Profound Energy Inc.
TSX : PFX

Profound Energy Inc.

May 13, 2008 18:05 ET

Profound Energy Inc. Announces Its Financial and Operating Results for the First Quarter of 2008

CALGARY, ALBERTA--(Marketwire - May 13, 2008) - Profound Energy Inc. (TSX:PFX) ("Profound" or the "Company") is pleased to report its operational and financial results for the three month period ending March 31, 2008.

Profound was formed on November 19, 2007 through the amalgamation of Profound Energy Ltd. ("Former Profound"), a private oil and gas exploration and production company, and Cork Exploration Inc. ("Cork"), a public oil and gas exploration and production company.

HIGHLIGHTS

On January 18, 2008 Profound announced that it had entered into an agreement to acquire all of the shares of Defiant Resources Corporation ("Defiant") by way of Plan of Arrangement. This transaction was completed on March 31, 2008.

Defiant brings to Profound 2.5 million boe of Proved and 4.6 million boe of Proved plus Probable reserves with an estimated value before tax using a 10 percent discount rate of $81.0 million based on a National Instrument 51-101 compliant report prepared by independent reserve evaluators Sproule Associates Limited as of December 31, 2007. Currently the Defiant properties produce approximately 1030 boed comprised of 4.5 mmcfd of natural gas and 280 bopd of oil and natural gas liquids.

Capital expenditures in the first quarter totalled $12.3 million which was invested in the drilling, completion and equipping for production of 7 (4.2 net) wells resulting in 6 (3.4 net) natural gas wells and 1 (0.8 net) dry hole thereby achieving a success rate of 81 percent.

During the first quarter Profound experienced average daily production of 9.5 mmcfd of natural gas and 635 bbls/d of NGLs and oil, a total of 2,220 boed.

Funds flow from operations in the first three months was $5.8 million or $0.23 per share on a basic and fully diluted basis.

Total net debt at March 31, 2008 including negative working capital and excluding commodity contracts was $60.3 million.

Asset sales at Brazeau and Majeau Alberta are scheduled to close May 15, 2008 yielding $14.1 million in proceeds subject to adjustments, due diligence and other conditions typical for a transaction of this nature.

Capital expenditures in 2008 are budgeted to be $36.5 million of which $24.2 million remain to be spent.

Profound holds 124,738 net undeveloped acres of land on which the Company has identified over 100 drilling locations; 25 of which are multi-stage completion horizontal wells and 75 of which are vertical wells. Profound holds an average working interest of 65 percent in the identified drilling inventory.

The field operating net back averaged $34.61 per boe in the first three months of the year and the cash flow net back which includes cash taxes, general and administrative and interest expense was $28.98 per boe.



FINANCIAL AND OPERATING HIGHLIGHTS

----------------------------------------------------------------------------
Three Month Period Ended
--------------------------
March 31, 2008
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FINANCIAL HIGHLIGHTS
($000 unless otherwise indicated)

Petroleum and natural gas sales 11,657
Funds flow from operations 5,854
Per share - basic and diluted ($) 0.23
Net loss (330)
Per share - basic and diluted ($) (0.01)
Operating netback - per boe ($) 34.61
Capital expenditures 12,266

Acquisition of Defiant Resources 55,896
Bank debt plus working capital deficiency and
excluding commodity contracts 60,270
Common shares outstanding (000's) 37,339

OPERATING HIGHLIGHTS

Average daily production
Natural gas (mcf/d) 9,503
Crude oil & NGL's (bbls/d) 636
Barrels of oil equivalent (boe/d) 2,220

Wells drilled
Gross 7
Net 4.2
Success (%) 81

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Please refer to the Management's Discussion and Analysis and the Financial
Statements that are part of this press release for more complete
information.


OPERATIONS OVERVIEW

Carrot Creek, Alberta

Profound drilled a (0.50 net) horizontal Rock Creek well, and participated in 3 (1.9 net) vertical wells. Three horizontal (2.0 net) Rock Creek wells are planned for the remainder of 2008. In addition to the horizontal multi-stage completion wells, Profound intends to drill 5 (2.9 net) vertical wells to further exploit the discoveries made to date in the Ostracod zone. A vertical gas well (0.37 net) drilled in Q1 2008 tested the Ostracod formation at a rate in excess of 1,250 boed.

Profound is working on installing additional compression and pipelines to bring on new production volumes which will be unable to flow until late June 2008 when this work is scheduled for completion. The amount of production estimated to be currently restricted until this work is completed is approximately 300 boed. Profound estimates that it currently has a drilling inventory in excess of 10 horizontal wells and 15 vertical wells at Carrot Creek.

Pembina Area, Alberta

One vertical oil well (1.0 net) and 3 re-completions (2.7 net) were undertaken in the Pembina, Alberta area.

Test rates of between 300 mcf/d and 3000 mcf/d were obtained in the re-completion operations where Profound holds a 60% working interest. Plans are underway to exploit this seismically defined natural gas accumulation with horizontal wells using multi-stage fracture stimulations. Profound anticipates spudding its first horizontal well (0.6 net) in this area in July 2008 when the drill site is expected to be accessible. Production performance will be carefully evaluated to determine the optimum well spacing and stimulation density required to maximize reserves recovery. If successful, Profound has identified an inventory of 10 additional horizontal drilling locations.

West Pembina Area, Alberta

Exploration at West Pembina is continuing, with capital being allocated to follow up a successful Belly River oil well re-completion (0.8 net) with a vertical well (0.8 net) directly offsetting the re-completed oil well.

Profound was also successful at Crown land sales and acquired an additional 4 sections of land at 100% working interest. The Company now has 15 contiguous sections of land at an average working interest of 75%.

Peace River Arch

As a result of the acquisition of Defiant Resources Corporation, a second core area has been added in the Peace River Arch area of Alberta. Three wells (2.4) net are budgeted for the remainder of 2008 to further exploit existing discoveries. Profound plans to continue to diversify its asset base in the area, with an emphasis on growing the Karr and Gold Creek areas.

ASSET SALES

Brazeau

Profound has entered into an agreement to sell all its interest in the Brazeau area of Alberta for $11.4 million subject to customary adjustments. The transaction is expected to close on or about May 15, 2008 and will be effective as at April 1, 2008. The disposition of these assets is subject to customary due diligence and other conditions typical for a transaction of this nature. Production from this area, net to Profound, is approximately 255 boed comprised of 1.14 mmcf/day of natural gas and 65 bbls/day of oil and natural gas liquids.

GLJ Petroleum Consultants Ltd., independent reserve evaluators, in their National Instrument 51-101 compliant report dated January 1, 2008, estimated that as of December 31, 2007 the Brazeau area represented approximately 392,000 boes of proved developed producing reserves, 143,000 boes of proved undeveloped reserves and 874,000 boes of proved plus probable reserves net to Profound's interest. The estimated future development cost required to establish these reserves is estimated to be $2.6 million. Included in the sale is undeveloped land of approximately 664 hectares.

Majeau

Another agreement has been reached to sell Profound's interests in the Majeau area of Alberta for a total purchase price of $2.7 million subject to customary adjustments. This transaction is also expected to close on or about May 15, 2008 and will also be effective as at April 1, 2008, subject to due diligence and other conditions typical for a transaction of this nature. Profound produces approximately 240 mcf/d or 40 boed from the Majeau area.

Sproule Associates Limited in their National Instrument 51-101 compliant report dated January 1, 2008, estimated that as of December 31, 2007 Profound held approximately 63,000 boes of proved developed producing reserves, nil boes of proved undeveloped reserves and 207,000 boes of proved plus probable reserves in the Majeau area. The estimated future development cost to establish these reserves is $0.5 million. Included in the sale is approximately 896 hectares of undeveloped land.

Outlook

The Defiant acquisition complements Profound's acquire, exploit and explore growth strategy. The acquisition provides significant increases to Profound's production, land and cash flow. The majority of the properties are located in the Peace River arch area of Alberta while others are in the Pembina area near other Profound properties. Extensive seismic coverage over much of the approximately 85,000 net undeveloped acres of Defiant land provides an inventory of opportunities that are being prepared for drilling in late 2008 and 2009.

The sale of the Brazeau and Majeau properties is consistent with Profound's strategy of concentrating assets and operations within key areas so as to yield efficiency. In addition to the operating efficiencies expected, the sales serve to strengthen Profound's financial position providing the flexibility, if it so determines, to expand its 2008 capital program when drilling results or economic conditions warrant or reduce its bank debt.

In total, Profound has assembled an inventory of over 100 gross exploration and development locations on land it has acquired over the last 12 months. Of these locations, 25 are horizontal wells which will incorporate multi-stage fracture stimulations. This represents almost 50% of the proposed future capital expenditures. These horizontal wells target formations with existing gas accumulations, and represent a low risk exploitation program for the next 2-3 years.

ABOUT PROFOUND

Profound explores for and produces oil and natural gas in Alberta, Canada. It was formed on November 19, 2007 through the amalgamation of Profound Energy Ltd., a private oil and gas exploration and production company, and Cork Exploration Inc. a public oil and gas exploration and production company. On March 31, 2008 Profound acquired Defiant Resources Ltd., a public oil and gas company operating in Alberta.

The Company operates in central Alberta west of the fifth meridian and in the Peace River Arch area of Alberta.

DISCLAIMER

Certain information regarding Profound in this news release including management's assessment of future plans, asset dispositions, production, drilling program and operations and the effect on Profound may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, risks associated with sour hydrocarbons, changes to the proposed royalty regime prior to implementation and thereafter, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, capital expenditure costs, including drilling, completion and facilities costs, unexpected decline rates in wells, delays in projects and/or operations resulting from surface conditions, wells not performing as expected, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Readers are cautioned that the forgoing list of factors is not exhaustive. Additional information on these and other factors that could effect Profound's operations and financial results are included in Profound's Annual Information Form on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Profound does not undertake any obligation to update publicly or to revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

In this news release, reserves and production data are commonly stated in barrels of oil equivalent ("boe") using a six to one conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf to one 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.

As an indicator of the Company's performance, the term "funds flow from operations" contained within this news release should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Profound believes that "funds flow from operations" is a useful supplementary measure as shareholders and/or investors may use this information to analyze operating performance, leverage and liquidity. Funds flow from operations, as disclosed within this news release, represents funds flow from operating activities before changes in non-cash operating activities working capital. The Company presents funds flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share.

"Total net debt" refers to projected bank debt plus estimated working capital deficit (excludes any current unrealized amounts pertaining to risk management commodity contracts). Total net debt is not a recognized measure under Canadian GAAP.

References in this news release to test production rates and test rates for recently drilled wells are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will commence production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company.

PROFOUND ENERGY INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following management's discussion and analysis (MD&A) dated May 9, 2008 is management's assessment of the Corporation's financial and operating results for the quarter ended March 31, 2008. This MD&A should be read in conjunction with the audited financial statements for the year ended December 31, 2007 of Profound Energy Inc. ("Profound" or the "Corporation") as well as the Annual Information Form and the Statement of Reserves Data and Other Information. These documents as well as other statutory filings are available on SEDAR at www.sedar.com and at the Corporation's website at www.profoundenergy.ca. Financial data contained herein has been prepared in accordance with Canadian generally accepted accounting principles (GAAP).

The term "2007" refers to the 12 months ended December 31, 2007. The terms "2008 Q1", "2007 Q4" and "2007 Q1" refer to the three months ended March 31, 2008, December 31, 2007 and March 31, 2007 respectively. All references are to Canadian dollars unless otherwise indicated.

Non-GAAP Measures

Profound utilizes the following terms for measurement within the MD&A that do not have the standard prescribed meanings under GAAP and these measurements may not be comparable with the calculation of similar measurements of other entities.

"Funds flow from (used in) operations" and "operating netback" are not recognized measures under GAAP. Management believes that in addition to net earnings, funds flow from (used in) operations and operating netback are useful supplemental measures as they demonstrate the Corporation's ability to generate the cash necessary to fund future growth through capital investment or to repay debt. Investors are cautioned that these measures should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of the Corporation's performance. The Corporation's method of calculating these measures may differ from those of other entities and therefore may not be comparable to measures used by other entities. For these purposes, the Corporation defines funds flow from (used in) operations as cash provided from operations before changes in non-cash working capital and defines operating netback as revenue less royalties, and operating expenses, calculated on a per boe basis.

In this MD&A, the calculation of "boe" is based on the conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This conversion conforms to National Instrument 51-101 - Standards for Oil and Gas Activities, issued by the Canadian Securities Administrators. Readers are cautioned that boe may be misleading if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and is not intended to represent a value equivalency at the wellhead.

Forward-Looking Statements

Certain statements contained within this MD&A, and in certain documents incorporated by reference into this document, constitute forward-looking statements. These statements relate to future events or Profound's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not exclusively, identified by words such as "anticipate", "estimate", "may", "expect", "plan", "future", "continue", "intends", "projects", "believes", "potential", "continue", "seek", "budget", "estimate", "forecast, "will", "predict", "potential", "target", "could", "might", and other similar expressions.

These statements involve known and unknown risks, uncertainties and other factors which may cause actual results and performance of the Corporation and/or industry to be materially different from future results and performance anticipated by such forward-looking information. Profound's management believes the expectations reflected in forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and, as such, forward-looking statements included in or incorporated by reference into this MD&A should not be unduly relied upon. These statements speak only as to the date of this MD&A or as of the date specified in the documents incorporated by reference into this MD&A. The Corporation does not undertake any obligation to publicly update forward-looking information except as required by applicable securities law.

Many factors may cause actual results to materially differ from those in the forward-looking statements. In particular, this MD&A and the documents incorporated by reference, contain forward-looking statements pertaining to the following:

- The performance characteristics of Profound's oil and natural gas properties;

- The size of the Corporation's oil, natural gas and natural gas liquids reserve and production volumes;

- Estimates of future cash flows;

- Future oil, natural gas prices, and natural gas liquids prices and the differentials between Corporation and benchmark prices;

- Timing and amounts of future capital to be expended;

- Commodity prices, exchange rates and interest rates;

- Expected royalty rates, operating costs, general and administrative costs and other expenses;

- Supply of and demand for oil, natural gas and natural gas liquids;

- The ability to raise capital and add to reserves through acquisitions and development;

- The existence, strategy and operation of Profound's commodity price risk management program;

- The ability to identify accretive growth opportunities and capitalize on them;

- The Corporation's acquisition strategy, the criteria employed to acquire properties and companies, and the benefits derived from same; and

- Treatment under governmental and other regulatory regimes including but not limited to royalty programs, taxation, environmental regulation and issues and other laws.

Overview

Profound was formed on November 19, 2007 through the combination of Cork Exploration Inc. ("Cork") and Profound Energy Ltd. ("Former Profound"). Former Profound shareholders received 1.6 Cork common shares for each Former Profound common share outstanding, for a total of 46,243,426 Cork shares (including 3,360,000 shares subject to share purchase loans). Cork and Former Profound amalgamated to form Profound Energy Inc. and completed a 4:1 share consolidation for a total of 24,902,616 Profound shares (including 840,000 post-consolidation shares subject to share purchase loans) outstanding immediately following the combination. For reporting purposes, the transaction was accounted for as a reverse takeover, whereby Profound is deemed to be the surviving entity. Share information presented pre-November 19, 2007 relates to Former Profound shares, with post-November 19 relating to Profound shares. In 2006, Former Profound was in a pre-production phase with no wells on production. Hence, no income statement comparatives are presented for 2006.

Accordingly, for the year ended December 31, 2007, the financial statements contain only 42 days of results from Cork and all historical comparatives are those of Former Profound.

On March 31, 2008, Profound completed the acquisition of Defiant Resources Corporation through the issuance of 12,436,592 common shares and the assumption of approximately $20.5 million of bank debt and negative working capital. Following the acquisition Defiant was immediately amalgamated. Financial results of Profound for the three months ended March 31, 2008 includes the acquisition of, and shares issued to acquire Defiant, but no revenue, royalties or expenses.



Volumes

2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Natural gas (mcf/day) 9,503 4,873 286
Oil and NGL (bbls/day) 636 323 25
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Total (boe/day) 2,220 1,135 73
--------- ------------------------
--------- ------------------------


Profound's natural gas and crude oil and natural gas liquids volumes increased from 1,135 boe per day to 2,220 boe per day or 96 percent in the first quarter of 2008 from the fourth quarter of 2007. Production from the fourth quarter of 2007 included only 42 days of production from Cork. Volumes for Q1 2008 declined slightly from December's production of 2,389 boe per day due to new wells coming off of flush production and the Pembina 7-32 well being shut in for approximately three weeks for a workover.



Daily Production by Area
Three months ended March 31, 2008

Crude Oil Natural Gas NGL Total
Area (bbls/day) (mcf/day) (bbls/day) (boe/day)
---------- ------------ ---------- ---------

Carrot Creek - 5,796 400 1,366
Pembina 2 1,930 107 431
West Pembina 25 398 37 128
Brazeau 14 917 46 213
Cochrane/Edson - 468 4 82
---------- ------------ ---------- ---------
Total 41 9,509 594 2,220
---------- ------------ ---------- ---------
---------- ------------ ---------- ---------


Product Pricing
Natural gas ($/mcf) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Price before hedging 8.12 6.89 7.87
Hedging gain (realized) 0.16 0.36 -
--------- --------- ---------
Net price 8.28 7.25 7.87
--------- --------- ---------
AECO daily index 7.54 6.00 5.20
NYMEX (US$/mcf) 9.22 7.36 6.59
Exchange rate Cdn$/US$ 1.00 0.98 0.96


Profound's realized natural gas price increased by $1.23 per mcf or 18 percent from Q4 of 2007 to Q1 of 2008. Profound receives a premium to AECO due to its higher heat content. The hedging gain of $0.16 per mcf for the quarter related to the collar which Cork had in place ($7.00 - $7.65/gj for 4,500 gj/day). This collar expired March 31, 2008.

Gas prices strengthened during the quarter due to larger than anticipated draws on gas storage in North America.

Except to the extent that the Corporation has hedged its exposure to natural gas price volatility using financial derivative instruments, all of the Corporation's production is sold on the spot market. Therefore both the historical prices received and the expected future prices fluctuate with prevailing prices of crude oil and natural gas.



2008 Q1 2007 Q4 2007 Q1
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Crude oil and NGL ($/bbl) 80.13 78.89 53.22
WTI (US$/bbl) 97.86 90.68 58.27
Edmonton Light ($/bbl) 98.08 87.11 67.79


Profound's realized crude oil and natural gas liquids price increased $1.24 per barrel (2 percent) to $80.13 per barrel from $78.89 per barrel received in the fourth quarter of 2007. The market increase in oil price accounted for a portion of higher average price. Profound's average price of oil and NGL's includes volumes of propane and butane which sell for a lower price than oil. In the first quarter of 2008, West Texas Intermediate crude oil prices increased by 8 percent and Edmonton Light postings were up by 13 percent compared to the fourth quarter of 2007.



Income Statement

Revenue 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Natural gas sales ($000) 7,021 3,088 202
Oil & NGL sales ($000) 4,636 2,342 121
--------- ------------------------
Total Sales ($000) 11,657 5,430 323
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Per boe ($) 57.71 52.01 49.30
--------- ------------------------
Realized Gain on commodity
contracts ($000) 142 162 -
--------- ------------------------
Per boe ($) 0.70 1.55 -


Revenue increased from $5,430,000 in the fourth quarter of 2007 to $11,657,000 in the first quarter of 2008. Of this increase, $600,000 was due to price increases, with the remainder of $5,627,000 related to a full quarter of production from the Cork acquisition versus the 42 days included in the fourth quarter. Profound's revenue per boe increased due to the increase in natural gas and oil prices.

At December 31, 2007, the Corporation had recorded a commodity contract asset of $172,725. This contract expired at March 31, 2008. For the three months ended March 31, 2008, the Corporation recorded an unrealized loss of $172,725 and a net realized gain of $141,592.



Following is a summary of all derivative contracts in place as at March 31,
2008:

Natural Volume Pricing Strike Price
Gas (GJ/day) Point ($Cdn/GJ) Term
-------- -------- --------- -------------- ------------------------
Swap 2,500 AECO-C Cdn. - $7.00 Apr. 1 - Oct. 31, 2008
Swap 2,500 AECO-C Cdn. - $7.02 Apr. 1 - Oct. 31, 2008


At March 31, 2008, the Corporation has recorded a commodity contract liability and unrealized loss of $1,999,973 associated with these two swaps.

On a go-forward basis, Profound may continue to use hedge transactions to manage the Corporation's cash flow. These transactions may take the form of swaps, costless collars, floors or ceilings, but will not exceed 50 percent of the Corporation's production. Further details of Profound's hedges are contained in Note 11 of the March 2008 financial statements.

The following table reconciles oil and natural gas revenue between the fourth quarter of 2007 and the first quarter of 2008:



Revenue for the three months ended December 31, 2007 ($000) 5,430
Increase in commodity prices ($000) 600
Increase in production volumes ($000) 5,627
---------
Revenue for the three months ended March 31, 2008 ($000) 11,657
---------
---------


Interest and Other Revenue 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total interest and other revenue
($000) 9 157 79
--------- --------- ---------


Interest and other revenue decreased from $157,000 in the fourth quarter of 2007 to $9,000 in the first quarter of 2008. Funds from the sale of Former Profound shares were held in short-term deposits until the close of the Cork Transaction on November 19, 2007. These funds were then applied against the outstanding bank line acquired through the Transaction. As such, the Corporation does not expect to receive interest revenue in the future. Other revenue of $9,000 in 2008 relates to third party income received from joint venture partners for usage of Profound facilities.



Royalties 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total royalties ($000) 2,871 1,286 81
% of revenue 24.6 23.7 25.1
Per boe ($) 14.21 12.32 12.39
--------- --------- ---------


Royalties increased from $1,286,000 in the fourth quarter of 2007 to $2,871,000 in the first quarter of 2008, due to the inclusion of a full quarter of Cork's sales volumes and revenue compared to the 42 days in Q4 of 2007. Profound's average royalty rate was 24.6 percent in the first quarter of 2008, compared to 23.7 percent in the fourth quarter. The increase from $12.32 to $14.21 per boe is reflective of higher prices received for all products.



Operating Expenses 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total lease operating ($000) 1,738 1,068 38
Per boe ($) 8.61 10.23 5.73
--------- --------- ---------


Operating expenses increased from $1,068,000 in the fourth quarter of 2007 to $1,738,000 in the first quarter of 2008 due to the inclusion of a full three months of Cork's production. The operating cost rate decreased by $1.62 per boe or 16 percent. Profound is in the process of streamlining and optimizing field operations to reduce operating costs. Also, in the fourth quarter of 2007 a workover on the Pembina 07-32 well and environmental cleanup work on the Cork properties contributed to the high operating costs in 2007. As compared to 2007 Q1, the Cork properties carry significantly higher operating costs than the Old Profound properties due to higher processing and compression fees and fixed rental compression charges.

Profound continues to review all properties to identify areas where production operations may be carried on more efficiently, thereby reducing operating costs. High operating costs reduce the netback of the Corporation which, in turn, reduces cash available for reinvestment in new drilling and acquisition opportunities. Profound is addressing the operating cost issue on several fronts, including replacing rental equipment with purchased equipment and optimizing general field operations.



Transportation Charges 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Transportation expenses ($000) 56 19 2
Per boe ($) 0.28 0.18 0.27
--------- --------- ---------


Transportation costs increased from $19,000 in Q4 of 2007 to $56,000 in Q1 of 2008. Transportation expenses relate to the cost of transporting natural gas and clean oil to point of sale. The change of costs from Q4 of 2007 to Q1 of 2008 relates to the inclusion of a full three months of Cork production. On a boe basis, Q1 2008 includes transportation charges relating to a prior period.



Operating Netback ($/boe) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Revenues 57.71 52.01 49.30
Royalties 14.21 12.32 12.39
Operating and transportation
expenses 8.89 10.41 6.00
--------- --------- ---------
Operating netback 34.61 29.28 30.91
--------- --------- ---------


The operating netback increased from $29.28 per boe in Q4 of 2007 to $34.61 in Q1 of 2008. The increase was due to higher prices for natural gas and oil and lower operating and transportation expenses.



General & Administrative
(G&A) Costs
($000 except per boe) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total G & A expense 1,109 1,179 413
Recoveries (340) (233) (24)
Capitalized (181) (461) (202)
--------- ------------------------
Net 588 485 187
Per boe ($) 2.91 4.64 28.46
--------- --------- ---------


Gross general and administrative (G&A) costs decreased from $1,179,000 in the fourth quarter of 2007 to $1,109,000 in the first quarter of 2008, primarily as a result of bonus payments and one-time consulting and professional fees expended in the fourth quarter of 2007. Recoveries increased due to an active first quarter of drilling and completing wells. Capitalized G&A is dependent upon the amount of recoveries charged out; as recoveries increase, capitalized G&A decreases. Per boe general and administrative expense fell from $4.64 per boe to $2.91 per boe due to the acquisition of the Cork properties and increased production from the amalgamated Corporation.

With the Defiant acquisition, the Corporation has added staff for a current total of 23. To assist in integrating Defiant, the Corporation also uses consultant services as required. The office lease for Defiant will be returned to the landlord May 11th, 2008 and all staff are now located in Profound's office. G&A expenses per boe are expected to continue to decrease in 2008 due to increased production levels from the Defiant acquisition.



Interest Expense 2008 Q1 2007 Q4 2007 Q1
--------- --------- ---------
Total interest expense ($000) 465 160 -
--------- --------- ---------
Per boe ($) 2.30 1.53 -
--------- --------- ---------


Interest expense of $465,000 in Q1 of 2008 includes a full three months of interest expense versus 42 days in the fourth quarter of 2007. The Corporation pays interest based on a sliding scale at prime plus 0 percent to prime plus .75 percent for its prime based loans and bankers' acceptance fees plus a stamp fee of 100 to 190 points for guaranteed notes. For the first quarter of 2008, the effective interest rate paid was 5.7 percent annualized. Prime fell on December 5 from 6.25 percent to 6.0 percent, followed by a further decrease to 5.75 percent on January 23 and 5.25 percent on March 5, 2008.



Provision for Taxes ($000) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Future income tax (recovery)
expense (184) 517 (86)
Part XII.6 tax on flow-through
expenditures 78 (4) 32
--------- --------- ---------
Total tax expense (106) 513 (54)
--------- --------- ---------


Future income taxes are recognized for the estimated tax consequences attributed to differences between the amounts reported in the financial statements and their respective tax bases using substantively enacted income tax rates. The provision for future income taxes was a recovery of $184,000 in Q1 of 2008 compared to an expense of $517,000 in Q4 of 2007. The credit of $184,000 in Q1 of 2008 relates to the loss incurred. The charge in the fourth quarter of 2007 related primarily to the positive income in Q4 as well as a reduction in the fourth quarter effective tax rate at which the future tax rate is recognized.

Part XII.6 Tax is associated with the look-back provision of flow-through share issuances. Tax is calculated on the unexpended portion of the flow-through for each month after January and is due on February 28, 2009. The charge of $78,000 in the first quarter of 2008 relates to $6,344,000 of unexpended flow-through expenditures associated with the February 2007 flow-through share issue of $16,008,000. The credit of $4,000 in the fourth quarter relates to a minor reallocation of expenditures from "D" to "E".

On January 23, 2007, Former Profound issued 50,000 (20,000 post-consolidation) flow-through common shares for gross proceeds of $60,000. Canadian exploration expenses from the offering were renounced to investors on November 16, 2007. All associated flow-through obligations were expended in 2007.

On November 19, 2007, the Corporation acquired obligations through the Cork Transaction for two flow-through share issues as follows:

On February 20, 2007 Cork issued, on a private placement, bought-deal basis, 3,335,000 (833,750 post-consolidation) flow-through common shares for gross proceeds of $16,008,000. Canadian exploration expenses from the offering were renounced to investors on December 31, 2007. As of March 31, 2008, an estimated $9.7 million of qualifying expenditures had been spent. The remaining $6.3 million will be spent throughout 2008 under Canada Revenue Agency's defined look-back rules.

With the exception of Part XII.6 Tax, the Corporation is not cash taxable in 2008 due to its substantial tax pools. The Corporation has approximately $210.7 million in tax pools, share issue costs and non-capital losses available for deduction in future periods. Tax pools are comprised of the following:



March 31, December 31,
Tax Pools ($000) 2008 2007
----------- -------------
Canadian oil and gas property expense 32,859 17,166
Canadian exploration expense 63,037 33,096
Canadian development expense 56,667 54,956
Capital cost allowance 39,987 28,514
Cumulative eligible capital 53 24
Non-capital loss carry-forwards expiring from
2014 through 2027 12,126 3,606

Share issue costs 5,945 5,343
----------- -------------

210,674 142,705
----------- -------------
----------- -------------


Stock-based Compensation
($000 except per boe) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total stock-based compensation 350 (227) 90
Capitalized 192 (160) 58
--------- ------------------------
Net 158 (67) 32
Per boe ($) 0.78 (0.65) 4.93
--------- --------- ---------


Stock-based compensation is a non-cash calculation that attempts to value stock options at the time they are granted. Options granted and outstanding vest over a three-year period, with one-third vesting at the end of each year.

Stock-based compensation of $158,000 in the first quarter of 2008 relates primarily to a full quarter of stock options granted in 2007 after the close of the Cork Transaction. The credit of $67,000 in Q4 2007 relates to Former Profound options, which were cancelled, unvested, in the fourth quarter as a condition of the Cork Transaction and is partially offset by new options granted after the November 19, 2007 Transaction.



Depletion, Depreciation and
Accretion (DD&A) 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Total DD&A ($000) 4,194 2,174 344
Per boe ($) 20.76 20.83 52.44
--------- --------- ---------


Depletion, depreciation and accretion (DD&A) increased from $2,174,000 in the fourth quarter of 2007 to $4,194,000 in the first quarter of 2008. This increase was due to the higher volumes produced subsequent to the date of the Cork Transaction on November 19.

Prior to the Cork Transaction, the DD&A rate of $54.19 per boe was high due to the majority of the Corporation's wells being drilled on farm-in lands during the earning phase where the farmee spends 100 percent of the costs but receives a lesser portion of the reserves. The fourth quarter rate of $20.83 per boe reflects the reserves and production acquired through the Cork acquisition.



Net Loss 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Comprehensive and net loss ($000) (330) (83) (226)
Per boe ($) (1.64) (0.80) (34.41)
Per share, basic and diluted ($) (0.01) (0.01) (0.06)
Weighted average shares outstanding
(000) (adjusted for Cork transaction) 25,039 16,589 3,646
--------- --------- ---------


The comprehensive and net loss increased from $83,000 in the fourth quarter of 2007 to $330,000 in the first quarter of 2008. Improved financial results from a full quarter of production was offset by an unrealized loss on commodity contracts of $2,173,000 to result in a comprehensive and net loss of $330,000.



2008 Q1 2007 Q4 2007 Q1
--------------- ------------- -------------
$000 $/boe $000 $/boe $000 $/boe
--------------- ------------- -------------
Revenue, including interest and
other 11,806 58.45 5,749 55.07 403 61.42
--------------- ------------- -------------

Royalties 2,871 14.21 1,286 12.32 81 12.39
Operating expenses and
transportation 1,794 8.89 1,087 10.41 39 6.00
General and administrative 588 2.91 485 4.64 187 28.46
Interest expense 465 2.30 160 1.53 - -
Part XII.6 tax on flow-through
expenditures 78 0.39 (4) (0.04) 32 4.85
--------------- ------------- -------------
5,796 28.70 3,014 28.86 339 51.70
--------------- ------------- -------------
--------------- ------------- -------------

Funds flow from operations
excluding asset retirement
obligations 6,010 29.75 2,735 26.20 64 9.72
Unrealized loss on financial
instrument 2,173 10.76 194 1.86
Depletion, depreciation and
accretion 4,193 20.76 2,174 20.83 344 52.44
Stock-based compensation 158 0.78 (67) (0.65) 32 4.93
Future tax expense (recovery) (184) (0.91) 517 4.96 (86) (13.24)
--------------- ------------- -------------
Comprehensive and net loss (330) (1.64) (83) (0.80) (226) (34.41)
--------------- ------------- -------------
--------------- ------------- -------------

Liquidity and Capital Resources

Funds Flow from Operations 2008 Q1 2007 Q4 2007 Q1
--------- ------------------------
Funds flow from operations ($000) 5,854 2,735 64
Funds flow netback, per boe ($) 28.98 26.20 9.72
Funds flow from operations, per basic
and diluted share ($) 0.23 0.16 0.02
Funds flow as a percentage of
petroleum and natural gas revenue 50.2 50 19.8
Weighted average basic shares
outstanding (000) (adjusted for
Cork transaction) 25,039 16,589 3,646


Funds flow from operations increased from $2,735,000 in the fourth quarter of 2007 to $5,854,000 in the first quarter of 2008, an increase of 114 percent. Inclusion of a full three months of the Cork production volumes resulted in increased net revenues which combined with higher oil and natural gas prices to generate the increased cash flow.



Cash and working capital March 31, December 31,
($000) 2008 2007
------------ ------------
Cash 50 91
Non-cash working capital/(deficiency) (62,320) (32,973)
------------ ------------

Total working capital (62,270) (32,882)
------------ ------------
------------ ------------


Working capital decreased from a negative $32,882,000 at December 31, 2007 to a negative $62,270,000 by March 31, 2008. The Corporation assumed $20,485,000 in negative working capital through the acquisition of Defiant.

The Corporation issued 12,436,592 shares in March 2008 to acquire Defiant. Shares were also issued in January, July and October of 2007 to fund its capital program and acquisition of Cork.

On January 4, 2007 the Corporation closed a major financing with ARC Financial Corporation (ARC). Pursuant to the Subscription Agreement dated January 4, 2007, ARC has subscribed for 21,212,121 common shares at $1.65 per common share for gross proceeds of $35,000,000. Of these, 4,242,424 were issued at closing, with the remainder to be issued as the Corporation required funds.

On July 20, 2007, the Corporation received $14,000,250 from ARC in full payment for 8,485,000 additional shares.

On October 9, 2007, pursuant to the ARC Subscription Agreement, the Corporation issued 8,484,697 common shares at $1.65 per share for gross proceeds of $13,999,750.

As of December 31, 2007 ARC has been issued 21,212,121 shares under the Subscription Agreement. This fulfills the ARC Subscription Agreement obligation.



Capital Expenditures ($000) Q1 2008 Q4 2007 Q1 2007
--------- --------- ---------

Land 1,085 555 518
Seismic 848 24 -
Drilling and completions 8,119 5,136 3,006
Well equipment and facilities 1,986 957 500
Other 47 11 166
--------- --------- ---------
12,085 6,682 4,190

Capitalized G&A 181 463 202
--------- --------- ---------

Total capital expenditures 12,266 7,145 4,392
--------- --------- ---------
--------- --------- ---------


Capital Expenditures by Area
Three Months Ended March, 2008

Land/ Drilling/ Equipping/
Area ($000) Seismic Completions Facilities Total
--------- ------------- ------------ --------

Carrot Creek 290 4,325 375 4,990
West Pembina 1,643 2,034 284 3,961
Pembina - 1,042 675 1,717
Brazeau - 695 652 1,347
Other Areas - 23 - 23
--------- ------------- ------------ --------
1,933 8,119 1,986 12,038
--------- ------------- ------------
Capitalized G&A and Other 228
--------
12,266
--------
--------


Profound had an active first quarter, spending a total of $12,266,000 for capital expenditures. The majority was spent on drilling 7 gross wells (4.2 net wells) with a net success rate of 81 percent as well as three recompletions at Pembina for a cost of $8,119,000. In addition, $1,933,000 was spent on land and seismic, and $1,986,000 to equip and tie-in wells for production.

Because Cork's and Profound's properties are in close proximity, Profound staff were able to immediately begin capitalizing on the Cork assets and, therefore, have integrated the Cork drilling prospects into the Profound drilling program.



Wells Drilled by Area
Three Months Ended March 31, 2008
Dry & Success
Area Natural gas Crude oil abandoned Total Rate
--------------- ------------- ------------ ---------- ---------
Gross Net Gross Net Gross Net Gross Net (net)
--------------- ------------- ------------ ---------- ---------
Carrot Creek 5 2.4 - - - - 5 2.4 100%
West Pembina 1 1.0 - - 1 0.8 2 1.8 56%
--------------- ------------- ------------ ---------- ---------
6 3.4 - - 1 0.8 7 4.2 81%
--------------- ------------- ------------ ---------- ---------
--------------- ------------- ------------ ---------- ---------


Capital Asset Management

The Corporation's policy is to maintain a strong capital base to maintain investor, creditor and market confidence to ensure continued growth.

The Corporation's capital consists of shareholders' equity, bank debt and working capital. The Corporation adjusts its capital structure to manage its current and future debt, drilling programs and potential corporate acquisitions through the issuance of shares, property dispositions, increasing the credit facility and adjusting capital spending.

To ensure corporate growth objectives are met, the Corporation must ensure sufficient capital is available to fund the Corporation's drilling programs, corporate and asset acquisitions. The Corporation monitors capital using non-GAAP measures, based on the ratio of net debt to annualized funds flow.

The Corporation's strategy is to maintain a ratio of no more than 2.0 to 1. To manage this ratio, the Corporation prepares annual budgets, which are updated quarterly with current and forecasted prices, production volumes, operating costs and forecasted capital expenditures. The annual and updated budgets are approved by the Board of Directors. The following table summarizes the Corporation's net debt to annualized cash flow calculation:



Three months Three months
ended, ended,
March 31 December 31
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Current assets $ 16,149,250 $ 9,634,594
Accounts payable and accrued liabilities (23,347,943) (18,709,218)
Bank Debt (53,071,357) (23,807,706)
----------------------------------------------------------------------------
Net Debt $ (60,270,050) $ (32,882,330)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net Earnings $ (330,472) $ (83,324)
Add (deduct):
Unrealized loss on commodity contracts 2,172,698 193,878
Depletion, depreciation and accretion 4,193,559 2,174,476
Future income taxes (recovery) (184,198) 517,452
Stock-based compensation 158,224 (67,372)
----------------------------------------------------------------------------
Funds flow from operations excluding asset
retirement expenditures 6,009,811 2,735,110
----------------------------------------------------------------------------
Funds flow from operations adjusted for a
full period of Cork production 6,093,000
----------------------------------------------------------------------------
Funds flow from operations adjusted for a
full period of Defiant production 7,849,303
----------------------------------------------------------------------------
Annualized funds flow $ 31,397,212 $ 24,372,000
----------------------------------------------------------------------------
Net Debt to Annualized Funds Flow 1.92X 1.35X
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at March 31, 2008, the Corporation's ratio of net debt to annualized cash flow was 1.9 to 1, within the range established by the Corporation. Subsequent to the end of the first quarter of 2008, the Corporation has signed two agreements to divest two properties (see Note 13). Proceeds will initially be applied against the bank line and then allocated to the capital program as required.

The Corporation's share capital is not subject to external restrictions but the amount of the bank line is dependent on independent valuation of the Corporation's oil and gas reserves. The Corporation has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

There were no changes in the Corporation's approach to capital management during the period.



Selected Supplemental Information
($000 except per share) 2007 2006
---------- -----------
Petroleum and natural gas sales 6,367 -
Income (loss) for the year (706) (10)
Total assets (end of period) 138,571 4,429
Income (loss) per share - basic and diluted $ (.09) $ (.02)
Total current liabilities (end of period) 42,517 302
----------- -----------


Q3 Q2 Q1 Q4
2007 2007 2007 2006
--------- --------- --------- ---------
Petroleum and natural gas
sales ($000) 318 296 323 -
Loss for the quarter ($000) (134) (263) (226) (10)
Capital expenditures ($000) 6,197 5,545 4,392 1,668
Working capital (end of
period) ($000) 9,109 1,529 7,090 2,427
Total assets (end of period)
($000) 30,902 15,803 15,767 4,429
Shareholders' equity (end of
period) ($000) 25,693 12,024 12,191 4,105
Common shares outstanding
(end of period) (000)
(adjusted for
Cork acquisition effect) 7,327 3,933 3,933 1,380
----------------------------------------------------------------------------

Q1 Q4
2008 2007
--------- ---------
Petroleum and natural gas
sales ($000) 11,657 5,430
Loss for the quarter ($000) (330) (83)
Capital expenditures ($000) 12,266 7,145
Working capital (end of
period) ($000) (62,270) (33,414)
Total assets (end of period)
($000) 209,710 138,571
Shareholders' equity (end of
period) ($000) 128,449 94,659
Common shares outstanding
(end of period) (000) 37,339 24,903
----------------------------------------------------------------------------

Share Financing

Outstanding securities at
December 31, 2007
Common shares 24,902,616
Common share options 2,155,000
Performance warrants 2,886,399
------------

Outstanding securities at
May 9, 2008
Common shares 37,339,208
Common share options 3,518,000
Performance warrants 2,886,399
------------

For further detail, see Note 8 in the March 31, 2008 financial statements.


On January 1, 2007, Former Profound had 3,450,000 shares outstanding.

On January 4, 2007, the Former Profound closed a major financing with ARC. Pursuant to the subscription agreement, ARC subscribed for 21,212,121 common shares at $1.65 per common share for gross proceeds of $35,000,000. Of these, 4,242,424 were issued at closing, with the remainder issued as the Corporation required funds. As part of the major financing, ARC also acquired 16,969,697 special voting shares which were subsequently cancelled for Nil consideration at time of take up and pay. In addition, ARC subscribed and paid for 90,000 common shares at $1.00 per share.

On January 23, 2007, the Former Profound closed a financing with other investors. A total of 2,000,000 common shares were issued at a price of $1.65 per share for gross proceeds of $3,300,000.

On January 23, 2007 Former Profound closed a Founder's financing pursuant to subscription agreements for flow-through and common shares. A total of 50,000 flow-through shares were issued at a price of $1.20 per share for proceeds of $60,000.

On July 20, 2007, Former Profound received $14,000,250 from ARC in full payment for the issuance of 8,485,000 additional shares. As per agreement, 8,485,000 of the special voting shares were cancelled and 8,485,000 equalization warrants were issued. Financing fees of $420,008 were paid to ARC.

On October 9, 2007, Former Profound received $13,999,750 from ARC in full payment for the issuance of 8,484,697 additional shares. As per agreement, 8,484,697 special voting shares were cancelled and 8,484,697 equalization warrants were issued. Financing fees of $419,993 were paid to ARC.

Subsequent to the October 9, 2007 issuance, a total of 26,802,141 shares have been issued, with Nil special voting shares still outstanding. These special voting shares have been cancelled for Nil consideration on the basis of one special voting share for each additional common share taken up and paid for under the subscription agreement. Per the major financing with ARC, all shares have now been issued.

On November 19, 2007, by way of reverse takeover transaction with Cork, all Former Profound shares were converted into Cork shares at a ratio of 1.6 Cork shares for each Former Profound share, and then consolidated on a 4:1 basis. Pursuant to the terms of the agreement all equalization warrants were cancelled on November 19, 2007.

Shares outstanding immediately following the combination and consolidation totalled 24,902,616 shares (including 840,000 post-consolidation shares subject to share purchase loans).

On March 31, 2008, Profound completed the acquisition of Defiant whereby Profound acquired all of the issued and outstanding common shares of Defiant by issuance of 0.55 common shares of Profound for each issued and outstanding common share of Defiant. A total of 12,436,592 Profound shares were issued.

Off-Balance Sheet Arrangements

Profound currently does not have any off-balance sheet arrangements with any party, and does not currently expect to enter into any such arrangements in 2008.

Transactions with Related Parties

On December 19, 2006, Former Profound loaned funds to founders and employees to purchase 2,070,000 common shares at a price of $1.00 per share. On January 23, 2007, Former Profound loaned additional funds to a founder to purchase 30,000 shares at $1.00 per share.

On December 19, 2007 the loaned funds pursuant to the share purchase loans were received by the Corporation. The risk for any decline in value of these shares was then transferred to the borrowers and the Corporation considered the shares issued for accounting purposes. In addition, the Corporation received $83,985 at 4 percent compounded annually, as per terms of the agreement.

The Corporation has paid financing fees of $1,149,000 to two shareholders, directors and officers equal to 3 percent of the gross proceeds from the ARC and other investor financing in Former Profound.

Subsequent Events

Brazeau Area Disposition

On April 24th, 2008, the Corporation entered into a purchase and sale agreement for the sale of its Brazeau area properties to a private oil and gas company. The sale is expected to close on May 15th, 2008 with an effective date of April 1st, 2008. The disposition of these assets is subject to customary due diligence and other conditions typical of transactions of this nature. The total consideration to be received is $11.4 million prior to adjustments. Production from this area, net to Profound, is approximately 255 boed.

Majeau Area Disposition

The Corporation has also entered into an offer to purchase for the sale of its Majeau area properties to a private oil and gas company. Total consideration prior to adjustments is $2.7 million. Profound produces approximately 40 boed from the Majeau area. The sale is expected to close on or about May 15th, 2008 with an effective date of April 1st, 2008. The disposition of these assets is subject to customary due diligence and other conditions typical of transactions of this nature.

Employee Stock Options Granted

Subsequent to March 31, 2008 the Corporation granted 1,128,000 additional stock options to employees at a price of $3.72 per share.

Financial Instruments

The Corporation has the following financial instruments:

- Cash and cash equivalents

- Accounts receivable and deposits

- Accounts payable and accrued liabilities

- Bank debt

- Commodity contracts

Cash and cash equivalents are designated as held-for-trading instruments and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Accounts receivable and deposits are designated as loans and receivables. Accounts payable and accrued liabilities and bank debt are designated as other financial liabilities. All commodity contracts are derivative financial instruments and classified as held-for-trading.

The Corporation may use various types of derivative financial instruments to manage risks associated with natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized at the time each transaction under a contract is settled. For the unrealized portion of such contracts, the Corporation utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counterparties to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date with unrealized gains or losses on those contracts recorded through net earnings. Transaction costs, if any, are added to the amounts of the associated financial instruments and amortized accordingly.

An embedded derivative is a component of a contract that affects the terms in relation to another factor. These hybrid contracts are considered to consist of a "host" contract plus an embedded derivative. The embedded derivative is separated from the host contract and accounted for as a derivative only if certain conditions are met. The Corporation has not identified any embedded derivatives which required separate recognition and measurement.

The nature of these financial instruments and the Corporation's operations expose the Corporation to market risk, liquidity risk and credit risk. The Corporation employs risk management strategies and polices to ensure that any exposure to risk are in compliance with the Corporation's business objectives and risk tolerance levels. Risk management is ultimately established by the Corporation's Board of Directors and is implemented by senior management and monitored by the risk management function within the Corporation.

a) Market Risk

Market risk is the risk that changes in market prices, such as commodity prices, interest rates and foreign exchange rates will affect the Corporation's net earnings or the value of financial instruments. The objective of the Corporation is to manage and mitigate market risk exposures within acceptable limits, while maximizing returns.

Commodity price risk

The nature of the Corporation's operations results in exposure to fluctuations in commodity prices. Management continuously monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. The Corporation has entered into derivative financial instruments for the purpose of protecting a portion of its funds flow from operations from the volatility of natural gas commodity prices.

The Corporation has not designated any of its derivatives as a hedge for accounting purposes and has therefore recorded the unrealized gains and losses on these contracts in the balance sheet as assets or liabilities with changes in their fair value recorded in net earnings for the period. Realized gains or losses from financial instruments related to commodity prices are recognized in income as the related sales occur.

Following is a summary of all derivative contracts in place as at March 31, 2008:



Volume Pricing Strike Price
Natural Gas (GJ/day) Point (per GJ) Term
----------------------------------------------------------------------------
April 1, 2008 to
Swap 2,500 AECO-C $ 7.00 October 31, 2008
April 1, 2008 to
Swap 2,500 AECO-C $ 7.02 October 31, 2008


As of March 31, 2008, the fair value of all commodity contract liabilities was $1,999,973. This resulted in an unrealized loss of $2,172,698 for the quarter ending March 31, 2008 (March 31, 2007 - $0). The Corporation's risk management activities had a net realized gain of $141,592 for the three month period ending March 31, 2008 (March 31, 2007 - $0).

The following table summarizes the sensitivity of the fair value of the Corporation's risk management positions to the fluctuations in commodity prices with all other variable held constant. When assessing the potential impact of these commodity price changes, the Corporation believes a 10% change is a reasonable measure. Fluctuations in commodity prices could have resulted in unrealized gains (losses) impacting net earnings as follows:



Net Earnings
---------------------------------------------
Three Months Ended
March 31, 2008
---------------------------------------------
Favourable Unfavourable
10% Change 10% Change
----------------------------------------------------------------------------
$ 945,000 $ (945,000)
Natural gas price ($685,000 after tax) (($685,000 after tax))
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility. The floating rate debt is subject to interest rate risk, as the cash required to service the debt will fluctuate as a result of market changes. The Corporation had no interest rate swaps or financial contracts in place as at or during the quarter ended March 31, 2008.

As at March 31, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $96,000 higher (March 31, 2007 - $0), due to lower interest expense. An equal opposite impact would have occurred to net earnings had interest rates been 1% higher. The sensitivity is higher in 2008 as compared to 2007 because the Corporation had no outstanding debt as of March 31, 2007.

Foreign currency exchange risk

The Corporation is exposed to foreign currency exchange risk as the underlying market prices in Canada for petroleum and natural gas fluctuate with changes in the exchange rate between the Canadian and United States dollar. As of March 31, 2008 the Corporation had no forward exchange rate contracts in place nor any significant working capital items denominated in foreign currencies.

b) Liquidity risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. The Corporation's approach to managing liquidity is to ensure it will have sufficient liquidity to meet its liabilities when due. By nature the oil and gas industry is very capital intensive. As a result the Corporation prepares annual capital expenditure budgets and utilizes authorizations for expenditures to manage capital expenditures. Refer to Note 10 for further disclosure on the management of capital. The Corporation also has a revolving operating credit facility, to facilitate the management of its liquidity risk. See Note 7 for credit facility disclosure.

c) Credit risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Substantially all of the Corporation's accounts receivable are due from customers in the oil and natural gas industry and are subject to normal credit risk. With respect to counterparties to financial instruments, the Corporation mitigates associated credit risk by entering into transactions with major institutions with investment grade credit ratings. Management believes the risk is mitigated by the size and reputation of the companies to which they extend credit.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers.

Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Corporation attempts to reduce the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and issuing cash calls to partners for capital projects before they commence.

d) Fair Value of Financial Instruments:

Financial instruments of the Corporation carried on the balance sheet consist mainly of cash and cash equivalents, accounts receivable, deposits, commodity contracts, bank debt, accounts payable and accrued liabilities. The estimated fair value of the financial instruments approximates their carrying value due to their short terms to maturity and the floating interest rate on the Corporation's debt.

The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.

Share Capital

As at May 9, 2008, the Corporation had outstanding 37,339,208 common shares, 3,518,000 stock options, and 2,886,399 performance warrants. For further detail regarding the stock options and performance warrants outstanding, see Note 8 (d) and (e) in the Corporation's March 31, 2008 financial statements.

Business Risks

Profound is subject to business risks that impact the market in general and the oil and natural gas business in particular. Profound's financial position, results of operations and cash flows are directly impacted by a number or risks including but not limited to the following:

(For a detailed discussion of Risks and Uncertainties, refer to the Corporation's Annual Information Form (AIF) filed on SEDAR at www.sedar.com).

Volatility of Oil and Natural Gas Prices

Profound's operational results and resulting financial condition are dependent on the prices received for oil and natural gas production. Prices have fluctuated widely in recent years and are determined by economic and often political factors beyond the Corporation's control. Profound may manage the risk associated with changes in commodity prices by entering into oil or natural gas price swaps and hedges. If and when the Corporation hedges its commodity price exposure, it may forego the benefits it would experience if commodity prices increase, or may expose itself to losses.

Exploration, Development and Production Risks

Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. The long-term commercial success of the Corporation depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves the Corporation has, and the production there from will decline over time as such existing reserves are exploited. There is no assurance that further commercial quantities of oil and natural gas will be discovered or acquired by the Corporation.

Future oil and natural gas exploration may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient petroleum substances to return a profit after drilling, operating and other costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.

While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or personal injury. In particular, the Corporation may explore for and produce sour natural gas in certain areas. An unintentional leak of sour natural gas could result in personal injury, loss of life or damage to property and may necessitate an evacuation of populated areas, all of which could result in liability to Profound. In accordance with industry practice, the Corporation is not fully insured against all of these risks, nor are all such risks insurable. Although Profound maintains liability insurance in an amount that it considers consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits, in which event the Corporation could incur significant costs that could have a material adverse effect upon its financial condition. Oil and natural gas production operations are also formations or pressures, premature decline of reservoirs and the invasion of water into producing formations. Losses resulting from the occurrence of any of these risks could have a material adverse effect on the Corporation.

Failure to Realize Anticipated Benefits of Acquisitions and Dispositions

Profound makes acquisitions and dispositions of businesses and assets in the ordinary course of business. Achieving the benefits of acquisitions depends in part on successfully consolidating functions and integrating operations and procedures in a timely and efficient manner as well as on Profound's ability to realize the anticipated growth opportunities and synergies from combining the acquired businesses and operations with those of the Corporation. The integration of an acquired business may require substantial management effort, time and resources and may divert management's focus from other strategic opportunities and operational matters. Management continually assesses the value and contribution of services provided and assets required to provide such services. In this regard, non-core assets are periodically disposed of, so that the Corporation can focus its efforts and resources more efficiently.

Depending on the state of the market for such non-core assets, certain non-core assets of the Corporation, if disposed of, could be expected to realize less than their carrying value on the financial statements of the Corporation.

Operational Dependence

Other companies operate some of the assets in which Profound has an interest. As a result, the Corporation will have limited ability to exercise influence over the operation of those assets or their associated costs, which could adversely affect the Corporation's financial performance. Profound's return on assets operated by others will therefore depend upon a number of factors that may be outside of the Corporation's control, including the timing and amount of capital expenditures, the operator's expertise and financial resources, the approval of other participants, the selection of technology and risk management practices.

Proposed Changes to Alberta Royalty Regime

On October 25, 2007, the Government of Alberta announced proposed changes to royalties payable on Crown mineral lands owned by the province. If enacted on January 1, 2009, as proposed, the changes will impact the Corporation's cash flow, as all current properties are located in Alberta. Profound is currently assessing the expected financial impact.

Kyoto Protocol

Canada is a signatory to the United Nations Framework Convention on Climate Change and has ratified the Kyoto Protocol established thereunder to set legally binding targets to reduce nationwide emissions of carbon dioxide, methane, nitrous oxide and other so called "greenhouse gases". The Corporation's exploration and production facilities and other operations and activities emit greenhouse gases which will likely subject the Corporation to possible future legislation regulating emissions of greenhouse gases. The Government of Canada has proposed a bill, which suggests further legislation will set greenhouse gases emission reduction requirements for various industrial activities, including oil and natural gas exploration and production. Future federal legislation, together with provincial emission reduction requirements, such as those included in Alberta's Climate Change and Emissions Management Act (partially in force), may require the reduction of emissions (or emissions intensity) produced by the Corporation's expected operations and facilities. The direct or indirect costs of these regulations may adversely affect the expected business of the Corporation.

Environmental

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 of applicable environmental legislation 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. Although the Corporation believes that it will be in material compliance with current applicable environmental regulations, no assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect the Corporation's financial condition, results of operations or prospects. 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 Kyoto Protocol or as otherwise determined, could have a material impact on the nature of oil and natural gas operations, including those of the Corporation.

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 either the nature of those requirements or the impact on the Corporation and its operations and financial condition.

Project Risks

The Corporation will manage a variety of small and large projects in the conduct of its business. Project delays may delay expected revenues from operations. Significant project cost over-runs could make a project uneconomic. Profound's ability to execute projects and market oil and natural gas will depend upon numerous factors beyond the Corporation's control, including:

- The availability of processing capacity;

- The availability and proximity of pipeline capacity;

- The availability of storage capacity;

- The supply of and demand for oil and natural gas;

- The availability of alternative fuel sources;

- The effects of inclement weather;

- The availability of drilling and related equipment;

- Unexpected cost increases;

- Accidental events;

- Currency fluctuations;

- Changes in regulations;

- The availability and productivity of skilled labour; and

- Regulation of the oil and natural gas industry by various levels of government and governmental agencies.

Because of these factors, the Corporation may be unable to execute projects on time, on budget or at all, and may not be able to effectively market the oil and natural gas that it produces.

Financial Reporting and Regulatory Update

i) Financial Instruments - Disclosures and Presentation

Effective January 1, 2008, the Corporation adopted two new Canadian Institute of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections replace existing Handbook Section 3861, Financial Instruments - Presentation and Disclosure.

The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. Specifically, Section 3862 requires disclosure of the significance of financial instruments on the Corporation'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. Refer to Note 11 "Financial Instruments" for additional disclosures under Section 3862.

The new presentation standard under Section 3863 carries forward the former presentation requirements.

ii) Capital Disclosures

Effective January 1, 2008, the Corporation adopted CICA Handbook Section 1535, "Capital Disclosures. This new guidance requires the Corporation to disclose its objectives, policies and processes for managing capital, the nature of externally imposed capital requirements, whether the requirements have been complied with, or consequence of non-compliance and an explanation of how the Corporation is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 10 "Capital Disclosures".

Future Accounting Changes

In addition, the Corporation has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Corporation:

i) Goodwill and Intangible Assets

As of January 1, 2009, the Corporation will be required to adopt CICA Section 3064, "Goodwill and Intangible Assets," which will replace Handbook Section 3062. This new guidance reinforces a principles-based approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition under Handbook Section 1000, "Financial Statement Concepts." Section 3064 clarifies the application of the concept of matching revenues and expenses in Section 1000 to eliminate the current practice of recognizing as assets items that do not meet the definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Corporation is currently determining the impact of this standard.

ii) International Financial Reporting Standards

In January 2006, the CICA Accounting Standards Board adopted a strategic plan for the direction of accounting standards in Canada. As part of the plan, accounting standards in Canada for public companies will converge with International Financial Reporting Standards ("IFRS") on January 1, 2011. The Corporation continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

Disclosure Controls and Procedures

The Corporation has implemented a system of internal controls that it believes adequately protects the assets of the Corporation and is appropriate for the nature of its business and the size of its operations. These disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to management in a timely manner to ensure timely decisions regarding required disclosure. The Corporation's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of March 31, 2008, that the controls and procedures are effective to provide reasonable assurance that material information related to Profound is made known to them by others within the Corporation.

The Corporation's Chief Executive Officer and Chief Financial Officer 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 GAAP. During 2007, the Corporation implemented a number of controls and procedures and will be testing them in 2008.

It should be noted that while Profound's Chief Executive Officer and Chief Financial Officer believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that all errors and fraud may be prevented. 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.

Critical Accounting Estimates

The significant accounting policies used by Profound are disclosed in Note 2 to the financial statements for the year ending December 31, 2007. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenues and expenses. Management is also required to adopt accounting policies that require the use of significant estimates. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstance may result in actual results or changes to estimated amounts that differ materially from current estimates. Profound's management believes the most critical accounting estimates that may have an impact on the Corporation's results are in the non-cash areas of reserves, accounting for property, plant and equipment, asset retirement obligations, future income taxes, and stock-based compensation.

Reserves

Under NI 51-101, proved reserves are defined as reserves that can be estimated with a high degree of certainty to be recoverable. The level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves.

Proved plus probable reserves are the most likely case and are based on a 50 percent probability that they will equal or exceed the reserves estimated. The new standard provides for a more conservative evaluation of proved and probable reserves, particularly on new wells where production history has not yet been established.

Oil and natural gas reserve estimates are made using available geological and reservoir data and historical production data. Profound's reserves were evaluated by an independent qualified reserves evaluator. However, revisions may occur as a result of various factors including actual reservoir performance, change in price and cost forecasts, or a change in future capital invested by Profound. Reserve changes will impact the financial results as reserves are used in the calculation of depletion and to assess whether asset impairment occurs. Reserve changes also affect other non-GAAP measurements such as finding and development costs, recycle ratios and net asset value calculations.

Property, Plant & Equipment

Profound follows the full cost method of accounting for oil and natural gas properties. Under this method, all costs related to the acquisition of, exploration for and development of oil and natural gas reserves are capitalized. These costs are then systematically charged to income through a depletion, depreciation and amortization (DD&A) calculation. This calculation is based on the unit-of-production method which amortizes the cost of oil and natural gas assets over the Corporation's proved oil and natural gas reserve base. Proved reserves are determined by the Corporation using the guidelines of NI 51-101. Changes to proved reserves in the future could increase or decrease the amount of the Corporation's DD&A.

The full cost accounting guidelines allow for the cost of unproved properties to be excluded from the DD&A calculation. For the quarter ended March 31, 2008, Profound excluded $26.2 million from costs subject to DD&A. These costs are assessed quarterly for impairment. Should the judgment be made that these costs are impaired, an increase to DD&A will result.

Ceiling Test

The ceiling test is a cost recovery test intended to identify and measure potential impairment of assets. The test limits the carrying value of the Corporation's property and equipment to the estimated net present value of future cash flows from the proved and probable reserves. 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 as a result of this ceiling test is charged to operations as additional depletion and depreciation expense. At March 31, 2008 the Corporation calculated the ceiling test and found no impairment.

Acquisitions

The acquisitions of Cork and Defiant were accounted for using the purchase method of accounting. Determination of value involves numerous estimates including the value of Cork and Profound shares, the value of other assets and liabilities and tax pool balances. This valuation could differ materially by altering various assumptions which would have affected the valuation of the purchase price or the allocation of the purchase price to the net assets acquired.

Asset Retirement Obligations

Under the asset retirement obligations rules, the total fair value of the Corporation's asset retirement obligations are set up on the balance sheet at the discounted future value of the liability. The key areas of judgment are in determining the amount of the future liability, the appropriate discount rate and when the expenditures will be incurred. External factors influencing these obligations include commodity prices, interest rates and changes to regulatory requirements. Dramatic changes in any of these could result in an increase or decrease in net income and in the liabilities recognized.

Stock-based Compensation

Profound is required to calculate the fair value of stock options and performance warrants at the time of grant and charge this to income in a systematic manner over the vesting period of the options and warrants. The calculation method that Profound has adopted to calculate the fair value of options is the Black-Scholes model. The most critical estimate in the Black-Scholes model is the expected volatility of Profound's shares. Management has determined that 50 percent is an appropriate volatility rate for Profound. Actual volatility could be more or less than 50 percent, which could have a material impact on net income.

Income Taxes

The determination of income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

The recognition of a future income tax asset is also based on estimates of whether the Corporation is "more likely than not" to realize these assets. This estimate, in turn, is based on estimates of proved and probable reserves, future oil and natural gas prices, royalty rates and costs. Changes in these estimates could materially impact net income and the future income tax asset recognized.



Financial Statements of

PROFOUND ENERGY INC.

March 31, 2008


PROFOUND ENERGY INC.
Balance Sheets
March 31, 2008 and December 31, 2007
(unaudited)
----------------------------------------------- ------------ -------------
----------------------------------------------- ------------ -------------
March 31, December 31,
2008 2007
------------ -------------
$ $
------------ -------------
ASSETS

CURRENT
Cash and cash equivalents 49,746 90,560
Accounts receivable 13,665,001 8,660,862
Prepaid expenses and deposits (Note 4) 2,434,503 710,447
Commodity contracts (Note 11) - 172,725
------------ -------------
16,149,250 9,634,594

Property and equipment (Note 5) 187,638,863 123,246,910
Future income tax 5,921,420 5,689,802
------------ -------------
209,709,533 138,571,306
------------ -------------
------------ -------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities 23,347,943 18,709,218
Bank debt (Note 7) 53,071,357 23,807,706
Commodity contracts (Note 11) 1,999,973 -
------------ -------------
78,419,273 42,516,924

Asset retirement obligations (Note 6) 2,841,146 1,395,367
------------ -------------
81,260,419 43,912,291
------------ -------------

SHAREHOLDERS' EQUITY

Share capital (Note 8) 129,041,028 95,217,847
Contributed surplus 398,097 100,707
Deficit (990,011) (659,539)
------------ -------------
128,449,114 94,659,015
------------ -------------
209,709,533 138,571,306
------------ -------------
------------ -------------

Commitments and contingencies (Note 12)

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

Approved by the Board

Keith Macdonald George Chow
Director Director


PROFOUND ENERGY INC.
Statements of Operations, Comprehensive Loss and Deficit
For the three month period ended March 31
(unaudited)
----------------------------------------------- ------------ -------------
----------------------------------------------- ------------ -------------
March 31, March 31,
2008 2007
------------ -------------
$ $
------------ -------------

REVENUE
Petroleum and natural gas sales 11,656,502 323,156
Royalties 2,870,771 81,242
------------ -------------
8,785,731 241,914
Realized gain on commodity contracts
(Note 11) 141,592 -
Unrealized loss on commodity contracts
(Note 11) (2,172,698) -
Interest and other income 8,546 79,477
------------ -------------
6,763,171 321,391
------------ -------------

EXPENSES
Operating 1,738,448 37,546
Transportation 55,936 1,791
General and administrative 588,345 186,557
Interest and bank charges 465,038 -
Part XII.6 tax on flow-through expenditures 78,291 31,800
Depletion, depreciation and accretion 4,193,559 343,719
Stock-based compensation (Note 8(e)) 158,224 32,290
------------ -------------
7,277,841 633,703
------------ -------------

Earnings (loss) before income taxes (514,670) (312,312)

Provision for income taxes
Future income tax recovery 184,198 86,749
------------ -------------
Comprehensive and net loss (330,472) (225,563)
Deficit, beginning of period (659,539) (10,129)
------------ -------------
Deficit, end of period (990,011) (235,692)
------------ -------------
------------ -------------

Income (loss) per share

Basic and diluted (0.01) (0.06)
------------ -------------
Weighted average number of shares - basic
(Note 9) 25,039,419 3,646,434
------------ -----------
Total number of shares outstanding,
end of period (Note 8(b)) 37,339,208 3,932,970
------------ -----------

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


PROFOUND ENERGY INC.
Statements of Cash Flows
For the three month period ended March 31
(unaudited)
----------------------------------------------- ------------ -------------
----------------------------------------------- ------------ -------------
March 31, March 31,
2008 2007
------------ -------------
$ $
------------ -------------
CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:

OPERATING
Net loss (330,472) (225,563)
Adjustments for:
Unrealized loss on commodity contracts
(Note 11) 2,172,698 -
Depletion, depreciation and accretion 4,193,559 343,719
Stock-based compensation 158,224 32,290
Future income taxes recovery (184,198) (86,749)
Asset retirement expenditures (156,280) -
------------ -------------
5,853,531 63,697
Changes in non-cash operating working capital 1,516,131 383,451
------------ -------------
7,369,662 447,148
------------ -------------
FINANCING
Issue of shares, net of share issue costs (6,000) 9,060,114
Increase in bank debt 9,371,571 -
Change in non-cash financing working capital - -
------------ -------------
9,365,571 9,060,114
------------ -------------
------------ -------------
INVESTING
Corporate acquisition (Note 3) (311,880) -
Property and equipment expenditures (12,265,633) (4,392,005)
Other deposits - -
Changes in non-cash investing working capital (4,198,534) 1,304,404
------------ -------------
(16,776,047) (3,087,601)
------------ -------------
------------ -------------
Net increase (decrease) in cash and cash
equivalents (40,814) 6,419,661
Cash and cash equivalents, beginning of period 90,560 2,381,227
------------ -------------
Cash and cash equivalents, end of period 49,746 8,800,888
------------ -------------
------------ -------------
Interest paid during the period 465,038 -
------------ -------------
Taxes paid during the period - -
------------ -------------
------------ -------------

The accompanying notes are an integral part of these financial statements


PROFOUND ENERGY INC.
Notes to the Financial Statements
March 31, 2008
(unaudited)
----------------------------------------------------------------------------


1. BUSINESS OF THE CORPORATION

Profound Energy Inc. (the "Corporation or Profound") was formed on November 19, 2007 through the combination of Profound Energy Ltd. ("Former Profound") and Cork Exploration Inc. ("Cork"), a public oil and natural gas exploration and production corporation (the "Transaction").

Under the terms of the Transaction, Cork acquired all of the issued and outstanding shares of Former Profound in exchange for Cork common shares, the issued and outstanding common shares were consolidated on a four-for-one basis, and the combined entity changed its name to Profound Energy Inc.

The Corporation is engaged in the exploration, development and production of crude oil and natural gas in the province of Alberta.

2. SIGNIFICANT ACCOUNTING POLICIES

The Corporation's financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. The preparation requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates.

These interim financial statements have been prepared by management following the same accounting policies and methods that were used and disclosed in the audited financial statements for the year ended December 31, 2007, except as noted below. These interim financial statements include all adjustments necessary to present fairly the results for the interim period ended March 31, 2008. These interim financial statements should be read in conjunction with the most recent audited financial statements and notes for the year ended December 31, 2007.

New Accounting Disclosures and Future Accounting Pronouncements

i) Financial Instruments - Disclosures and Presentation

Effective January 1, 2008, the Corporation adopted two new Canadian Institute of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook Sections replace existing Handbook Section 3861, Financial Instruments - Presentation and Disclosure.

The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. Specifically, Section 3862 requires disclosure of the significance of financial instruments on the Corporation'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. Refer to Note 11 "Financial Instruments" for additional disclosures under Section 3862.

The new presentation standard under Section 3863 carries forward the former presentation requirements.

ii) Capital Disclosures

Effective January 1, 2008, the Corporation adopted CICA Handbook Section 1535, "Capital Disclosures." This new guidance requires the Corporation to disclose its objectives, policies and processes for managing capital, the nature of externally imposed capital requirements, whether the requirements have been complied with, or consequence of non-compliance and an explanation of how the Corporation is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 10 "Capital Disclosures".

Future Accounting Changes

In addition, the Corporation has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Corporation:

i) Goodwill and Intangible Assets

As of January 1, 2009, the Corporation will be required to adopt CICA Section 3064, "Goodwill and Intangible Assets," which will replace Handbook Section 3062. This new guidance reinforces a principles-based approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition under Handbook Section 1000, "Financial Statement Concepts." Section 3064 clarifies the application of the concept of matching revenues and expenses in Section 1000 to eliminate the current practice of recognizing as assets items that do not meet the definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Corporation is currently determining the impact of this standard.

ii) International Financial Reporting Standards

In January 2006, the CICA Accounting Standards Board adopted a strategic plan for the direction of accounting standards in Canada. As part of the plan, accounting standards in Canada for public companies will converge with International Financial Reporting Standards ("IFRS") on January 1, 2011. The Corporation continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

3. DEFIANT ACQUISITION

On March 31, 2008, Profound completed a takeover of Defiant Resources Corporation ("Defiant") whereby Profound acquired all of the issued and outstanding common shares of Defiant by issuance of 0.55 common shares of Profound for each issued and outstanding common share of Defiant. A total of 12,436,592 Profound shares were issued.

The estimated fair value of the acquisition, before transaction costs, is $33,827,531 based on the total value of all of the issued shares of Profound at $2.72 per share. The determination of $2.72 per share was based on the weighted-average market price of Profound shares over a five-day trading period before and after the terms of the acquisition were announced.

The acquisition has been accounted for using the purchase method, with the results of Defiant being recorded by the Corporation from March 31, 2008 forwards and with the purchase price allocated to the fair values of the assets and liabilities of Defiant as follows:



Consideration

Value of shares issued to Defiant $ 33,827,531
Transaction costs 311,880
---------------
Total purchase price $ 34,139,411
---------------
---------------

Allocation of purchase price

Non-cash working capital (deficiency) $ (592,933)
Property and equipment 55,896,200
Future tax asset 98,557
Bank indebtedness (19,892,080)
Asset retirement obligation (1,370,333)
---------------
$ 34,139,411
---------------
---------------


The transaction costs of $311,880 were comprised primarily of professional fees.

Defiant incurred the following commitments with respect to its corporate maximization process. These amounts were paid by Defiant on closing of the acquisition and are included in the working capital deficiency acquired.



Severance payments to former officers and employees $ 823,000
Financial advisory fees 534,056
Professional fees 173,562
Other 14,545
---------------
$ 1,545,163
---------------
---------------


The above amounts are estimates made by management based on currently available information. Amendments may be made to the purchase equation as the cost estimates and balances are finalized. The value assigned to the common shares issued and the allocation of the purchase price to the net assets of Defiant at the acquisition date are based on estimates of numerous factors affecting valuation including discount rates, proved and probable reserves, future oil and natural gas prices and other factors. These estimates are subject to measurement uncertainty and the effect of changes in such estimates could be material.

The attributed values of the common shares issued in the acquisition have been excluded from the consolidated statement of cash flows as non-cash transactions.

4. PREPAID EXPENSE AND DEPOSITS

Deposits are comprised of deposits required under Crown royalty regulations and operating lease obligations.



5. PROPERTY AND EQUIPMENT

Net Book
Accumulated Value
Depletion and March 31,
Cost Depreciation 2008
------------- ------------- -------------
$ $ $
------------- ------------- -------------
Petroleum and natural gas
properties and equipment 194,961,757 7,434,529 187,527,228
Furniture and equipment and
leasehold improvements 170,120 58,485 111,635
------------- ------------- -------------

195,131,877 7,493,014 187,638,863
------------- ------------- -------------
------------- ------------- -------------


Costs subject to depletion include $23,475,000 of future capital, and exclude unproved properties and proprietary seismic data of $26,233,729. During the first quarter of 2008, the Corporation capitalized $180,546 (2007 - $202,313) of general and administrative expenditures and $191,953 (2007 - $59,877) including $52,787 (2007 - $17,383) future tax effect of stock-based compensation related to exploration and development activities.



Net Book
Accumulated Value
Depletion and December 31,
Cost Depreciation 2007
------------- ------------- -------------
$ $ $
------------- ------------- -------------
Petroleum and natural gas
properties and equipment 126,402,657 3,277,952 123,124,705
Furniture and equipment and
leasehold improvements 168,791 46,586 122,205
------------- ------------- -------------

126,571,448 3,324,538 123,246,910
------------- ------------- -------------
------------- ------------- -------------


6. ASSET RETIREMENT OBLIGATIONS

The changes in asset retirement obligations for the year ended December 31, 2007 and quarters ended March 31, 2008 and March 31, 2007 are as follows:



March 31, March 31, December 31,
2008 2007 2007
----------- ---------- ------------
$ $ $
Asset retirement obligation,
beginning of period 1,395,367 22,322 22,322
Liabilities incurred 206,643 42,494 389,749
Liabilities acquired in business
combination with Cork Exploration - - 971,413
Liabilities acquired in business
combination with Defiant (Note 3) 1,370,333 - -
Accretion expense 25,083 391 11,883
Abandonment costs incurred (156,280) - -
Revisions in estimated cash flows - - -
----------- ---------- ------------
Asset retirement obligation,
end of period 2,841,146 65,207 1,395,367
----------- ---------- ------------
----------- ---------- ------------


The total estimated, undiscounted cash flows required to settle the obligations at March 31, 2008 without including salvage, is $3,045,002 (December 31, 2007 - $2,713,285; March 31, 2007 - $124,272). These amounts have been discounted using a credit-adjusted risk-free interest rate of approximately 7.0 percent (December 31, 2007 - 7.0 percent; March 31, 2007 - 7.0 percent). The Corporation expects these obligations to be settled, on average, in 12 years, the majority of which are expected to be incurred between 2016 and 2021. As at March 31, 2008, no funds have been set aside to settle these obligations.

7. BANK DEBT

At March 31, 2008, the Corporation had a $70.0 million revolving operating credit facility agreement. The facility revolves for 364-day periods, renewable at the option of the lender. The facility is subject to a review on or before October 31, 2008. The credit facility provides that advances may be made by way of prime rate loans, guaranteed notes (bankers' acceptances) and letters of credit. The credit facility is tested quarterly, in arrears, and bears interest based on a sliding scale as follows:

- Prime-based loans - Interest is payable in Canadian dollars at prime plus 0.0 percent to prime plus 0.75 percent per 365-day period;

- Guaranteed Notes - Interest is payable in Canadian dollars at bankers' acceptance fees plus a stamp fee of 100 to 190 basis points per 365-day period.

The interest rate varies depending on the Corporation's debt to cash flow ratio determined quarterly on a grid system, with the grid ranging from debt to cash flow ranges of lower than 1.0:1 to greater than 2.5:1

The facility is secured by a general security agreement conveying a first floating charge over all real and personal property and after-acquired assets. The Corporation is required to meet certain financial based covenants under the terms of this facility. As at March 31, 2008, the Corporation is in compliance with all covenants in accordance with the terms of the credit facility.

As at March 31, 2008, $53.1 million was drawn under the bank facility. The effective interest rate on the outstanding debt for the first quarter of 2008 is approximately 5.7 percent annualized.



8. SHARE CAPITAL

(a) Authorized

Unlimited number of common voting shares
Unlimited number of preferred shares, issuable in series
Unlimited number of special voting shares, with no dividend or distribution
rights

(b) Issued common voting shares outstanding

2008
---------------------------
Number of Amount
Shares $
---------------------------
Balance January 1, 2008 24,902,616 95,217,847

Acquisition of Defiant (Note 3) 12,436,592 33,827,531
---------------------------
37,339,208 129,045,378

Share issuance costs, net of tax of $1,650 - (4,350)
---------------------------

Balance, March 31, 2008 37,339,208 129,041,028
---------------------------
---------------------------


(c) Acquisition of Defiant

On March 31, 2008 the Corporation acquired all of the outstanding shares of Defiant Resources. At closing, the Corporation issued 12,436,592 common shares at a deemed value of $33,827,531 (Note 3).

(d) Performance Warrants

In January 2007 the Corporation issued performance warrants to founders, directors, officers and employees. The performance warrants have a term of seven years from January 23, 2007 and vest fully as to one-third on January 23, 2008, 2009 and 2010 or upon a change of control or a liquidity event. The performance warrants are issued in series as follows:



# of Exercise
Series Warrants Price
--------- ----------- ----------
Series 1 577,282 $6.20
Series 2 577,280 $7.23
Series 3 577,279 $8.25
Series 4 577,279 $9.28
Series 5 577,279 $10.33
-----------
Total 2,886,399
-----------
-----------

The estimated value of the performance warrants at the time of grant was
estimated to be $Nil.


(e) Stock Option Plan

The Corporation has established a stock option plan (the "Plan") in compliance with the requirements of the TSX. The Plan authorizes the Board to grant stock options to directors, officers, employees and consultants of the Corporation. The Plan provides for options to have exercise prices fixed by the Board of Directors equivalent to the fair value of the Corporation's common shares at the grant date, and terms of no more than ten years. Stock options issued to date vest over a three-year period commencing on the first anniversary of and expire five years after the date of issue.

The aggregate number of shares which may be reserved for issuance under the plan is 10 percent of the Corporation's issued and outstanding shares. No one person can receive options within a one-year period entitling the person more than 5 percent of issued common shares.



A summary of the Corporation's stock option plan as at March 31, 2008 is as
follows:

Weighted
Number Average
of Exercise
Continuity of stock options Shares Price
----------- ----------

Outstanding, December 31, 2007 2,155,000 $3.15
Granted during the period 235,000 $2.99
Cancelled - -
----------- ----------
Outstanding, March 31, 2008 2,390,000 $3.13
----------- ----------
----------- ----------
Exercisable, March 31, 2008 - -
----------- ----------
----------- ----------


The following table summarizes information about the Corporation's stock
options outstanding and exercisable at March 31, 2008.

Options Outstanding Exercisable Options
----------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
----------------------------------- ----------------------

Up to $3.00 155,000 4.8 $2.91 - -
$3.01 - $3.30 2,235,000 4.7 3.15 - -
----------------------------------- ----------------------
2,390,000 4.7 $3.13 - -


Compensation cost recognized for the quarter ended March 31, 2008 related to options granted in prior years was $269,600 of which $135,050 was charged to income and $134,550 was capitalized to property and equipment. As stock-based compensation is not deductible for income tax purposes, a future income tax liability of $51,036 associated with the current period's capitalized stock-based compensation was recorded.

The fair value of stock options granted during the quarter ended March 31, 2008 was estimated using the Black-Scholes option pricing model with the following assumptions: expected volatility (50 percent); risk-free interest rates (3.46 to 3.76 percent); expected life (five years) and expected future dividends (0%). Stock options granted during the period had an estimated fair value of $1.39 to $1.56 per option with a weighted average of $1.42 per option.

Compensation cost recognized for the quarter ended March 31, 2008 related to options granted in 2008 was $27,790 of which $23,174 was charged to income and $4,616 was capitalized to property and equipment. A future tax liability of $1,751 associated with the current period's capitalized stock based compensation was also recorded.

(f) Normal Course Issuer Bid

On January 29, 2008, the Corporation announced a normal course issuer bid that will allow purchase and cancellation of up to 1,245,131 common shares at prevailing market prices. The bid commenced on February 1, 2008 and will terminate on January 31, 2009 or such earlier time as the Bid is completed or terminated at the option of Corporation. No shares have been purchased to date.



9. WEIGHTED AVERAGE SHARES OUTSTANDING

The weighted average number of common shares issued and outstanding for the
three months and year ended March 31 are as follows:

Three months ended March 31
-----------------------------
2008 2007
-----------------------------

Weighted average share outstanding - basic 25,039,419 3,646,434

Dilutive stock options outstanding - -
-----------------------------

Weighted average share outstanding - diluted 25,039,419 3,646,434
-----------------------------
-----------------------------

No stock options or performance warrants have been included in the
calculation of diluted shares outstanding as their inclusion would be
anti-dilutive.


10. CAPITAL DISCLOSURES

The Corporation's policy is to maintain a strong capital base to maintain investor, creditor and market confidence to ensure continued growth.

The Corporation's capital consists of shareholders' equity, bank debt and working capital. The Corporation adjusts its capital structure to manage its current and future debt, drilling programs and potential corporate acquisitions through the issuance of shares, property dispositions, increasing the credit facility and adjusting capital spending.

To ensure corporate growth objectives are met, the Corporation must ensure sufficient capital is available to fund the Corporation's drilling programs, corporate and asset acquisitions. The Corporation monitors capital using non-GAAP measures, based on the ratio of net debt to annualized funds flow.

The Corporation's strategy is to maintain a ratio of no more than 2.0 to 1. To manage this ratio, the Corporation prepares annual budgets, which are updated quarterly with current and forecasted prices, production volumes, operating costs and forecasted capital expenditures. The annual and updated budgets are approved by the Board of Directors. The following table summarizes the Corporation's net debt to annualized cash flow calculation:



Three months Three months
ended, ended,
March 31 December 31
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Current assets $ 16,149,250 $ 9,634,594
Accounts payable and accrued liabilities (23,347,943) (18,709,218)
Bank Debt (53,071,357) (23,807,706)
----------------------------------------------------------------------------
Net Debt $(60,270,050) $(32,882,330)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net Earnings $ (330,472) $ (83,324)
Add (deduct):
Unrealized loss on commodity contracts 2,172,698 193,878
Depletion, depreciation and accretion 4,193,559 2,174,476
Future income taxes (recovery) (184,198) 517,452
Stock-based compensation 158,224 (67,372)
----------------------------------------------------------------------------
Funds flow from operations excluding asset
retirement obligations 6,009,811 2,735,110
----------------------------------------------------------------------------
Funds flow from operations adjusted for a full
period of Cork production 6,093,000
----------------------------------------------------------------------------
Funds flow from operations adjusted for a full
period of Defiant production 7,849,303
----------------------------------------------------------------------------
Annualized funds flow $ 31,397,212 $ 24,372,000
----------------------------------------------------------------------------
Net Debt to Annualized Funds Flow 1.92X 1.35X
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at March 31, 2008, the Corporation's ratio of net debt to annualized cash flow was 1.9 to 1, within the range established by the Corporation. Subsequent to the end of the first quarter of 2008, the Corporation has signed two agreements to divest two properties (see Note 13). Proceeds will initially be applied against the bank line and then allocated to the capital program as required.

The Corporation's share capital is not subject to external restrictions but the amount of the bank line is dependent on independent valuation of the Corporation's oil and gas reserves. The Corporation has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.

There were no changes in the Corporation's approach to capital management during the period.

11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Corporation has the following financial instruments:

- Cash and cash equivalents

- Accounts receivable and deposits

- Accounts payable and accrued liabilities

- Bank debt

- Commodity contracts

Cash and cash equivalents are designated as held-for-trading instruments and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Accounts receivable and deposits are designated as loans and receivables. Accounts payable and accrued liabilities and bank debt are designated as other financial liabilities. All commodity contracts are derivative financial instruments and classified as held-for-trading.

The Corporation may use various types of derivative financial instruments to manage risks associated with natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized at the time each transaction under a contract is settled. For the unrealized portion of such contracts, the Corporation utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counterparties to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date with unrealized gains or losses on those contracts recorded through net earnings. Transaction costs, if any, are added to the amounts of the associated financial instruments and amortized accordingly.

An embedded derivative is a component of a contract that affects the terms in relation to another factor. These hybrid contracts are considered to consist of a "host" contract plus an embedded derivative. The embedded derivative is separated from the host contract and accounted for as a derivative only if certain conditions are met. The Corporation has not identified any embedded derivatives which required separate recognition and measurement.

The nature of these financial instruments and the Corporation's operations expose the Corporation to market risk, liquidity risk and credit risk. The Corporation employs risk management strategies and polices to ensure that any exposure to risk are in compliance with the Corporation's business objectives and risk tolerance levels. Risk management is ultimately established by the Corporation's Board of Directors and is implemented by senior management and monitored by the risk management function within the Corporation.

a) Market risk

Market risk is the risk that changes in market prices, such as commodity prices, interest rates and foreign exchange rates will affect the Corporation's net earnings or the value of financial instruments. The objective of the Corporation is to manage and mitigate market risk exposures within acceptable limits, while maximizing returns.

Commodity price risk

The nature of the Corporation's operations results in exposure to fluctuations in commodity prices. Management continuously monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. The Corporation has entered into derivative financial instruments for the purpose of protecting a portion of its funds flow from operations from the volatility of natural gas commodity prices.

The Corporation has not designated any of its derivatives as a hedge for accounting purposes and has therefore recorded the unrealized gains and losses on these contracts in the balance sheet as assets or liabilities with changes in their fair value recorded in net earnings for the period. Realized gains or losses from financial instruments related to commodity prices are recognized in income as the related sales occur.



Following is a summary of all derivative contracts in place as at March 31,
2008:

Natural Gas Volume Pricing Strike Price
(GJ/day) Point (per GJ) Term
----------------------------------------------------------------------------

April 1, 2008 to
Swap 2,500 AECO-C $7.00 October 31, 2008

April 1, 2008 to
Swap 2,500 AECO-C $7.02 October 31, 2008


As of March 31, 2008, the fair value of all commodity contract liabilities was $1,999,973. This resulted in an unrealized loss of $2,172,698 for the quarter ending March 31, 2008 (March 31, 2007 - $0). The Corporation's risk management activities had a net realized gain of $141,592 for the three month period ending March 31, 2008 (March 31, 2007 - $0).

The following table summarizes the sensitivity of the fair value of the Corporation's risk management positions to the fluctuations in commodity prices with all other variables held constant. When assessing the potential impact of these commodity price changes, the Corporation believes a 10% change is a reasonable measure. Fluctuations in commodity prices could have resulted in unrealized gains (losses) impacting net earnings as follows:



Net Earnings
---------------------------------------------
Three Months Ended March 31, 2008
---------------------------------------------
Favourable Unfavourable
10% Change 10% Change
----------------------------------------------------------------------------
Natural gas price $ 945,000 $ (945,000)
($685,000 after tax) (($685,000) after tax)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility. The floating rate debt is subject to interest rate risk, as the cash required to service the debt will fluctuate as a result of market changes. The Corporation had no interest rate swaps or financial contracts in place as at or during the quarter ended March 31, 2008.

As at March 31, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $96,000 higher (March 31, 2007 - $0), due to lower interest expense. An equal opposite impact would have occurred to net earnings had interest rates been 1% higher.

Foreign currency exchange risk

The Corporation is exposed to foreign currency exchange risk as the underlying market prices in Canada for petroleum and natural gas fluctuate with changes in the exchange rate between the Canadian and United States dollar. As of March 31, 2008 the Corporation had no forward exchange rate contracts in place nor any significant working capital items denominated in foreign currencies.

b) Liquidity risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. The Corporation's approach to managing liquidity is to ensure it will have sufficient liquidity to meet its liabilities when due. By nature the oil and gas industry is very capital intensive. As a result the Corporation prepares annual capital expenditure budgets and utilizes authorizations for expenditures to manage capital expenditures. Refer to Note 10 for further disclosure on the management of capital. The Corporation also has a revolving operating credit facility, to facilitate the management of its liquidity risk. See Note 7 for credit facility disclosure.

c) Credit risk

Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Substantially all of the Corporation's accounts receivable are due from customers in the oil and natural gas industry and are subject to normal credit risk. With respect to counterparties to financial instruments, the Corporation mitigates associated credit risk by entering into transactions with major institutions with investment grade credit ratings. Management believes the risk is mitigated by the size and reputation of the companies to which they extend credit.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. The Corporation historically has not experienced any collection issues with its petroleum and natural gas marketers.

Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Corporation attempts to reduce the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and issuing cash calls to partners for capital projects before they commence.

d) Fair Value of Financial Instruments:

Financial instruments of the Corporation carried on the balance sheet consist mainly of cash and cash equivalents, accounts receivable, deposits, commodity contracts, bank debt, accounts payable and accrued liabilities. The estimated fair value of the financial instruments approximates their carrying value due to their short terms to maturity and the floating interest rate on the Corporation's debt.

The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.

12. COMMITMENTS AND CONTINGENCIES

(a) Operating commitments

In order to ensure continued availability of, and access to, facilities and services to meet its operational requirements, the Corporation has entered into operating leases for office space and other property and equipment. Under contracts existing at March 31, 2008, future minimum amounts payable on a fiscal year basis, excluding operating costs, are as follows:



$
-----------
2008 281,148
2009 403,495
2010 407,905
2011 403,057
2012 398,635
2013 33,220
-----------
-----------
1,927,460
-----------
-----------


(b) Flow-through Qualifying Expenditures

Pursuant to a flow-through share offering on February 27, 2007, the Corporation is committed to incur a total of $16,008,000 in qualifying expenditures by December 31, 2008. As of March 31, 2008 approximately $6,344,000 is still to be incurred.

13. SUBSEQUENT EVENTS

(a) Brazeau Area Disposition

On April 24th, 2008, the Corporation entered into a purchase and sale agreement for the sale of its Brazeau area properties to a private oil and gas company. The sale is expected to close on May 15th, 2008 with an effective date of April 1st, 2008. The disposition of these assets is subject to customary due diligence and other conditions typical of transactions of this nature. The total consideration to be received is $11.4 million prior to adjustments. Production from this area, net to Profound, is approximately 255 boed.

(b) Majeau Area Disposition

The Corporation has also entered into an agreement for the sale of its Majeau area properties to a private oil and gas company. Total consideration prior to adjustments is $2.7 million. Profound produces approximately 40 boed from the Majeau area. The sale is expected to close on or about May 15th, 2008 with an effective date of April 1st, 2008. The disposition of these assets is subject to customary due diligence and other conditions typical of transactions of this nature.

(c) Employee Stock Options Granted

Subsequent to March 31, 2008 the Corporation granted 1,128,000 additional stock options to employees priced at $3.72 per share.

14. COMPARATIVE FIGURES

Certain comparative figures as at December 31, 2007 and for the three month period ended March 31, 2007 have been reclassified to conform to current period presentation.

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