SignalEnergy Inc.
TSX : SGI

August 14, 2006 23:59 ET

SignalEnergy Inc. Announces 2006 Second Quarter Results

CALGARY--(CCNMatthews - Aug. 14) - SignalEnergy Inc. (TSX:SGI)

CORPORATE OVERVIEW

In February 2006, the Company sold its Ferrier, Carrot Creek, Kaybob and Redwater properties for cash proceeds of approximately $96.5 million. The Company retained its assets in the Chigwell, Bashaw and Buick Creek areas.

After the completion of the sale, the Company announced its intention to distribute the net proceeds (after repayment of existing indebtedness) to shareholders.

On March 27, 2006, Pearl Exploration and Production Ltd. ("Pearl") announced its intention to make an offer (the "Offer") to acquire all of the issued and outstanding shares of Signal. The Offer was mailed to Signal shareholders on May 16, 2006 and was withdrawn on June 22, 2006 due to a lack of support by Signal shareholders.

In consideration of its fiduciary obligations to maximize shareholder value, the Company's Board of Directors decided to defer the decision of a distribution so that it could consider other strategic alternatives. In this regard, the Company has engaged FirstEnergy Capital Corporation ("FirstEnergy") as its independent financial advisors to consider alternative transactions which could return greater value to shareholders than the proposed distribution and the retention or future sale of the remaining operating entity.



HIGHLIGHTS
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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Sales volume:
Natural gas (mcf/d) 1,833 5,100 3,092 5,015
Oil and NGL's (bbl/d) 69 170 166 157
Equivalence at 6:1 (boe/d) 375 1,020 681 993
Sales price:
Natural gas ($/mcf) 6.04 7.25 7.32 7.09
Oil and NGL's ($/bbl) 57.08 56.59 59.09 52.60
Equivalence at 6:1 ($/boe) 40.08 45.67 47.58 44.15
Financial: (000's)
Petroleum and natural gas sales 1,362 4,238 5,862 7,937
Net income 270 85 13,710 598
Net income per share - basic - - 0.19 0.01
Net income per share - diluted - - 0.19 0.01
Funds from operations 17 2,208 704 3,569
Total assets 98,071 58,582 98,071 58,582
Capital expenditures, net 764 3,179 3,969 7,730
Working capital (deficiency) 65,788 (3,993) 65,788 (3,993)
Weighted average shares
outstanding - basic 72,595 47,090 72,300 45,863
Weighted average shares
outstanding - diluted 73,316 47,090 72,995 46,284
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MANAGEMENT'S DISCUSSION AND ANALYSIS


Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements of SignalEnergy Inc. ("Signal" or the "Company") for the three and six months ended June 30, 2006, and the audited consolidated financial statements of the Company as at and for the year ended December 31, 2005. The unaudited interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All tabular amounts in the following discussion are in thousands of Canadian dollars unless otherwise noted.

This MD&A provides managements analysis of Signal's historical financial and operating performance based on information currently available. Actual results will vary from estimates and variances may be significant. Historical results are not indicative of future performance. This MD&A is dated August 14, 2006.

Non-GAAP Measurements

Management uses the term "funds from operations" to analyze operating performance and leverage, determined as net income (loss) adjusted for certain non-cash items such as depletion and depreciation expense, future income taxes, stock-based compensation expense, gain on property disposition, and accretion of asset retirement obligations. While widely used in the oil and gas industry, funds from operations does not have any standardized meaning prescribed by GAAP and therefore it may not be comparable to the calculation of similar measures for other entities. The Company considers funds from operations to be a key measure since it demonstrates the Company's ability to generate the cash necessary to fund future growth and repay debt. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period, nor should it be viewed as an alternative to cash flow from operating activities, net income (loss), or other measures of financial performance calculated in accordance with GAAP.

Management also uses certain key performance indicators ("KPI's") and industry benchmarks such as "operating netbacks" to analyze financial and operating performance. These KPI's and benchmarks as presented do not have any standard meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other entities.

BOE Presentation

Natural gas reserves and volumes recorded in thousand cubic feet are converted to barrels of oil equivalent ("boe") on the basis of six thousand cubic feet ("mcf") of gas to one barrel ("bbl") of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalent at the wellhead.

Forward Looking Statements

Statements in this MD&A may contain forward looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward looking in nature and subject to substantial risks and uncertainties. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The Company cautions the readers that actual performance will be affected by a number of factors, as many may respond to changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production, delays or changes in plans; risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. These external factors beyond the Company's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward looking information.

Statements throughout this MD&A that are not historical facts may be considered "forward looking statements." These forward looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals or future plans are forward looking statements. Since forward looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to any number of risks including, but not limited to:


a. Risks associated with the oil and gas industry and regulatory bodies
(e.g. operational risks in exploration, development and production);
b. Delays or changes in plans with respect to exploration or development
projects or capital expenditures;
c. Uncertainty of estimates and projections relating to recoverable
reserves, costs and expenses;
d. Health safety and environmental risks; and
e. Commodity price and exchange rate fluctuations.

SUMMARY OF QUARTERLY RESULTS

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2006 2005 2004
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Sales volume:
Natural gas
(mcf/d) 1,833 4,366 6,253 5,990 5,100 4,929 1,901 1,762
Oil and NGL's
(bbl/d) 69 263 430 242 170 145 105 123
Equivalence at
6:1 (boe/d) 375 991 1,472 1,240 1,020 966 421 417
Sales price:
Natural gas
($/mcf) 6.04 7.86 11.48 9.22 7.25 6.93 6.94 6.50
Oil and NGL's
($/bbl) 57.08 59.62 65.95 62.88 56.59 47.86 50.04 46.58
Equivalence at
6:1 ($/boe) 40.08 50.45 68.31 56.82 45.67 42.53 43.18 41.30
Benchmark prices:
AECO bench
($/gj) 5.71 7.19 10.84 8.76 6.98 6.49 6.25 5.89
Edmonton Par
($/bbl) 80.43 68.90 72.18 77.80 65.80 61.07 58.16 56.99
Financial ($000's):
Petroleum and
natural gas
sales 1,362 4,500 9,250 6,483 4,238 3,699 1,708 1,586
Net income
(loss) 270 13,440 952 536 85 513 (548) (500)
Net income
(loss) per
share
- basic ($) - 0.19 0.02 0.01 - 0.01 (0.02) (0.02)
Net income
(loss) per
share
- diluted ($) - 0.19 0.02 0.01 - 0.01 (0.02) (0.02)
Funds from
operations 17 687 4,223 3,141 2,208 1,361 486 526
Operating costs
($/boe) 13.13 13.07 12.81 7.20 7.78 7.25 10.58 7.32
Weighted average
shares
outstanding
- basic 72,595 70,598 69,195 59,085 47,090 44,622 30,666 30,666
Weighted average
shares
outstanding
- diluted 73,316 71,239 69,525 61,240 47,090 44,781 30,666 30,666
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In February 2006, the Company sold its interest in certain oil and gas assets, as previously noted. The sale resulted in substantially lower sales volumes in the first and second quarters of 2006. Significant increases in sales volumes were realized in the first and third quarters of 2005 with the acquisitions of Predator Exploration Ltd. ("Predator") and a private oil and gas company in January, and with the acquisition of Goose River Resources Ltd. ("Goose River") in August. These three acquisitions added production gains of approximately 750 boe/d at the time of acquisition. In addition to improved sales volumes throughout 2005, the Company benefited from significantly increased commodity prices in the third and fourth quarters of 2005.

The Company has recorded net income in the past six calendar quarters. Net income for the second quarter of 2006 is attributed to a future income tax recovery of $1,068,000 recorded in the period. Net income for the first quarter of 2006 included a gain on the sale of oil and gas properties of $20,087,000. Net income for the first quarter of 2005 is attributable to the recognition of a portion of previously unrecognized tax assets as a result of a 2004 flow-through share renouncement for which the income tax effects were recorded in March 2005. Net income in the fourth quarter of 2005 improved over the previous quarter due to record commodity prices and increased sales volumes resulting from the Goose River acquisition and the Company's drilling program which included the drilling of 31 gross wells (19 net wells) in the last half of 2005.

The Company reported funds from operations in the second quarter of 2006 of $17,000. Funds from operations in the first quarter of 2006 decreased from the prior quarter due to the sale of oil and gas properties and substantially lower natural gas prices realized. Funds from operations improved throughout 2005 as a result of production increases and record commodity prices realized.



RESULTS OF OPERATIONS

Sales
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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Petroleum and natural gas
sales ($000's) 1,362 4,238 5,862 7,937
Sales volume:
Natural gas (mcf/d) 1,833 5,100 3,092 5,015
Oil and NGL's (bbl/d) 69 170 166 157
Equivalence at 6:1 (boe/d) 375 1,020 681 993
Sales price:
Natural gas ($/mcf) 6.04 7.25 7.32 7.09
Oil and NGL's ($/bbl) 57.08 56.59 59.09 52.60
Equivalence at 6:1 ($/boe) 40.08 45.67 47.58 44.15
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Revenues from petroleum and natural gas sales decreased in the second quarter of 2006 when compared to the first quarter of 2006 and the second quarter of 2005, as a result of the sale of oil and gas assets in the first quarter of 2006 and lower natural gas prices realized by the Company. For the six months ended June 30, 2006, revenues also decreased when compared to the same six month period in 2005, primarily as a result of the sale of oil and gas assets in the first quarter of 2006.

The Company recorded an average sales volume of 375 boe/d for the second quarter of 2006 compared to 1,020 boe/d for the second quarter of 2005. The sale of oil and gas assets resulted in a decrease in sales volumes for the first and second quarters of 2006 as the sold properties accounted for average sales volumes of approximately 674 boe/d in the first quarter of 2006 (or 335 boe/d for the six months ended June 30, 2006). For the six months ended June 30, 2006, sales volumes decreased to 681 boe/d compared to 993 boe/d for the same six month period in 2005.

Natural gas accounted for 81% of sales volumes in the second quarter of 2006 compared to 83% for the second quarter of 2005. The natural gas price realized by the Company in the second quarter of 2006 decreased to $6.04/mcf from $7.25/mcf a year earlier. For the six months ended June 30, 2006, natural gas accounted for 76% of sales volumes compared to 84% for the six months ended June 30, 2005. The average price for natural gas realized by the Company for the six months ended June 30, 2006, was $7.32/mcf compared to $7.09/mcf for the six months ended June 30, 2005. The average sales price per mcf realized by the Company is consistent with the AECO spot price, adjusted for heat content and transportation costs.

The average price realized by the Company for oil and natural gas liquids sales for the three months ended June 30, 2006 was $57.08/bbl - a slight increase from $56.59/bbl for the second quarter of 2005. For the six months ended June 30, 2006, the Company realized a price of $59.09/bbl for oil and natural gas liquids compared to $52.60/bbl for the six months ended June 30, 2005. The price realized by the Company is slightly lower than the average Edmonton Par posting as a result of quality differentials and transportation costs.

All of the Company's production is marketed in the Alberta spot market and is unhedged.



Royalties

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Royalties (net of Alberta Royalty
Tax Credit) ($000's) 280 600 1,231 1,600
$/boe 8.22 6.47 9.99 8.90
Percentage of petroleum and
natural gas sales 20.6 14.2 21.0 20.2
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Royalties, consisting of crown, gross-overriding and freehold royalties were $280,000 for the three months ended June 30, 2006 - a decrease of $320,000 from the three months ended June 30, 2005, reflecting the sale of oil and gas properties and lower sales. As a percentage of sales, royalties for the second quarter of 2006 are consistent with the previous quarter but reflect a sharp increase from the second quarter of 2005. The second quarter of 2005 reflected a substantial decrease in royalties to 14.2% of sales reflecting the disposition of the Company's Twining property on April 1, 2005, which recorded substantially higher gross-overriding and freehold royalties than the Company's other properties. Royalties for the six months ended June 30, 2006 are consistent with that of the six months ended June 30, 2005. The Company sold its interest in certain oil and gas properties in February 2006. Royalties for the properties retained by the Company averaged 21.8% of revenue in 2005 and it is expected that royalties will trend to this figure in future periods.



Operating Expenses

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Operating expenses ($000's) 447 722 1,617 1,353
$/boe 13.13 7.78 13.12 7.53
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The Company's operating expenses decreased to $447,000 for the three months ended June 30, 2006 from $722,000 for the comparable period in 2005. This decrease can be attributed to the sale of oil and gas assets and lower sale volumes. On a per boe basis, operating expenses have increased substantially in the second quarter of 2006 to $13.13/boe, compared to $7.78/boe in the second quarter of 2005. This increase is due to an under estimation of first quarter operating expenses of approximately $238,000 (or $6.99/boe) resulting from the Company's inexperience with several new wells in the Redwater area that came onto production in the first quarter of 2006 and that experienced substantially higher operating costs than anticipated, as noted below. The Company also incurred repairs and maintenance costs of approximately $44,000 (or $1.29/boe) in the second quarter of 2006, related to the Bashaw 10-7 and Buick Creek B-22-C/94 wells. The Company has not been able to restore production to either of these wells.

Operating expenses for the six months ended June 30, 2006 increased to $1,617,000 from $1,353,000 for the six month period ended June 30, 2005. A substantial portion of this increase is attributed to the acquisition of the Redwater property in August 2005 which posted higher than average operating costs due to additional costs incurred for compressor and pump jack rentals, trucking, salt water disposal, and oil treating fees at third party facilities. The Redwater property accounted for 28% of revenues in the first six months of 2006, despite its sale in March 2006.



General and Administrative Expenses

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Three months ended Six months ended
June 30, June 30,
($000's) 2006 2005 2006 2005
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General and administrative
expenses 1,176 1,024 2,863 1,741
General and administrative
costs capitalized - (452) (110) (549)
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General and administrative
expenses (net) 1,176 572 2,753 1,192
$/boe 34.53 6.16 22.34 6.63
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General and administrative expenses increased to $1,176,000 in the second quarter of 2006 compared to $1,024,000 in the second quarter of 2005. The increase is attributed to additional severance and retention costs of approximately $205,000 recorded in the second quarter of 2006 due to the continued downsizing that has occurred as a result of the sale of oil and gas properties in February 2006. Also, advisory and legal costs of approximately $358,000 pertaining to the proposed Pearl transaction were incurred in the second quarter of 2006.

The Company capitalized general and administrative costs of $110,000 in the six months ended June 30, 2006 compared to $549,000 in the six months ended June 30, 2005. The Company did not capitalize any general and administrative costs in the second quarter of 2006, due to the curtailment of exploration and development activities as a result of the sale of a major portion of the Company's asset base, and the process announced by the Company in March 2006 whereby the Board appointed FirstEnergy to review certain strategic alternatives to maximize shareholder value. The Company has not drilled any wells in 2006.



Stock-based Compensation Expense

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Stock-based compensation
expense ($000's) (30) 309 822 580
$/boe (0.88) 3.32 6.67 3.23
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Stock-based compensation expense reflects the value attributed to stock options granted to employees, officers, directors and consultants to the Company. Stock-based compensation expense for the six months ended June 30, 2006 was $822,000 compared to $580,000 for the six months ended June 30, 2005. As a result of the sale of oil and gas properties in February 2006 and the substantial reduction in the Company's asset base, all stock options outstanding that had not previously vested, were vested on March 1, 2006. Stock-based compensation expense for the second quarter of 2006 reflects a reduction of $30,000 for unvested stock options that were cancelled in the previous quarter.



Interest Expense

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Interest expense ($000's) 70 138 304 223
$/boe 2.06 1.49 2.47 1.24
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Interest expense decreased to $70,000 for the three months ended June 30, 2006 from $138,000 for the three months ended June 30, 2005. The Company repaid its operating loan on February 28, 2006 with the proceeds from the sale of oil and gas assets. Interest expense for the second quarter of 2006 represents accrued interest to June 30, 2006 on unspent flow-through funds that were raised in December 2005, which must be spent on qualified exploration projects by December 31, 2006. Interest expense incurred in prior periods represents interest on the Company's operating loan, the proceeds of which were used to fund the cash portion of three corporate acquisitions and the Company's capital program in 2005. The increase in interest expense in the six months ended June 30, 2006 when compared to the six months ended June 30, 2005, represents an increase in the average loan balance and an increase in the prime lending rate over this period, and interest on unspent flow-through funds.



Depletion and Depreciation Expense

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Depletion and depreciation
expense ($000's) 697 1,786 2,629 3,500
$/boe 20.47 19.25 21.33 19.47
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Depletion and depreciation expense was $697,000 for the second quarter of 2006 compared to $1,786,000 for the second quarter of 2005. This decrease is due to the sale of oil and gas assets in the first quarter of 2006. The depletion and depreciation expense rate of $20.47/boe is consistent with that realized on the properties retained in the sale of oil and gas assets, which was $20.27/boe in the first quarter of 2006. Depletion and depreciation expense for the six months ended June 30, 2006 of $2,629,000 represents a decrease of $871,000 from $3,500,000 reported for the six months ended June 30, 2005. The increase in the depletion and depreciation expense rate for the six months ended June 30, 2006 reflects the mix of the properties sold and those retained.



Accretion of Asset Retirement Obligations

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Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Accretion of asset retirement
obligations ($000's) 16 28 59 86
$/boe 0.47 0.30 0.48 0.48
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Accretion expense was $16,000 for the three months ended June 30, 2006 compared to $28,000 for the three months ended June 30, 2005. The sale of oil and gas properties in February 2006 resulted in a reduction in asset retirement obligations, which have been assumed by the purchaser, and a reduction in the accretion expense for the three and six months ended June 30, 2006.

Income Tax

The Company recorded future income tax expense of $3,439,000 for the six months ended June 30, 2006 which represents the difference between the carrying amount of the asset base and available tax pools remaining after the sale of oil and gas properties in the first quarter. The Company intends to apply its available tax pools to the sale proceeds to minimize the overall tax liability from the sale. In addition, the Company recorded the income tax effect of the 2005 flow-through share issuance in the first quarter of 2006 amounting to $1,022,000. In the first quarter of 2005 the Company recorded a future income tax recovery of $1,195,000 which reflects the income tax effect of a 2004 flow-through share issuance.



Operating Netback

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Three months ended Six months ended
June 30, June 30,
($/per boe) 2006 2005 2006 2005
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Petroleum and natural gas sales 40.08 45.67 47.58 44.15
Less: Royalties (net of ARTC) (8.22) (6.47) (9.99) (8.90)
Operating expenses (13.13) (7.78) (13.12) (7.53)
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Operating netback 18.73 31.42 24.47 27.72
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Funds from operations 0.50 12.28 5.71 19.85
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The operating netback for the three months ended June 30, 2006 decreased to $18.73/boe from $31.42/boe for the second quarter of 2005, due to lower commodity prices, and higher operating expenses in the second quarter of 2006. For the six months ended June 30, 2006, the Company's operating netback decreased to $24.47/boe as a result of substantially higher operating costs incurred, primarily on properties acquired in August 2005, when compared to the six months ended June 30, 2005.

Funds from operations for the three months ended June 30, 2006 was $0.50/boe compared to $12.28/boe for the three months ended June 30, 2005. Funds from operations for the six months ended June 30, 2006 was $5.71/boe compared to $19.85/boe for the six months ended June 30, 2005. These decreases are a result of lower operating netbacks and substantially higher general and administrative costs which included severance and retention costs, and additional advisory and legal costs incurred as a result of the Pearl offer.



Net Income

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Three months ended Six months ended
June 30, June 30,
($000's except per share amounts) 2006 2005 2006 2005
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Net income 270 85 13,710 598
Net income per share - basic - - 0.19 0.01
Net income per share - diluted - - 0.19 0.01
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The Company recorded net income for the three months ended June 30, 2006 of $270,000 compared to $85,000 for the three months ended June 30, 2005. The net income for the three months ended June 30, 2006, is due to a future income tax recovery of $1,068,000 recorded in the period. Net income for the six months ended June 30, 2006 can be attributed to the gain on sale of oil and gas assets of $19,955,000. Net income for the six month period ended June 30, 2005 is attributable to the income tax effects of the 2004 flow-through share renouncement, as noted earlier in this MD&A.



Capital Expenditures, net

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Three months ended Six months ended
June 30, June 30,
($000's) 2006 2005 2006 2005
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Land and rentals - 663 104 923
Seismic - 142 56 202
Drilling and completions - 1,148 908 3,981
Equipment and tie-ins 603 655 2,165 1,876
Property acquisitions - - 465 -
Capitalized overhead costs - 452 110 549
Other 161 119 161 199
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764 3,179 3,969 7,730
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Signal participated and was successful at the crown land sale in January 2006 at a cost of approximately $465,000. The Company incurred additional costs in the first quarter of 2006 to complete and tie-in wells that were drilled in the Redwater area in the fourth quarter of 2005 and were brought onto production early in 2006. Property dispositions reflect the sale of oil and gas properties in February 2006, as noted earlier.

The Company has not drilled any wells or undertaken any new exploration or development activities in 2006.

Liquidity and Capital Resources

Cash used in operating activities was $3,747,000 for the three months ended June 30, 2006, compared to $5,724,000 for the three months ended June 30, 2005. This decrease is attributed to substantially less operating activity in the field resulting from the sale of oil and gas assets in the first quarter of 2006. Cash used in operating activities in the six month period ended June 30, 2006 was $1,664,000 compared to $2,049,000 in the six months ended June 30, 2005 - a decrease of $385,000. This decrease is attributed to a reduction in the Company's operations.

Cash provided by financing activities for the three months ended June 30, 2006 was $1,624,000 compared to cash used in financing activities of $6,093,000 for the three months ended June 30, 2005. Cash provided by financing activities for the three months ended June 30, 2006 represents the exercise of stock options. Cash used in financing activities in the second quarter of 2005 represents the net repayment of the Company's operating loan in the period from the sale proceeds from the Twining property which was sold on April 1, 2005, and the repurchase of Company shares as part of a normal course issuer bid. For the six months ended June 30, 2006, the Company used the proceeds from the sale of oil and gas properties to repay its revolving operating loan which had $28,550,000 drawn at the time of repayment. The exercise of stock options resulted in proceeds to the Company of $3,188,000, for the six months ended June 30, 2006. For the six months ended June 30, 2005, the Company used its revolving operating loan to fund the cash portion of two corporate acquisitions that were completed in January.

Cash used in investing activities for the three months ended June 30, 2006 was $243,000 compared to cash provided by investing activities of $13,183,000 for the three months ended June 30, 2005. Cash used in investing activities for the three months ended June 30, 2006 mainly represents expenditures on property and equipment and an adjustment to the gain on the sale of oil and gas assets. Cash provided by investing activities for the second quarter of 2005 reflects the sale of the Company's Twining property for proceeds of $13,250,000. Cash provided by investing activities for the six months ended June 30, 2006 of $82,664,000 represents the proceeds from the sale of oil and gas properties in the first quarter, partially offset by expenditures to equip and complete wells drilled in the fourth quarter of 2005 in the Redwater area, and funds used to pay down supplier accounts that resulted from the 2005 capital program. This compares to cash used in investing activities for the six months ended June 30, 2005, of $4,868,000, reflecting the cash component of the purchase price of two oil and gas companies acquired in January 2005, expenditures related to the acquisition of undeveloped land in the Buick Creek and Chigwell areas, the tie-in of the West Pembina 3-1 well, the commencement of drilling of the Grizzly 16-10 and Innisfail 16-29 wells, and various completions in the Kaybob and Buick Creek areas, offset by the sale proceeds of the Twining property.

Securities Outstanding

Securities outstanding as of the date of this MD&A consist of 73,266,448 issued and outstanding common shares and 110,000 stock options.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Related Party Transactions

The Company has no related party transactions.

Commitments and Contingencies

The Company has no commodity price, interest rate swaps or fixed price contracts in place as of June 30, 2006. The Company has a lease for office premises which expires in November 2006.

New Canadian Accounting Pronouncements

The Canadian Institute of Chartered Accountants (CICA) has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods. These have been summarized in the Company's MD&A for the year ended December 31, 2005.

BUSINESS RISKS and UNCERTAINTIES

Signal's production and exploration activities are concentrated in the Western Canadian Sedimentary Basin, where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies. Signal is subject to the various types of business risks and uncertainties including:



- finding and developing oil and natural gas reserves at economic
costs;
- production of oil and natural gas in commercial quantities; and
- marketability of oil and natural gas produced.


In order to reduce exploration risk, the Company strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality proprietary geological and geophysical prospects. To help maximize drilling success, Signal combines exploration in areas that afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high-risk with high-reward opportunities. The Company explores in areas where the Company has drilling experience.

The Company mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems. In addition, the Company seeks to maintain operational control of its prospects.

Oil and gas exploration and production can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risks, Signal conducts its operations at high standards and follows safety procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Company maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements, as well as industry standards and government regulations. Signal may periodically use financial or physical delivery hedges to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved by senior management subject to controls established by the Board of Directors.

CRITICAL ACCOUNTING ESTIMATES

The reader is advised that the critical accounting estimates, policies, and practices as described in this MD&A and financial statements continue to be critical in determining Signal's financial results.

The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes. Changes in these judgments and estimates could have a material impact on the financial results and financial condition. The accounting policies and practices that are critical to the determination of the Company's financial results are summarized in the Company's MD&A for the year ended December 31, 2005.





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SIGNALENERGY INC.
CONSOLIDATED BALANCE SHEETS
As at
(in thousands)
(unaudited)
-------------------------------------------------------------------------
June 30, December 31,
2006 2005
-------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents (note 3) $ 61,274 $ 61
Accounts receivable 6,980 11,269
Prepaid expenses 203 258
-----------------------------------------------------------------------
68,457 11,588
Property and equipment (notes 4 and 5) 25,066 102,503
Goodwill 4,548 4,548
-------------------------------------------------------------------------
$ 98,071 $ 118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 2,386 $ 17,810
Income taxes payable 283 283
Revolving operating loan (note 6) - 22,975
-----------------------------------------------------------------------
2,669 41,068
Future income tax liability 4,461 -
Asset retirement obligations (note 7) 1,100 4,428
-------------------------------------------------------------------------
8,230 45,496
-------------------------------------------------------------------------

Commitment (note 8)

Shareholders' Equity
Share capital (note 8) 140,166 136,817
Contributed surplus (note 8) 1,779 2,140
Deficit (52,104) (65,814)
-----------------------------------------------------------------------
89,841 73,143


-------------------------------------------------------------------------
$ 98,071 $ 118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.




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SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the three and six months ended June 30
(in thousands, except per share amounts)
(unaudited)
-------------------------------------------------------------------------
Three months ended Six months ended
2006 2005 2006 2005
-------------------------------------------------------------------------

REVENUE
Petroleum and natural
gas sales $ 1,362 $ 4,238 $ 5,862 $ 7,937
Royalties (net of
Alberta Royalty Tax
Credit) (280) (600) (1,231) (1,600)
-------------------------------------------------------------------------
1,082 3,638 4,631 6,337
Interest income 608 1 747 7
-------------------------------------------------------------------------
1,690 3,639 5,378 6,344
-------------------------------------------------------------------------
EXPENSES
Operating 447 722 1,617 1,353
General and administrative 1,176 572 2,753 1,192
Stock-based compensation
(note 9) (30) 309 822 580
Interest 70 138 304 223
Depletion and depreciation 697 1,786 2,629 3,500
Accretion of asset
retirement obligations
(note 7) 16 28 59 86
-------------------------------------------------------------------------
2,376 3,555 8,184 6,934
-------------------------------------------------------------------------
Income (loss) from operations
before the following (686) 84 (2,806) (590)

OTHER
Gain/(loss) on sale of oil
and gas properties and
equipment (note 4) (132) - 19,955 -
-------------------------------------------------------------------------

Income (loss) before income
taxes (818) 84 17,149 (590)
-------------------------------------------------------------------------
Income tax expense
(recovery) (note 10)
Current (20) (1) - 7
Future (1,068) - 3,439 (1,195)
-------------------------------------------------------------------------
(1,088) (1) 3,439 (1,188)
-------------------------------------------------------------------------
Net income for the period 270 85 13,710 598

Deficit, beginning of period (52,374) (67,103) (65,814) (67,616)
-------------------------------------------------------------------------
Deficit, end of period $ (52,104) $ (67,018) $ (52,104) $ (67,018)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per share
(note 8)
Basic $0.00 $0.00 $0.19 $0.01
Diluted $0.00 $0.00 $0.19 $0.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.




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SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30
(in thousands)
(unaudited)
-------------------------------------------------------------------------
Three months ended Six months ended
2006 2005 2006 2005
-------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $ 270 $ 85 $ 13,710 $ 598
Items not affecting
cash flows:
Stock-based compensation
expense (30) 309 822 580
Depletion and depreciation 697 1,786 2,629 3,500
Accretion of asset
retirement obligations 16 28 59 86
Gain on sale of oil and
gas properties and
equipment 132 - (19,955) -
Future income tax expense
(recovery) (1,068) - 3,439 (1,195)
-------------------------------------------------------------------------
Funds from operations 17 2,208 704 3,569
Change in non-cash operating
working capital (note 11) (3,764) (7,932) (2,368) (5,618)
-------------------------------------------------------------------------
Cash used in operating
activities (3,747) (5,724) (1,664) (2,049)
-------------------------------------------------------------------------

FINANCING ACTIVITIES
Change in revolving
operating loan - (5,550) (22,975) 7,675
Share buy back - (542) - (542)
Issuance of common shares on
exercise of stock options 1,624 - 3,188 -
Share Issuance costs - (1) - (17)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities 1,624 (6,093) (19,787) 7,116
-------------------------------------------------------------------------

INVESTING ACTIVITIES
Property and equipment
expenditures (764) (3,179) (3,969) (7,730)
Sale of property and
equipment, net of
transaction costs (132) 13,250 95,345 13,250
Acquisition of businesses,
net of cash acquired - 143 - (4,081)
Deferred costs 175 - - -
Change in non-cash investing
working capital (note 11) 478 2,969 (8,712) (6,307)
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities (243) 13,183 82,664 (4,868)
-------------------------------------------------------------------------

Net change in cash (2,366) 1,366 61,213 199
Cash and cash equivalents -
beginning of period 63,640 1,551 61 2,718
-------------------------------------------------------------------------
Cash and cash equivalents -
end of period $ 61,274 $ 2,917 $ 61,274 $ 2,917
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash flow
information:
Interest paid - 138 234 223
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.




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SIGNALENERGY INC.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
(Tabular figures are in thousands of Canadian dollars unless otherwise
indicated)
(unaudited)
-------------------------------------------------------------------------

1. NATURE OF OPERATIONS

SignalEnergy Inc. ("Signal" or the "Company") is a Calgary-based
junior oil and gas exploration and development company. All activity
is conducted in Western Canada and comprises a single operating
segment.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The unaudited interim consolidated financial statements of the
Company have been prepared by management in accordance with Canadian
generally accepted accounting principles using the same accounting
policies as those set out in the audited consolidated financial
statements of the Company for the year ended December 31, 2005.
Certain information or disclosures normally required to be included
in notes to annual audited financial statements have been condensed
or omitted. Accordingly, the unaudited interim consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31,
2005.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand and short-term
investments as follows:

---------------------------------------------------------------------
June 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------
Cash on hand 790 61
Short-term investment 60,484 -
---------------------------------------------------------------------
61,274 61
---------------------------------------------------------------------
---------------------------------------------------------------------

Short-term investments at June 30, 2006 consist of an investment in
banker's acceptances with terms less than three months from inception
and an interest rate of 4.30%.

4. PROPERTY DISPOSITION

Effective February 27, 2006, the Company sold certain oil and gas
properties, tangible equipment and undeveloped land for cash proceeds
of $96,446,000. The transaction involved the sale of the Company's
Ferrier, Carrot Creek, Kaybob, Redwater and certain other minor
properties (the "Sold Properties"). The Company retained its
Chigwell, Bashaw and Buick Creek properties (the "Retained
Properties"). The transaction closed in two stages on February 27 and
March 9, 2006. The transaction costs associated with this transaction
were $1,101,000.

The carrying amount of the Sold Properties at the time of sale was
$78,777,000 and the related asset retirement obligation was
$3,387,000. Included in accounts receivable at June 30, 2006 is
$1,344,000 that is receivable from the purchaser for estimated final
adjustments on the sale. In the six months ended June 30, 2006, the
Company recorded a gain on sale of oil and gas properties and
equipment of $19,955,000.

5. PROPERTY AND EQUIPMENT

---------------------------------------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
June 30, 2006 $ $ $
---------------------------------------------------------------------
Oil and gas properties 29,482 4,474 25,008
Other 110 52 58
---------------------------------------------------------------------
29,592 4,526 25,066
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
December 31, 2005 $ $ $
---------------------------------------------------------------------
Oil and gas properties 114,170 11,730 102,440
Other 110 47 63
---------------------------------------------------------------------
114,280 11,777 102,503
---------------------------------------------------------------------
---------------------------------------------------------------------

In the six months ended June 30, 2006, the Company capitalized
general and administrative expenses of $110,000 (six months ended
June 30, 2005 - $549,000) directly attributable to exploration and
development activities. No general and administrative expenses were
capitalized in the three months ended June 30, 2006 (three months
ended June 30, 2005 - $452,000).

As at June 30, 2006, undeveloped land costs of $1.2 million (June 30,
2005 - $2.5 million) were excluded from assets subject to depletion.

6. BANK FACILITIES

On February 28, 2006, the Company used the proceeds from the sale of
oil and gas properties (note 4) to repay the revolving operating loan
from its bank, which had $28,550,000 drawn at the time of repayment.

7. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations result from net ownership
interests in oil and gas assets including well sites, gathering
systems and processing facilities. The Company estimates the net
present value of its total asset retirement obligations at June 30,
2006 to be $1.1 million (December 31, 2005 - $4.4 million) based on a
total future liability of $2.0 million (December 31, 2005 -
$8.9 million) which will be primarily incurred between 2006 and 2029.
An inflation rate of 3.0% and a credit-adjusted risk-free rate of
6.0% were used to calculate the fair value of the asset retirement
obligations.

---------------------------------------------------------------------
Asset Retirement Obligations $
---------------------------------------------------------------------
Balance, December 31, 2005 4,428
Obligations disposed (note 4) (3,387)
Accretion expense 59
---------------------------------------------------------------------
Balance, June 30, 2006 1,100
---------------------------------------------------------------------
---------------------------------------------------------------------

8. SHARE CAPITAL

(a) Authorized:

Unlimited number of voting common shares without par value.

Unlimited number of class A, non-voting common shares without par
value.

Unlimited number of non-voting, non-retractable, non-redeemable
preferred shares without par value to be issued in series as
determined by the Company.

-----------------------------------------------------------------
June 30, December 31,
Share capital is comprised of: 2006 2005
$ $
-----------------------------------------------------------------
Common shares 139,446 136,097
Additional paid-in capital 720 720
-----------------------------------------------------------------
140,166 136,817
-----------------------------------------------------------------
-----------------------------------------------------------------

(b) Common shares issued and outstanding:

-----------------------------------------------------------------
Number of
Common
Shares $
-----------------------------------------------------------------
Balance, December 31, 2005 70,520,948 136,097
Tax effect of 2005 flow-through
share issuance (i) - (1,022)
Issued on exercise of stock
options (ii) 1,480,000 2,201
-----------------------------------------------------------------
Balance, March 31, 2006 72,000,948 137,276
Issued on exercise of stock
options (ii) 1,265,500 2,170
-----------------------------------------------------------------
Balance, June 30, 2006 73,266,448 139,446
-----------------------------------------------------------------

(i) On December 1, 2005, the Company closed a private placement
of 2,000,000 flow-through common shares at $1.52 per share
for total gross proceeds of $3,040,000 ($2,935,000 net of
share issuance costs). The full expenditure commitment was
renounced to subscribers effective December 31, 2005 with
all expenditures to be incurred by December 31, 2006. The
tax effect related to this flow-through offering of
$1,022,048 was recorded at March 31, 2006 using a tax rate
of 33.62%. As at June 30, 2006, the Company has not incurred
any expenditures in relation to this flow-through share
obligation and, accordingly, for the six months ended
June 30, 2006, the Company has recorded income tax of
$70,000, which has been included in interest expense.

(ii) During the three and six month periods ended June 30, 2006,
options to purchase common shares were exercised for
proceeds of $1,624,000 and $3,188,000, respectively. The
additional $637,000 and $1,183,000 credited to share capital
for the three and six months ended June 30, 2006,
respectively, represents a transfer of the contributed
surplus in respect of these options.

(c) Contributed surplus:

-----------------------------------------------------------------
$
-----------------------------------------------------------------
Balance, December 31, 2005 2,140
Stock-based compensation expense 852
Reclassification to share capital for stock options
exercised (637)
-----------------------------------------------------------------
Balance, March 31, 2006 2,355
Reclassification to share capital for stock options
exercised (546)
Stock-based compensation expense (30)
-----------------------------------------------------------------
Balance, June 30, 2006 1,779
-----------------------------------------------------------------

(d) Stock option plan:

The following table summarizes stock option transactions during
the period:

-----------------------------------------------------------------
June 30, 2006
---------------------------

Weighted
average
exercise
Number price
$

Outstanding, December 31, 2005 4,385,500 2.01
Cancelled (1,530,000) 1.49
Exercised (2,745,500) 1.17
-----------------------------------------------------------------
Outstanding, June 30, 2006 110,000 4.15
-----------------------------------------------------------------

The Company has the following stock options outstanding:

-----------------------------------------------------------------
Exercisable
Outstanding at June 30, 2006 at June 30,
Weighted 2006
average
years to Exercise
Exercise Price Number expiry Price Number
$ $
-----------------------------------------------------------------

3.00 - 4.00 102,000 2.8 3.91 102,000
4.01 - 5.00 4,000 4.8 4.40 4,000
10.00 4,000 3.4 10.00 4,000
-----------------------------------------------------------------
Outstanding,
June 30, 2006 110,000 2.9 4.15 110,000
-----------------------------------------------------------------
-----------------------------------------------------------------

(e) Per share amounts:

The weighted average number of common shares outstanding for the
three and six months ended June 30, 2006 and 2005 are as follows:

-----------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Weighted average
- basic 72,594,859 47,090,244 72,299,545 45,862,930
Weighted average
- diluted 73,316,247 47,090,244 72,994,542 46,284,031
-----------------------------------------------------------------
-----------------------------------------------------------------

9. STOCK-BASED COMPENSATION

The Company records compensation costs on the granting of stock
options using the fair value based method. Compensation expense is
calculated using the Black-Scholes option pricing model with the
following weighted average assumptions:

---------------------------------------------------------------------
June 30, June 30,
2006 2005
---------------------------------------------------------------------
Risk-free interest rate (%) 3.51 3.51
Expected life (years) 3.3 5.0
Expected volatility (%) 60.0 75.0
Expected dividend yield (%) - -
---------------------------------------------------------------------

The estimated fair value of stock options of $0.71 per share is
amortized to expense over the vesting period on a straight-line
basis. As a result of the sale of oil and gas properties (note 4) and
the substantial reduction in the Company's asset base, all unvested
stock options outstanding on March 1, 2006 were vested and the
unexercised portion of these options expired on June 1, 2006.
Stock-based compensation expense for the six months ended June 30,
2006 of $822,000 represents the accelerated vesting of these options.

10. INCOME TAXES

The provision for income tax expense (recovery) recorded in the
consolidated statement of operations differs from the amount that
would be obtained by applying the statutory income tax rate to the
income (loss) before tax as follows:

---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Net income (loss) before
tax (818) 84 17,149 (590)
---------------------------------------------------------------------
---------------------------------------------------------------------
Expected tax expense
(recovery) at 34.5%
(2005 - 37.62%) (283) 32 5,916 (222)
Add (deduct) income tax
effect of:
Non-deductible crown
charges 33 137 110 344
Resource allowance 7 (167) (39) (295)
Stock-based compensation (10) 104 284 218
Flow-through share
renouncement - - (1,022) (1,195)
Non-deductible expenses
and other permanent
differences 9 2 18 9
Large Corporations Tax (20) - - 7
Rate adjustments (824) - (1,828) -
Change in valuation
allowance on unrecognized
benefit of tax assets - (109) - (54)
---------------------------------------------------------------------
Income tax expense
(recovery) (1,088) (1) 3,439 (1,188)
---------------------------------------------------------------------
---------------------------------------------------------------------

The components of the Company's future tax assets and liabilities are
as follows:

---------------------------------------------------------------------
June 30, December 31,
2006 2005
---------------------------------------------------------------------
Net book value of property and equipment
in excess of tax pools (5,411) (16,529)
Scientific research and experimental
development expenditures - 10,330
Non-capital losses carried forward 356 4,468
Asset retirement obligation 321 1,489
Attributed Canadian royalty income 63 -
Share issue costs 210 242
---------------------------------------------------------------------
Net future income tax liability 4,461 -
---------------------------------------------------------------------

11. CHANGE IN NON-CASH WORKING CAPITAL

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

---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Accounts receivable 910 (421) 4,272 (343)
Prepaid expenses (5) 204 55 34
Accounts payable and
accrued liabilities (4,171) (5,057) (15,407) 917
Income taxes payable (20) 119 - 125
---------------------------------------------------------------------
(3,286) (5,155) (11,080) 733
Less: working capital
acquired on acquisitions - 192 - (12,658)
---------------------------------------------------------------------
(3,286) (4,963) (11,080) (11,925)
Attributable to investing
activities 478 2,969 (8,712) (6,307)
---------------------------------------------------------------------
Attributable to operating
activities (3,764) (7,932) (2,368) (5,618)
---------------------------------------------------------------------
---------------------------------------------------------------------

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