------------------------------------------------------------------------
As at December 31, 2006 2005
------------------------------------------------------------------------
Balance, beginning of the year $ 237,145 $ -
------------------------------------------------------------------------
Stock based compensation 1,341,030 237,145
------------------------------------------------------------------------
Options exercised (185,769) -
------------------------------------------------------------------------
Balance, end of the year $ 1,392,406 $ 237,145
------------------------------------------------------------------------


8. Income taxes

Income taxes differ from the amounts that would be obtained by applying the Canadian statutory income tax rates to the income (loss) before income taxes as follows:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------

Net income (loss) before income taxes $ (4,661,496) $ 467,374

Combined federal and provincial tax rate 34.5% 38.9%

Computed "expected" income tax recovery $ (1,608,216) $ 181,808

Non deductible crown charges 5,455 -
Resource allowance 23,365 -
Stock based compensation 452,726 92,249
Change in valuation allowance 949,539 (274,058)
Change in tax rates 180,085 -
Other (2,955) -
------------------------------------------------------------------------
$ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


At December 31, 2006 the Company had approximately $3,568,000 of non capital losses available to offset future years' taxable income, the benefit of which has not been recorded in these financial statements.

The major components of the Company's net future taxes are as follows:



-----------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------
Future income tax assets:
Capital losses $ - $ 148,336
Non capital losses 1,034,716 84,013
Share issue costs 405,917 -
Asset retirement obligations 23,276 -
Property and equipment 154,431 49,200
Attributed Alberta royalty deduction 4,535 -

Valuation allowance (1,622,875) (281,549)
-----------------------------------------------------------------------
Net future tax assets $ - $ -
-----------------------------------------------------------------------
-----------------------------------------------------------------------


9. Segmented information

Management has determined that the Company operates in one dominant industry segment, which involves the exploration and development of petroleum and natural gas products in the following areas:



-----------------------------------------------------------------------
As at December 31, 2006 Canada Argentina Tunisia Total
-----------------------------------------------------------------------

Capital expenditures $ 9,246,177 $ 470,961 $ 31,692 $ 9,748,830

Total Assets $ 25,894,658 $ 490,149 $ 41,286 $ 26,426,093
-----------------------------------------------------------------------


10. Supplemental cash flow information

Changes in non cash working capital items are comprised of the following:



-----------------------------------------------------------------------
As at December 31, 2006 2005
-----------------------------------------------------------------------
Accounts receivable $ (210,426) $ (22,426)
Prepaid expenses and deposits (22,288) 0
Accounts payable and accrued liabilities 954,744 (106,067)
Change in non cash working capital $ 722,029 $ (128,493)
Attributable to:
Operating activities $ (50,018) $
Discontinued operations (97,755) (128,493)
Investing 869,802
-----------------------------------------------------------------------
$ 722,029 $ (128,493)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


11. Commitments

The Company entered into a lease agreement for office premises commencing April 15, 2006 to June 15, 2010. The minimum rentals payable including estimated operating costs are summarized in the following table:



--------------------------------------------------
2007 $ 113,722
2008 113,722
2009 113,722
2010 52,123
--------------------------------------------------
Total $ 393,289
--------------------------------------------------
--------------------------------------------------


The Company as part of normal business operations has agreed to spend up to $2,270,000 on seismic exploration during 2007.

The Company entered into a lease agreement for the use of a copier commencing August 15, 2006 to December 15, 2010. The minimum lease payments are summarized as follows:



--------------------------------------------------
2007 $ 3,722
2008 3,722
2009 3,722
2010 3,722
--------------------------------------------------
Total $ 14,888
--------------------------------------------------
--------------------------------------------------


12. Financial instruments

Fair value of financial instruments:

The Company's financial instruments consist of cash, short term discount bonds, Guaranteed Investment Certificates, accounts receivable, accounts payable, and accrued liabilities. At December 31, 2006, the carrying value of these financial instruments approximated their fair value due to their short-term nature. The Company has no bank indebtedness.

Credit risk

At December 31, 2006 the Company's accounts receivable consists of GST input tax credits receivable of $120,048, interest on GIC's and short term bonds of $131,121 and oil and gas trade receivables of $27,893 which are with customers involved in the oil and gas industry and are subject to normal industry credit risks. The carrying value of accounts receivable reflects management's best estimate of the credit risk associated with these receivables.

Commodity price contracts

The Company had no derivative financial instruments outstanding during at December 31, 2006.

Foreign currency exchange risk

The Company had no foreign exchange exposures at December 31, 2006. The Company's activities in South America and Tunisia, have not required the advancement or investment in any foreign currency at December 31, 2006.

13. Related party transactions

Two directors of the Company are also directors of a public exploration company with which Madalena is in engaged in joint venture operations. All of the Company's oil and gas revenues, royalties and operating expenses are derived from this joint venture. At December 31, 2006 the Company has accounts payable due to this joint venture partner of $858,625.

The Company utilizes the services of a law firm in which one of the directors is a partner. During the year ended December 31, 2006 the Company expended $108,883 on services obtained from this firm.

14. Subsequent events

Subsequent to year end, 477,250 warrants to acquire common shares of the Company at $0.50 per share were exercised and 7,500 warrants to acquire common shares of the Company at $0.50 per share expired, resulting in the issuance of 477,250 common shares for proceeds of $238,625. In April of 2007 500,000 stock options to acquire common shares of the company at $0.12 per share were exercised for gross proceeds of $60,000.

Madalena Ventures Inc.

December 31, 2006

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management Discussion and Analysis ("MD&A") is provided by the management of Madalena Ventures Inc. ("Madalena" or the "Company"), and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2006. The Company's audited financial statements and other public disclosure documents are filed on SEDAR at www.sedar.com. The commentary in this MD&A is based on information available to April 27, 2007. Unless otherwise stated, all dollar amounts are expressed in Canadian dollars.

In this MD&A, all calculations converting natural gas to barrels of oil equivalent ("boe") have been made using a conversion ratio of six thousand cubic feet (six "mcf") of natural gas to one barrel of oil, unless otherwise stated. The use of boe may be misleading, particularly if used in isolation, as the conversion ratio of six mcf of natural gas to one barrel of oil, is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-looking Statements

This MD&A contains forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements are based on current expectations, estimates, and projections that involve numerous risks and uncertainties, many of which are beyond the Company's and management's control. These risks and uncertainties could cause actual results to differ materially from those anticipated by the Company and described in this MD&A. These risks and uncertainties include, but are not limited to, the impact of general economic conditions, industry conditions, fluctuation of commodity prices, fluctuation of foreign exchange rates, imperfection of reserve estimates, environmental risks, industry competition, availability of qualified personnel and management, stock market volatility, and timely and cost-effective access to sufficient capital from internal and external sources. The Company assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change except as required by law.

Non-GAAP Measurements

This MD&A contains the term operating netback, which has been calculated as total revenue less royalties, operating expenses, and transportation expenses.

Disclosure Controls and Procedures

Disclosure controls and procedures ("DC&P") are designed to provide reasonable assurance, that information required to be disclosed by the Company in its annual and interim filings or other reports filed or submitted under various securities legislation, are recorded, processed, summarized, and reported within the time limits specified by the particular securities legislation, and include controls and procedures designed to ensure that information to be disclosed by the Company is accumulated and communicated to management to allow timely decisions regarding the required disclosure. The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the Company are responsible for designing DC&P, or causing them to be designed under their supervision, to provide reasonable assurance that material information related to the Company is made known to them by others within the organization.

The CEO and CFO have evaluated the effectiveness of the Company's DC&P as of December 31, 2006 and have concluded that the DC&P provide a reasonable level of assurance that material information related to the Company is recorded, processed, summarized, and reported in a timely fashion and that material information is made known to them by others within the organization except as described below.

Internal Controls over Financial Reporting

Internal controls over financial reporting ("ICFR") is a process designed by, or under the supervision of, the CEO and CFO, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financials statements for external purposes in accordance with Canadian GAAP, and includes those policies and procedures that:

(a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company;

(b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Canadian GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors; and

(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets, that could have a material affect on the annual or interim financial statements.

ICFR have been designed under the supervision of the CEO and CFO of Madalena to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP, however in designing the ICFR, management has identified the following significant weaknesses inherent in the system:

- A lack of segregation of incompatible duties within the accounting and reporting function.

- The lack of sufficient financial reporting personnel with enough technical accounting knowledge in all areas to address all complex and non-routine accounting transactions that may arise.

- A lack of sufficient information system controls with respect to access and documentation of spreadsheet information.

Management is of the view that the size of the Company and cost of correcting these inherent weaknesses does not justify the additional assurance re-mediation will provide, and therefore does not plan to re-mediate these weaknesses. Management believes that the small size of the Company, allows the board of directors and management to possess significant knowledge of all events occurring in the Company which mitigates the possibility of a material error from taking place.

There were no changes in the Company's ICFR during the fourth quarter of 2006 that have materially affected, or are reasonable likely to materially affect the Company's ICFR.

OVERVIEW

2006 was a year of transition for Madalena. From the date of its formation in September of 2001, until the end of 2005, Madalena had pursued mining exploration and development opportunities and considered itself "a development stage company". In 2006 Madalena focused its attention on the development of an International oil and gas exploration and development Company.

During 2006 Madalena made significant changes to its board of directors by adding and replacing the previous board with experienced oil and gas directors. In January and March of 2006 Madalena negotiated two non-operated, domestic oil and gas development joint ventures in the Edson and Brazeau areas of Alberta in order to generate a stable cash flow to fund general and administrative expenses while it pursued international opportunities. Cash flow has been generated from the joint ventures however the results of the domestic joint ventures did not meet the Company's expectations. Due to development drilling issues beyond its control, the Company spent more on the drilling programs than anticipated, and was required to write down the carrying cost of its Canadian properties following its full cost accounting policy.

In April of 2006 the Company hired a new management team with significant international oil and gas experience and moved its head office from Vancouver, BC, to Calgary, Alberta. The Company shifted its focus to concentrate on the evaluation of opportunities in North Africa and South America and in May and June of 2006 the Company announced two exploration programs in Tunisia which are currently ongoing. In August of 2006 the Company disposed of its mineral exploration business as part of a plan of arrangement approved by the BC Supreme Court and the shareholders of the Company. In November of 2006 the Company announced the completion of a private placement of common shares which raised a net $18,869,758 to allow the Company to take advantage of its international opportunities. In September of 2006 the Company applied to have its common shares traded on the TSX Venture exchange and began trading on the exchange in February of 2007.

Madalena is confident that the corporate changes undertaken during 2006 will place the Company in a good position to take advantage of its international opportunities in 2007.



SELECTED ANNUAL INFORMATION

--------------------------------------------------------------------------
(Cdn $'s except boe/d) 2006 2005 2004
--------------------------------------------------------------------------
Revenues
Interest Income 286,533 26,396 1,171
Gain on disposal of marketable
securities 45,016 890,033 340,952
Petroleum and natural gas 290,348 - -

Income (loss) from continuing
operations (4,647,850) 679,284 342,123
Basic and diluted per share (0.07) 0.02 0.07

Net income (loss) (4,661,496) 467,374 174,378
Basic and diluted per share (0.07) 0.01 0.04

Total assets 26,426,093 2,457,393 1,929,496

Total liabilities 1,132,761 97,755 203,821

Dividends declared per share 0.00 0.03 0.00

Total daily production (boe/d) 24 - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------

SUMMARY OF QUARTERLY RESULTS(i)

--------------------------------------------------------------------------
Year Ended December 31, 2006
---------------------------------------------
Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Sales Volumes:
Natural gas (mcf/d) 198 109 68 -
Oil and natural gas
liquids (bbl/d) 7 2 2 -
Barrels of oil
equivalent (boe/d) 40 20 13 -
--------------------------------------------------------------------------
Per unit information:
Natural gas price ($/mcf) 7.54 5.75 6.57 -
Oil and natural gas liquids
price ($/bbl) 51.65 62.47 65.66 -
Oil equivalent price ($/boe) 46.39 37.01 43.02 -
Operating net back ($/boe) 25.11 32.57 27.81 -
--------------------------------------------------------------------------
Financial:
Revenue:
Interest Income $ 147,948 $ 94,762 $ 17,303 $ 26,520
Gain on disposal of
marketable securities - 17,429 - 27,588
Petroleum and natural
gas revenues 171,532 67,475 51,341 -
Income (loss) from
continuing operations (2,793,574) (352,724) (421,722) (1,034,814)
Basic and diluted per share (0.03) (0.00) (0.01) (0.06)
Net income (loss) (2,796,248) (405,633) (424,801) (1,034,814)
Basic and diluted per share (0.03) (0.01) (0.01) (0.06)
Capital expenditures 1,471,112 5,398,608 1,718,484 1,181,058
Shares outstanding (000's) 106,391 71,586 71,471 66,521
Working capital 18,309,436 274,561 5,874,256 6,490,488
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(i) The comparative quarterly information for June 30, 2006 and March 31,
2006 has been re-stated to reflect an adjustment to stock based
compensation calculated in those periods, as well as a movement of oil
and gas revenues, royalties, operating costs, and depletion from Q3
to Q2. Stock based compensation for Q1 and Q2 was overstated by
$1,744,247, and $2,927 respectively. The result of these adjustments
is to reduce the net loss for Q1 by $1,744,246 and to increase the net
loss for Q2 by $7,593. Comparative information for Sales Volume and
Per unit information, has not been provided for 2005, as no
production occurred in 2005.


--------------------------------------------------------------------------
Year Ended December 31, 2005
--------------------------------------------------
Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Financial:
Revenue:
Interest Income $ 18,225 $ 0 $ 1,937 $ 6,234
Gain on disposal of
marketable securities 4,839 20,869 69,784 794,541
Petroleum and natural
gas 0 0 0 0
Income (loss) from
continuing operations (214,081) 20,869 71,721 800,775
Basic and diluted per
share (0.01) 0.00 0.00 0.02
Net income (loss) (280,045) (35,160) 23,021 759,558
Basic and diluted per
share (0.01) (0.00) 0.00 0.02
Capital expenditures 133,108 56,782 0 4,899
Shares outstanding
(000's) 51,421 35,471 35,471 35,471
Working capital 1,769,182 1,067,411 1,182,369 1,235,275
--------------------------------------------------------------------------
--------------------------------------------------------------------------


RESULTS OF OPERATIONS

Production

Madalena's daily production rates increased each quarter of 2006 as the Edson and Brazeau area wells were drilled, completed and tied in. Production volume averaged 24.4 boe/d in 2006. Fourth quarter production volumes averaged 40.2 boe/d as four Brazeau area wells were tied in and started producing during the quarter. The Company had no production in 2005. Natural gas and natural gas liquids accounted for 100 percent of the Company's production in 2006.

Production Revenue

Madalena received an average of $6.84 per mcf for natural gas and $55.74 per bbl for its natural gas liquids during 2006, resulting in gross revenues of $234,958 (81%) and $55,390 (19%) respectively for 2006. The Company had no production during 2005. The Company averaged $43.24 per boe during 2006.

In the fourth quarter the Company received an average of $7.54 per mcf of natural gas and $51.65 per bbl for natural gas liquids or an average of $46.39 per boe.

The Company did not have any natural gas pricing contracts in place at December 31, 2006.

Interest Income

Interest income for the fourth quarter of 2006 amounted to $147,948 compared to $18,225 in 2005. Interest income for the year ended 2006 amounted to $286,533 compared to $26,396 in 2005. The increase in interest income in the fourth quarter and the year reflects the Company's investment of funds it received from its private placement in November in short term asset backed securities which are purchased at a discount and mature at face value providing interest income for the company.

Operating netbacks

Madalena realized the following operating netbacks from oil and gas operations:



---------------------------------------------------------------------------
Year Ended December 31, 2006
Quarterly operating ---------------------------------------------------
netbacks ($'s per boe) Q4 Q3 Q2 Q1
---------------------------------------------------------------------------

Gross revenue 46.39 37.01 43.02 -
Less:
Royalties 9.64 0 8.01 -
Production Expenses 10.86 4.14 6.72 -
Transportation 0.78 0.30 0.48 -
---------------------------------------------------------------------------
Operating net back 25.11 32.57 27.81
---------------------------------------------------------------------------
---------------------------------------------------------------------------


For 2006 total average operating netbacks were $27.62 per boe consisting of gross revenue of $43.24 per boe, less royalties of 10.17 per boe, production expenses of $8.29 per boe, and transportation costs of $0.60 per boe. Madalena does not operate any of its properties.

Royalties

Crown royalties net of accrued ARTC amounted to $45,184 for 2006 for an average of $10.17 per boe or 15.6% of production revenues. The somewhat low royalty rates reflect reduced rates for low productivity wells. On September 21, 2006 the Alberta government announced the elimination of the ARTC for royalties paid in respect of production after January 1, 2007. The Company will apply for ARTC on eligible 2006 production prior to the elimination of the program.

Production expenses and transportation

Total production expenses for 2006 amounted to $55,704 or $8.29 per boe, and transportation expenses amounted to $4,011 or $0.60 per boe for 2006.

General and administrative costs

General and administrative ("G&A") costs were $291,146 in the fourth quarter of 2006 compared to $65,964 in the fourth quarter of 2005. For 2006 G&A costs totaled 1,013,873 compared to $211,910 in 2005. The Company capitalized $470,961 of G&A in the Argentina cost centre in 2006 and $31,692 of G&A in the Tunisia cost center in 2006. The capitalized G&A reflects costs directly attributable to exploration activities in these cost centers.

The Company incurred significantly more G&A costs in 2006 and the fourth quarter of 2006 than in 2005 for the following reasons:

- Office expenses - the Company moved its head office out of Vancouver to a location in downtown Calgary and incurred additional costs for rent, supplies, etc.

- Shareholder communications - the Company announced numerous changes to its board of directors and management team, had three significant financings, and numerous announcements with respect to the plan of arrangement, and its exploration and development activities which did not occur in 2005.

- Consulting services - the Company utilized the services of computer consultants, corporate media consultants, and consultants to assist in the development of business in Argentina during 2006.

- Salaries and benefits - in 2006 the Company hired four full time senior people to develop the oil and gas business internationally. In 2005 the only costs incurred was a management fee paid to a company owned by the President.

- Travel and entertainment - in 2006 significantly more was spent to travel to international locations such as Argentina, Chile, Colombia, and Tunisia, to evaluate oil and gas exploration opportunities in those areas.

- Geological consulting - in 2006 the Company incurred geological consulting fees to evaluate oil and gas opportunities which were not incurred in 2005. These costs have been expensed in relation to areas where a cost center has not been established. $83,850 of geological fees was capitalized into two cost centers in Argentina and Tunisia.

- Legal and accounting fees - considerably more money was spent on legal and accounting fees in 2006 than in 2005. Legal fees increased because: legal responsibilities were transitioned from a Vancouver firm to a Calgary firm, the Company made an application to get listed on the TSX Venture exchange, additional legal fees were spent on dealing with issues related to the plan of arrangement transferring out the mining properties, and assisting with the additional reporting requirements mentioned above. Accounting fees increased in 2006 because: the size of the company increased substantially resulting in additional audit work, the company had its third quarter reviewed by external auditors for the first time, the company addressed specific reporting issues which required the assistance of its auditors on the plan of arrangement and disclosures for oil and gas companies.

The increase in general and administrative costs is consistent with transitioning the Company from a mining company to an oil and gas exploration, development and production, company.

Stock-based compensation

Stock-based compensation ("SBC") in the fourth quarter of 2006 amounted to $31,860 compared to $237,145 in 2005. The costs recorded in the fourth quarter reflect revisions to the calculation of SBC for the correct vesting period associated with the SBC. The amount recorded in the fourth quarter of 2005 reflects stock options which were granted in the last quarter. The Company capitalized $19,189 of SBC to the Argentina cost center, and $9,594 to the Tunisia cost center in 2006. The SBC capitalized reflects the estimated cost of options granted to the Company's geological consultant for evaluating exploration opportunities in these cost centers.

The Company recorded SBC in 2006 of $1,312,249 compared to $237,145 in 2005. SBC is a measure of the estimated cost of options granted during the year. At December 31, 2006, the Company has $1,568,862 of unamortized stock-based compensation costs that will be charged to income over the remaining vesting period of the options outstanding.

Depletion depreciation and accretion

Depletion for petroleum and natural gas assets is calculated using the unit-of-production method based on total estimated proved reserves. Depreciation on office furniture and fixtures and on leasehold improvements is calculated on a declining balance basis or on a straight line basis at rates designed to amortize the cost of the asset over its estimated useful life. Depletion expense for the fourth quarter of 2006 was $222,000 compared to nil for 2005 and depletion for the year ended 2006 was $288,000 compared to nil in 2005. The substantial increase in depletion for the last quarter of 2006 reflects revised reserve values at December 31, 2006 compared to the estimated reserves used in the first three quarters of 2006 to calculate the initial depletion. Depletion for the year ended 2006 amounted to $42.88 per boe.

Depletion was not recorded in Argentina or Tunisia. These cost centers are considered to be in the development stage where all costs reasonably attributable to exploring for oil and gas in these areas are capitalized to the cost center. Management feels that the costs capitalized to date will be recoverable from future business activities in the area.

Depreciation for the fourth quarter amounted to $6,237 compared to nil in 2005 and was $19,431 for the year ended 2006 compared to nil in 2005.

The provision for accretion of asset retirement costs was $3,604 for the fourth quarter and $5,945 for the year ended December 31, 2006.

Ceiling test write down

At December 31, 2006 the Company compared the estimated fair value of its Canadian oil and gas properties (as determined by an independent group of petroleum engineers based on the proven properties of the Company using a 0% discount rate) to the carrying cost of those properties, and determined that the carrying amount exceeded the estimated fair value. The Company prepared a ceiling test calculation in which the net present value of the proved plus probable reserves using a 5% discount rate was determined by the same group of independent engineers. The 5% discount rate was estimated to be the Company's risk free rate of return. As a result of this calculation, the Company determined that the carrying cost of the Canadian oil and gas properties had to be written down to their estimated value of $6,455,000 and expensed $2,480,341 in the fourth quarter of 2006.

Loss from discontinued operations, distribution of assets, dividends, and gain on sale of marketable securities

In 2006 the Company decided to focus on International oil and gas exploration and development opportunities. In August of 2006 the Company received final approval to complete a plan of arrangement to distribute the mining exploration business, and marketable securities related to that business, to its shareholders. The company identified $58,662 of legal costs relating to the plan of arrangement that were removed from G&A and shown separately as a loss from discontinued operations. All expenses incurred in 2005 with the exception of SBC were considered to be related to the discontinued operations and the comparative numbers for the year ended 2005 and for the quarterly information shown in this MD&A were separated and shown as a loss from discontinued operations. For 2005 the total loss from discontinued operations amounted to $211,910.

As part of the plan of arrangement the carrying cost of the mineral exploration properties and the marketable securities associated with the mineral exploration business were transferred to Great Bear Resources Ltd. In accordance with the CICA handbook the carrying cost of the mineral resource assets and the marketable securities at the time of completion of the plan of arrangement in the amount of $653,386 were charged to retained earnings.

On November 15, 2004 the Company declared a dividend in specie with respect to shares of Planet Exploration Inc. ("Planet"). Each shareholder of the Company at November 15, 2004 became entitled to receive 0.675 Planet shares for each Madalena share owned at November 15, 2004, subject to the shareholder fulfilling certain conditions. During 2006, and prior to the completion of the plan of arrangement, the Company distributed 96,963 Planet shares to shareholders that had fulfilled the conditions. In 2005 1,898,498 Planet shares were distributed. The fair market value of the shares at the date of the distribution (determined from the trading value of the shares on the TSX Venture exchange) is recorded as dividends paid in kind, and any gain or loss on the disposition of the Planet shares is recorded as a gain on sale of marketable securities. In 2006 the Company recorded $51,716 of dividends in kind and $45,016 of gain on sale of marketable securities. In 2005, $953,784 of dividends in kind and $890,033 of gain on sale of marketable securities were recorded. At August 22, 2006 any Planet shares that had not been distributed by the Company were transferred to Great Bear Resources Ltd. who assumed the obligation to distribute the shares if the shareholders fulfilled the commitment specified in the dividend in specie.

Net income (loss)

The net loss for the fourth quarter of 2006 was $2,796,248, compared to net loss of $280,045 in the fourth quarter of 2005. The net loss for 2006 was $4,661,496 compared to a net income of $467,374 for 2005. The increase in net loss for the fourth quarter and the year reflects the write down and depletion taken on the Canadian petroleum and natural gas properties, higher G&A and SBC offset by increases in production revenues and higher interest income. In 2005 net income was generated from the distribution of Planet shares as described above.

Income taxes

The Company has no provision for current income taxes in 2006 or 2005 and does not expect to have a current income tax expense for 2007 based on its available tax pool deductions. At December 31, 2006 the Company has tax pools available to deduct against income as follows:



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Non capital loss carryforwards 3,567,983
Share issue costs 1,399,715
Asset retirement obligations 80,262
Property and equipment 7,596,680
ACRI 45,354
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Future income tax assets and liabilities arise due to the difference between the tax basis of assets and their respective accounting carrying cost. The Company's tax basis of its assets exceeds its accounting carrying costs which results in a net future tax asset. The benefit of the future tax assets of the Company have not been recognized in the Company as it is not more likely than not that the benefit of the assets will be realized in the carry forward period.

Capital Expenditures

Madalena spent $9,845,506 on petroleum and natural gas properties and office furniture and fixtures in 2006 and $1,471,112 in the fourth quarter. In 2005 no capital expenditures made except for expenditures on mining properties which have been shown separately as discontinued operations assets. The total expenditures on the mining properties in 2005 amounted to $194,789. The expenditures incurred in 2005 are summarized in the following table:




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Canada
Drilling and intangible completions 8,158,008
Tangible completion and facilities 936,209
Land 54,807
Asset retirement obligations 67,893
Office furniture and equipment 97,153
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9,314,070
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Argentina - prospecting costs 490,149
Tunisia - prospecting costs 41,286
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Total capital expenditures 9,845,506
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LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006 Madalena had working capital of $18,309,436 compared to $1,769,182 in 2005. Working capital increased significantly in 2006 as a result of the issuance of common stock from private placements in March, May and November of 2006 for gross proceeds of $27,124,200, stock options exercised for gross proceeds of $262,000, and warrants exercised for gross proceeds of $1,257,626. The funds received from the issuance of common stock amounted to $26,959,262 in 2006. The Company has no debt at December 31, 2006. Capital expenditures in 2006 were funded entirely from working capital.

The Company is committed to a seismic exploration program in Tunisia in which it expects to incur $4,700,000 during 2007. In Canada, the Company expects to spend $1,208,000 on follow up wells, completions and tie-ins in the Edson and Brazeau areas in 2007. All expected expenditures will be funded from the Companies existing working capital.

TRANSACTIONS WITH RELATED PARTIES

Two directors of the Company are also directors of a public exploration company with which Madalena is in engaged in joint venture operations. All of the Company's oil and gas revenues, royalties and operating expenses are derived from this joint venture. At December 31, 2006 the Company has accounts payable due to this joint venture partner of $858,625.

The Company utilizes the services of a law firm in which one of the directors is a partner. During the year ended December 31, 2006 the Company expended $108,883 on services obtained from this firm.

SHARE INFORMATION

The Company has 106,391,449 common shares, 8,400,000 stock options and 15,071,690 warrants to purchase common shares outstanding at December 31, 2006. During 2006 the Company issued 38,155,250 shares pursuant to private placements, 1,700,000 shares pursuant to the exercise of stock options, and 15,115,250 shares pursuant to the exercise of warrants. At April 27, 2007 the company had 107,368,697 common shares, 7,900,000 stock options and 14,586,940 warrants outstanding.

BUSINESS RISKS

The oil and gas industry involves inherent risks which include but are not limited to the uncertainty of the exploration process and finding new reserves, securing markets for production from existing reserves, commodity price fluctuations, exchange rate fluctuations, interest rate changes, and changes in government regulations related to pricing, royalties, taxes, land fees, allowable production volumes, and environmental requirements. The oil and natural gas industry is intensely competitive and the Company competes with a number of Companies that may have better access to capital.

The Company's ability to increase reserves in the future will depend on its ability to select and acquire suitable prospects and the funds required to develop those prospects in a timely fashion. The ability of equity or debt financing is affected by many factors, some of which are not controllable by the Company.

The Company is focused on the international oil and gas exploration market. Conducting oil and gas exploration and development activities in foreign jurisdictions creates inherent risks in addition to oil and gas exploration risks which include but are not limited to currency instability, potential civil disturbances, currency and funds movement controls, price controls, political instability, changes in foreign ownership restrictions, and potential expropriation of property.

For addition detail regarding the Company's risks and uncertainties, refer to the Company's most recent AIF on SEDAR at www.sedar.com.

CONTRACTUAL OBLIGATIONS

The Company has committed to a lease for office premises terminating on June 15, 2010. The estimated obligation at December 31, 2006, including operating costs at current levels, is $393,289. The Company is also committed to a lease for its photocopier until December 15, 2010. The estimated obligation at December 31, 2006 is $14,888.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Significant accounting policies used by Madalena are disclosed in note 2 to the December 31, 2006 audited financial statements. Preparing financial statements in accordance with Canadian GAAP requires management to make judgments and estimates with respect to the critical accounting policies. Changes to these judgments and estimates could have a material effect on the Company's financial statements and financial position.

In 2006 the Company adopted new accounting policies applicable to the oil and gas exploration and development industry. These policies were not applicable to Madalena in 2005 when it was considered to be a development stage company in the mineral exploration business. The following is a summary of the significant accounting policies adopted and the estimates used by the Company in adopting these policies:

Full cost accounting

The Company has chosen to follow the full cost method of accounting exploration and development costs in accordance with the Canadian Institute of Chartered Accountants guideline AcG-16. The Company chose the full cost method of accounting, over the successful efforts method of accounting because it feels the full cost method of accounting is more widely utilized in the industry, Note 2 to the audited financial statements at December 31, 2006 describes the full cost method of accounting in detail. The following is brief summary of the two methods:

Full cost method

In accordance with the full cost method of accounting, all costs associated with the exploration for and the development of oil and gas reserves in cost centers that are no longer in the preproduction stage, are capitalized. Proceeds on sale or disposition of oil and gas properties are credited to the full cost pool unless this results in a change in the depletion and depreciation rate by 20 percent or more, in which case a gain or loss is recognized. Capitalized costs, including estimated future costs to develop proved reserves, accumulated within a cost center are depleted and depreciated using the unit of production method, based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of petroleum based on relative energy content of six thousand cubic feet of natural gas to one barrel of petroleum. Costs of acquiring and evaluating significant unproved petroleum and natural gas interests are excluded from the depletion calculation until it is determined that proved reserves are attributable to such interests, or until impairment occurs.

Successful efforts method

Under the successful efforts method of accounting costs associated with the development wells are capitalized and costs associated with exploration well are initially capitalized. Exploration wells are then evaluated to determine if economically recoverable reserves have been found, if reserves are not found the costs are expensed. All other exploration costs including geological and geophysical costs are expensed. Each year the capitalized wells are evaluated and reduced to estimated fair value of proved plus probable reserves as applicable. Depletion of capitalized costs is calculated following the unit of production method.

There are a number of estimates inherent in the full cost method of accounting for oil and gas expenditures including but not limited to the following:

(a) The proved and probable reserves available to be produced from the reservoir;

(b) The future pricing expected to be received;

(c) The decline rates applicable to the reserve;

(d) The estimated future costs to be used in the calculation of depletion;

(e) The discount rate associated with calculating net present value; and

(f) In cost centers in the development stage the ability to recover recorded costs from future activities.

Asset Retirement Obligations

The Company recognizes an asset retirement obligation ("ARO") in the period in which a well is drilled and a reasonable estimate of the fair value of the future costs associated with removal, site restoration and asset retirement, can be made. The fair value of the estimated ARO is recorded as a long-term liability with a corresponding increase in the carrying amount of property and equipment. Asset retirement costs recorded in property plant and equipment are amortized using the unit of production method and included in depreciation and depletion and accretion. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded. Any difference between the actual costs incurred upon settlement of the ARO and the recorded liability is recognized in the Company's earnings in the period in which the settlement occurs.

RECENT CANADIAN ACCOUNTING PRONOUNCEMENTS

Financial instruments:

Effective January 1, 2007, the Company will adopt the recommendations of the Canadian Institute of Chartered Accountants ("CICA") contained in an number of new Handbook Sections relating to financial instruments. These new accounting standards are effective for fiscal years beginning on or after October 1, 2006 and are described in new Handbook Sections 1530 - "Comprehensive Income"; 3855 - "Financial Instruments - Recognition and Measurement";3862 - "Financial Instruments - Disclosures"; 3863 - "Financial Instruments - Presentation"; and 3865 - "Hedges".

The new standards determine how reporting entities recognize and measure financial assets, financial liabilities, and non-financial derivatives. All financial assets are to be measured at fair market value with the exception of loans, receivables and investments that are "held to maturity", and certain equity investments, which are to be measured at cost. All financial liabilities are to be measured at fair market value when they are "held for trading" or if they are derivatives.

Gains and losses on financial instruments measured at fair market value will be included in net income in the period in which they arise, except for gains and losses from financial assets held for sale, and gains and losses from financial instruments which qualify for hedge accounting. Gains and losses from financial assets held for sale will be deferred and accumulated in other comprehensive income, disclosed separately from net income, and reclassified to net income when they are realized or impaired.

The Company has determined that a number of its asset backed securities which are usually held to maturity would be considered under this new standard to be available for sale assets which would require comprehensive accounting treatment. The Company believes that separate comprehensive accounting treatment provides no additional value, and therefore has designated to treat these financial instruments as held for trading assets, which require the recognition of an income or loss in net income in the period in which it arises.

Accounting changes:

The CICA has issued revisions to Handbook Section - 1506 - "Accounting Changes", which will apply to interim and annual financial statements issued after January 1, 2007. The revisions in this section address changes in accounting policies, accounting estimates and the correction of errors. The Company will adopt the requirements of this section for any future changes to accounting policies and estimates and any identification of errors.

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