SignalEnergy Inc.
TSX : SGI

November 14, 2006 23:59 ET

SignalEnergy Inc. Announces 2006 Third Quarter Results

CALGARY--(CCNMatthews - Nov. 14) - SignalEnergy Inc. ("Signal" or the "Company") is pleased to announce its financial results for the third quarter of 2006.

CORPORATE OVERVIEW

In February 2006, SignalEnergy Inc. ("Signal" or the "Company") (TSX:SGI) 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 The Offer was mailed to Signal shareholders on May 16, 2006 and was withdrawn on June 22, 2006 due to a lack of support by Signal shareholders.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 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 or properties.

On November 8, 2006, the Company announced that it had entered into an agreement to acquire a private oil and gas company ("PrivateCo") and proposed to proceed with a plan of arrangement (the "Arrangement") to reorganize its share capital.

PrivateCo has 2.9 million boes of proven and 3.3 million boes of proven and probable reserves as determined by its independent engineers in an evaluation completed as at May 31, 2006. The consideration for the acquisition of PrivateCo will be $15.0 million cash, approximately 16.3 million common shares of Signal and the assumption of approximately $8.2 million of indebtedness, net of working capital. PrivateCo's current production is approximately 550 boe/d with an additional 200 boe/d that is behind pipe. In addition, PrivateCo holds 14,000 net acres of undeveloped land with an average working interest of 54% and options to earn an additional 52,800 gross acres of undeveloped lands. The PrivateCo lands are all located in the Ladyfern area straddling the borders of Alberta and British Columbia where there is an estimated 60 infill drilling locations with immediate access to production facilities.

Closing of the acquisition is expected to occur on or before November 15, 2006, subject to regulatory approval.

Upon completion of the acquisition Signal will have production of 850 boe/d and 3.6 million boes of proven and 5.4 million boes of proven and probable reserves consisting of natural gas and natural gas liquids based on independent engineering evaluations. In addition, Signal will have 23,000 net acres of undeveloped land and the right to earn up to an additional 52,800 acres of undeveloped land.

In conjunction with the acquisition, Signal will propose an arrangement with its shareholders whereby existing shareholders can elect to receive one share of a newly created company ("Amalco") for each five Signal shares held, $1.30 cash for each share or a combination thereof provided that the maximum amount of cash to be paid out to shareholders is $30 million.

Following the completion of the Arrangement and the acquisition of PrivateCo and assuming that the Corporation takes up and pays for $30 million of common shares, Signal will have approximately 13.2 million common shares outstanding and a working capital surplus of $12 million. Signal's 2007 capital budget for the combined company is estimated to be $15 million which will fund the drilling of 10 infill development wells and 5 exploration wells in the Ladyfern area, all expected to be drilled by the end of the first quarter 2007.

Upon completion of the Arrangement, funds managed or advised by Lime Rock Management LP ("Lime Rock") will hold approximately 2.6 million shares of the resultant company representing 19.6% of the issued and outstanding shares (assuming that the Company takes up and pays for all of the $30 million of common shares). Upon completion of the Arrangement, two Lime Rock nominees will be appointed to the Board of Directors of Signal and Mr. George Watson and Mr. Randy Harrison will resign. We would like to thank Mr. Watson and Mr. Harrison for their valuable contributions and support to the Corporation. Mr. Watson has served on the Board of Signal since the re-organization of SignalGene Inc. in December 2003 and Mr. Harrison has served on the Board since the acquisition of Predator Exploration Ltd in January, 2005.

Mr. J. Cameron Bailey, CFA will remain as President and Chief Executive Officer of Signal. Mr. Bailey led Signal from its restructuring as a biotechnology company in December 2003 to an oil and gas company with peak production of 2,200 boe/d in December 2005 while maintaining top quartile finding and development costs of $13.67 per boe and recycle ratio of 2.5 times.

Mr. John C. Milford has been appointed Executive Vice President, Exploration and Development of Signal. Mr. Milford has a Masters Degree in Earth Sciences from the University of British Columbia. He has worked as a Petroleum Geologist for 25 years during which time he has been a founder and director of a number of successful private oil and gas companies. He has established a successful track record of low finding and development costs experienced directly from his prospect generation activities.

Mr. Jamie Jeffs, C.A. will remain as the Chief Financial Officer of Signal. He joined the Company in August 2005 as the Chief Financial Officer. Mr. Jeffs was formerly Vice President, Finance of CriticalControl Solutions Corp., and prior thereto was with KPMG LLP.

Additional management appointments will be made in the near future.



HIGHLIGHTS

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Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 1,777 5,990 2,649 5,344
Oil and NGL's (bbl/d) 35 242 121 186
Equivalence at 6:1 (boe/d) 331 1,240 563 1,076
Sales price:
Natural gas ($/mcf) 5.31 9.22 6.86 7.93
Oil and NGL's ($/bbl) 65.43 62.88 60.96 57.10
Equivalence at 6:1 ($/boe) 35.46 56.82 45.16 49.07
Financial: (000's)
Petroleum and natural gas sales 1,079 6,483 6,941 14,420
Net income (loss) (13) 536 13,697 1,134
Net income (loss) per share
- basic (0.00) 0.01 0.19 0.02
Net income (loss) per share
- diluted (0.00) 0.01 0.19 0.02
Funds from operations 821 3,141 1,525 6,710
Total assets 98,450 103,936 98,450 103,936
Capital expenditures 1,570 4,447 5,539 12,177
Working capital (deficiency) 65,040 (23,737) 65,040 (23,737)
Weighted average shares
outstanding - basic 73,266 59,086 72,153 50,319
Weighted average shares
outstanding - diluted 73,266 61,240 72,153 52,737
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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 nine months ended September 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 management's 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 November 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" and funds from operations/boe 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

---------------------------------------------------------
2006
Q3 Q2 Q1
---------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 1,777 1,833 4,366
Oil and NGL's (bbl/d) 35 69 263
Equivalence at 6:1 (boe/d) 331 375 991
Sales price:
Natural gas ($/mcf) 5.31 6.04 7.86
Oil and NGL's ($/bbl) 65.43 57.08 59.62
Equivalence at 6:1 ($/boe) 35.46 40.08 50.45
Benchmark prices:
AECO bench ($/gj) 5.39 5.71 7.19
Edmonton Par ($/bbl) 80.26 80.43 68.90
Financial ($000's):
Petroleum and natural
gas sales 1,079 1,362 4,500
Net income (loss) (13) 270 13,440
Net income (loss) per share
- basic ($) (0.00) 0.00 0.19
Net income (loss) per share
- diluted ($) (0.00) 0.00 0.19
Funds from operations 821 17 687
Operating costs ($/boe) 8.51 13.13 13.07
Weighted average shares
outstanding - basic 73,266 72,595 70,598
Weighted average shares
outstanding - diluted 73,266 73,316 71,239
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2005 2004
Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Sales volume:
Natural gas (mcf/d) 6,253 5,990 5,100 4,929 1,901
Oil and NGL's (bbl/d) 430 242 170 145 105
Equivalence at 6:1 (boe/d) 1,472 1,240 1,020 966 421
Sales price:
Natural gas ($/mcf) 11.48 9.22 7.25 6.93 6.94
Oil and NGL's ($/bbl) 65.95 62.88 56.59 47.86 50.04
Equivalence at 6:1 ($/boe) 68.31 56.82 45.67 42.53 43.18
Benchmark prices:
AECO bench ($/gj) 10.84 8.76 6.98 6.49 6.25
Edmonton Par ($/bbl) 72.18 77.80 65.80 61.07 58.16
Financial ($000's):
Petroleum and natural
gas sales 9,250 6,483 4,238 3,699 1,708
Net income (loss) 952 536 85 513 (548)
Net income (loss) per share
- basic ($) 0.02 0.01 0.00 0.01 (0.02)
Net income (loss) per share
- diluted ($) 0.02 0.01 0.00 0.01 (0.02)
Funds from operations 4,223 3,141 2,208 1,361 486
Operating costs ($/boe) 12.81 7.20 7.78 7.25 10.58
Weighted average shares
outstanding - basic 69,195 59,086 47,090 44,622 30,666
Weighted average shares
outstanding - diluted 69,525 61,240 47,090 44,781 30,666
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In February 2006, the Company sold its interest in certain oil and gas assets, as previously noted in this MD&A. The sale resulted in substantially lower sales volumes in the first three 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 recorded a net loss of $13,000 in the third quarter of 2006 compared to net income in the previous six calendar quarters. This net loss was mainly the result of decreased natural gas prices realized by the Company. Net income for the second quarter of 2006 is attributed to a future income tax recovery of $1,068,000 recorded in that 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 third quarter of 2006 of $821,000 compared to $17,000 in the previous quarter - an increase of $804,000 which reflects a decrease in royalties, operating expenses, and general and administrative expenses in the third quarter of 2006. Funds from operations in the second quarter of 2006 reflects substantially lower operating netbacks and certain one-off charges related to the sale of oil and gas properties and the failed Pearl offer. 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 by the Company.

RESULTS OF OPERATIONS

Sales



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Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Petroleum and natural gas
sales ($000's) 1,079 6,483 6,941 14,420
Sales volume:
Natural gas (mcf/d) 1,777 5,990 2,649 5,344
Oil and NGL's (bbl/d) 35 242 121 186
Equivalence at 6:1 (boe/d) 331 1,240 563 1,076
Sales price:
Natural gas ($/mcf) 5.31 9.22 6.86 7.93
Oil and NGL's ($/bbl) 65.43 62.88 60.96 57.10
Equivalence at 6:1 ($/boe) 35.46 56.82 45.16 49.07
-------------------------------------------------------------------------


Revenues from petroleum and natural gas sales decreased substantially in the third quarter of 2006 compared to the third quarter of 2005 and the prior two quarters in 2006, 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 nine months ended September 30, 2006, revenues also decreased when compared to the same nine month period in 2005, primarily as a result of the sale of oil and gas assets in the first quarter of 2006 and lower commodity prices, as noted previously.

Average sales volumes for the third quarter of 2006 were 331 boe/d compared to 1,240 boe/d for the same period in 2005. This decrease is a result of the sale of oil and gas properties in the first quarter of 2006 which accounted for average production of 674 boe/d in the first quarter (and which was producing at a rate of approximately 1,100 boe/d at the time of sale). For the nine months ended September 30, 2006, sales volumes decreased to 563 boe/d compared to 1,076 boe/d for the same nine month period in 2005. This decrease is mainly due to the sale of oil and gas properties in the first quarter of 2006.

Natural gas accounted for 89% of sales volumes for the third quarter of 2006 compared to 80% for the third quarter of 2005. This increase is due to the change in sales mix resulting from the sale of oil and gas properties in the first quarter of 2006. The natural gas price realized by the Company in the third quarter of 2006 decreased to $5.31/mcf from $9.22/mcf a year earlier. For the nine months ended September 30, 2006, natural gas accounted for 79% of sales volumes compared to 83% for the nine months ended September 30, 2005. The average price for natural gas realized by the Company for the nine months ended September 30, 2006, was $6.83/mcf compared to $7.93/mcf for the nine months ended September 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 September 30, 2006 was $65.43/bbl - a slight increase from $62.88/bbl for the third quarter of 2005. For the nine months ended September 30, 2006, the Company realized a price of $60.96/bbl for oil and natural gas liquids compared to $57.10/bbl for the nine months ended September 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 Nine months ended
September 30, September 30,
2006 2005 2006 2005
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Royalties (net of Alberta
Royalty Tax Credit) ($000's) 142 1,626 1,374 3,226
$/boe 4.67 14.25 8.94 10.98
Percentage of petroleum and
natural gas sales 13.2 25.1 19.8 22.4
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Royalties, consisting of crown, gross-overriding and freehold royalties were $142,000 for the three months ended September 30, 2006 - a decrease of $1,484,000 from the three months ended September 30, 2005, reflecting the sale of oil and gas properties and lower sales. In addition, in July of 2006, the Company was advised of an adjustment to its Capital Cost and Custom Processing Fee Adjustments (formerly "Gas Cost Allowance") that resulted from an under estimation of these amounts in 2005. This adjustment reduced the overall crown royalty rate for the third quarter by 4.6%.

Royalties for the nine months ended September 30, 2006 are consistent with that of the nine months ended September 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.

Operating Expenses



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Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Operating expenses ($000's) 264 822 1,882 2,175
$/boe 8.51 7.20 12.26 7.40
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The Company's operating expenses decreased to $264,000 for the three months ended September 30, 2006 from $822,000 for the comparable period in 2005. This decrease can be attributed to the sale of oil and gas assets. On a per boe basis, operating expenses have increased in the third quarter of 2006 to $8.51/boe, compared to $7.20/boe in the third quarter of 2005. This is primarily due to increased repairs and maintenance costs of approximately $25,000 in the third quarter of 2006, related to the Chigwell 3-1 well and the Buick Creek D-11-C/94 compressor.

Operating expenses for the nine months ended September 30, 2006 decreased to $1,882,000 from $2,175,000 for the nine month period ended September 30, 2005. On a per boe basis, this amounts to $12.26/boe for the nine months ended September 30, 2006 and $7.40/boe for the comparable period in 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.

General and Administrative Expenses



-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(000's) 2006 2005 2006 2005
-------------------------------------------------------------------------
General and administrative
expenses 494 1,027 3,355 2,782
General and administrative
costs capitalized (60) (318) (170) (867)
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General and administrative
expenses (net) 434 709 3,185 1,915
$/boe 14.26 6.21 20.72 6.51
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General and administrative expenses decreased to $494,000 in the third quarter of 2006 compared to $1,027,000 in the third quarter of 2005. The decrease is attributed to a substantial reduction in staff levels as a result of the sale of oil and gas properties in the first quarter of 2006. General and administrative expenses for the nine months ended September 30, 2006 were $3,355,000 compared to $2,782,000 for the nine months ended September 30, 2005 - an increase of $573,000. This increase is attributed to additional severance and retention costs of approximately $909,000 recorded in the period due to the downsizing that occurred as a result of the sale of oil and gas properties in February 2006. Also, advisory and legal costs of approximately $360,000 related to the failed Pearl offer were incurred in the second quarter of 2006.

The Company capitalized general and administrative costs of $170,000 in the nine months ended September 30, 2006 compared to $867,000 in the nine months ended September 30, 2005. The Company capitalized general and administrative costs of $60,000 in the third quarter of 2006, a substantial reduction from the third quarter of 2005. This decrease is due to a reduction in exploration and development activities being conducted due to the sale of oil and gas properties in the first quarter of 2006 and the Board initiated process to review strategic alternatives.

Stock-based Compensation Expense



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Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Stock-based compensation
expense ($000's) - 259 822 839
$/boe - 2.27 5.35 2.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------


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 nine months ended September 30, 2006 was $822,000 compared to $839,000 for the nine months ended September 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 reflects the vesting of these options.

Interest Expense



-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Interest expense ($000's) 61 230 365 453
$/boe 2.00 2.02 2.37 1.54
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Interest expense decreased to $61,000 for the three months ended September 30, 2006 from $230,000 for the three months ended September 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 and third quarters of 2006 represents accrued interest 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.

Depletion and Depreciation Expense



-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Depletion and depreciation
expense ($000's) 818 2,297 3,447 5,797
$/boe 26.88 20.13 22.43 19.72
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Depletion and depreciation expense was $818,000 for the third quarter of 2006 compared to $2,297,000 for the third quarter of 2005. This decrease results from the sale of oil and gas assets in the first quarter of 2006. The depletion and depreciation expense rate for the three months ended September 30, 2006 increased to $26.88/boe from $20.13/boe for the three months ended September 30, 2005. This increase is a result of a reduction in proven reserves for the Bashaw 10-7 and Buick Creek B-22-C/94 wells. These reductions were partially offset by new reserves related to 3 gross (1 net) wells in the Bashaw area that were brought onto production in the third quarter of 2006. Depletion and depreciation expense for the nine months ended September 30, 2006 of $3,447,000 represents a decrease of $2,350,000 from $5,797,000 reported for the nine months ended September 30, 2005. The increase in the depletion and depreciation expense rate for the nine months ended September 30, 2006 reflects the mix of the properties sold and retained and the reserve adjustments, noted above.

Accretion of Asset Retirement Obligations



-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Accretion of asset retirement
obligations ($000's) 16 49 75 135
$/boe 0.53 0.43 0.49 0.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Accretion expense was $16,000 for the three months ended September 30, 2006 compared to $49,000 for the three months ended September 30, 2005. The sale of oil and gas properties in February 2006 resulted in a reduction in asset retirement obligations by $3,387,000, which have been assumed by the purchaser, and a reduction in the accretion expense for the three and nine months ended September 30, 2006.

Income Tax

The Company recorded future income tax expense of $3,439,000 for the nine months ended September 30, 2006 which represents the difference between the carrying amount of the Company's net assets and available income 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. 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 Nine months ended
September 30, September 30,
($/per boe) 2006 2005 2006 2005
-------------------------------------------------------------------------
Petroleum and natural gas sales 35.46 56.82 45.16 49.07
Less: Royalties (net of ARTC) (4.67) (14.25) (8.94) (10.98)
Operating expenses (8.51) (7.20) (12.26) (7.40)
-------------------------------------------------------------------------
Operating netback 22.28 35.37 23.96 30.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from operations 821 3,141 1,525 6,710
-------------------------------------------------------------------------
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The operating netback for the three months ended September 30, 2006 decreased to $22.28/boe from $35.37/boe for the third quarter of 2005, due to lower commodity prices. For the nine months ended September 30, 2006, the Company's operating netback decreased to $23.96/boe from $30.69/boe for the nine months ended September 30, 2005, as a result of lower commodity prices realized and higher operating costs.

Funds from operations for the three months ended September 30, 2006 was $26.98/boe compared to $27.53/boe for the three months ended September 30, 2005. Funds from operations for the nine months ended September 30, 2006 was $9.92/boe compared to $22.84/boe for the nine months ended September 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 as previously noted in this MD&A.

Net Income



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Three months ended Nine months ended
September 30, September 30,
($000's except per share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income (loss) (13) 536 13,697 1,134
Net income (loss) per share
- basic (0.00) 0.01 0.19 0.02
Net income (loss) per share
- diluted (0.00) 0.01 0.19 0.02
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-------------------------------------------------------------------------


The Company recorded a net loss for the three months ended September 30, 2006 of $13,000 compared to net income of $536,000 for the three months ended September 30, 2005. The net loss for the three months ended September 30, 2006, is primarily due to a lower operating netback realized by the Company. Net income for the nine months ended September 30, 2006 can be attributed to the gain on sale of oil and gas assets of $19,955,000.

Capital Expenditures



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Three months ended Nine months ended
September 30, September 30,
($000's) 2006 2005 2006 2005
-------------------------------------------------------------------------
Land and rentals 17 230 121 1,153
Seismic (50) - 6 202
Drilling and completions 1,138 3,512 2,047 7,493
Equipment and tie-ins 495 387 2,660 2,263
Property acquisitions - - 465 -
Capitalized overhead costs 60 318 170 867
Other (90) - 70 199
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1,570 4,447 5,539 12,177
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The Company incurred costs of approximately $2.8 million in the nine months ended September 30, 2006 to complete, equip, and tie-in wells drilled in the fourth quarter of 2005, mainly in the Redwater area, brought onto production early in 2006.

In the nine months ended September 30, 2006, the Company recompleted 3 gross (1 net) wells and upgraded its gas gathering systems in the Bashaw area. In addition, the Company conducted 4 workover operations on wells in the Chigwell, Bashaw, and Buick Creek areas. The cost of these recompletion and workover operations was approximately $1.6 million.

Liquidity and Capital Resources

Cash provided by operating activities was $2,209,000 for the three months ended September 30, 2006, compared to $1,749,000 for the three months ended September 30, 2005. This increase in cash provided by operating activities is due to a reduction in non-cash working capital balances related to operations. Funds from operations for the three months ended September 30, 2006 decreased to $821,000 from $3,141,000 for the three months ended September 30, 2005 as a result of decreased activity in the field due to the sale of oil and gas assets in the first quarter to 2006 and lower operating netbacks realized by the Company. For the nine months ended September 30, 2006, cash provided by operating activities was $545,000 compared to cash used in operating activities of $304,000 for the nine months ended September 30, 2005. Funds from operations for the nine months ended September 30, 2006 decreased to $1,525,000 from $6,710,000 for the nine months ended September 30, 2005 due to the sale of oil and gas assets.

Cash provided by financing activities for the three months ended September 30, 2006 was $nil compared to cash provided by financing activities of $13,699,000 for the three months ended September 30, 2005. Cash provided by financing activities for the three months ended September 30, 2005 represents an increase to the Company's operating loan to fund the acquisition of Goose River and the balance of the 2005 drilling program. For the nine months ended September 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 nine months ended September 30, 2006. In addition to the acquisition of Goose River, the Company used its operating loan to fund the cash portion of the acquisitions of Predator and a private oil and gas company in the nine months ended September 30, 2005.

Cash used in investing activities for the three months ended September 30, 2006 was $2,501,000 compared to $18,197,000 for the three months ended September 30, 2005. Cash used in investing activities for the three months ended September 30, 2006 and 2005 represents expenditures on property and equipment and a decrease in non-cash working capital balances. Cash provided by investing activities for the nine months ended September 30, 2006 reflects capital expenditures, a reduction in non-cash working capital balances as a result of the substantial decrease in the Company's capital program compared to 2005 activity levels, and the proceeds from the sale of oil and gas properties, as noted previously in this MD&A. Cash used in financial activities for the nine months ended September 30, 2005 reflects property and equipment expenditures, the proceeds of sale on the Company's Twining property for proceeds of $13,250,000 in the second quarter of 2005, and a working capital deficiency on companies acquired in 2005. In the first nine months of 2005, the Company drilled 18 gross (8.47 net) wells and 6 gross (2 net) CBM wells of which 13 wells had been completed, evaluated and released for tie-in by September 30, 2005.

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 September 30, 2006. The Company entered into an operating lease for office premises in the third quarter of 2006, which expires on August 31, 2011.

Subsequent Events

On November 8, 2006, the Company announced that is had entered into an agreement to acquire a private oil and gas company ("PrivateCo") and proposes to proceed with a plan of arrangement (the "Arrangement") to reorganize its share capital.

The consideration for the acquisition of PrivateCo will be $15.0 million cash and approximately 16.3 million common shares of Signal and the assumption of approximately $8.2 million of indebtedness, net of working capital. Closing of the acquisition is expected to occur on or before November 15, 2006, subject to regulatory approval.

In conjunction with the acquisition, Signal will propose an arrangement with its shareholders whereby existing shareholders can elect to receive one share of a newly created company ("Amalco") for each five Signal shares held, $1.30 cash for each share or a combination thereof provided that the maximum amount of cash to be paid out to shareholders is $30 million.

Following the completion of the Arrangement and the acquisition of PrivateCo and assuming that the Company takes up and pays for $30 million of common shares, Signal will have approximately 13.2 million common shares outstanding.

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.



-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED BALANCE SHEETS
As at
(in thousands)
(unaudited)
-------------------------------------------------------------------------
September December
30, 2006 31, 2005
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents (note 3) $ 60,982 $ 61
Accounts receivable 6,788 11,269
Prepaid expenses 315 258
-----------------------------------------------------------------------
68,085 11,588
Property and equipment (notes 4 and 5) 25,817 102,503
Goodwill 4,548 4,548
-------------------------------------------------------------------------
$ 98,450 $118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 2,762 $ 17,810
Income taxes payable 283 283
Revolving operating loan (note 6) - 22,975
-----------------------------------------------------------------------
3,045 41,068
Future income tax liability (note 10) 4,461 -
Asset retirement obligations (note 7) 1,116 4,428
-------------------------------------------------------------------------
8,622 45,496
Commitment (notes 8 and 12)

Shareholders' Equity
Share capital (note 8) 140,166 136,817
Contributed surplus (note 8) 1,779 2,140
Deficit (52,117) (65,814)
-----------------------------------------------------------------------
89,828 73,143

-------------------------------------------------------------------------
$ 98,450 $118,639
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Subsequent events (note 13)

See accompanying notes to consolidated financial statements.





-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the three and nine months ended September 30
(in thousands, except per share amounts)
(unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
2006 2005 2006 2005
-------------------------------------------------------------------------
REVENUE
Petroleum and natural
gas sales $ 1,079 $ 6,483 $ 6,941 $ 14,420
Royalties (net of Alberta
Royalty Tax Credit) (142) (1,626) (1,374) (3,226)
-------------------------------------------------------------------------
937 4,857 5,567 11,194
Interest income 643 52 1,390 59
-------------------------------------------------------------------------
1,580 4,909 6,957 11,253
-------------------------------------------------------------------------
EXPENSES
Operating 264 822 1,882 2,175
General and administrative 434 709 3,185 1,915
Stock-based compensation
(note 9) - 259 822 839
Interest 61 230 365 453
Depletion and depreciation 818 2,297 3,447 5,797
Accretion of asset retirement
obligations (note 7) 16 49 75 135
-------------------------------------------------------------------------
1,593 4,366 9,776 11,314
-------------------------------------------------------------------------
Income (loss) from operations
before the following (13) 543 (2,819) (61)

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

Income (loss) before income taxes (13) 543 17,136 (61)
-------------------------------------------------------------------------
Income tax expense (recovery)
(note 10)
Current - 7 - -
Future - - 3,439 (1,195)
-------------------------------------------------------------------------
- 7 3,439 (1,195)
-------------------------------------------------------------------------
Net income (loss) for the period (13) 536 13,697 1,134

Deficit, beginning of period (52,104) (67,018) (65,814) (67,616)
Distribution to shareholders - (284) - (284)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, end of period $(52,117) $(66,766) $(52,117) $(66,766)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income (loss) per share
(note 8)
Basic $ 0.00 $ 0.01 $ 0.19 $ 0.02
Diluted $ 0.00 $ 0.01 $ 0.19 $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.




-------------------------------------------------------------------------
SIGNALENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30
(in thousands)
(unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) for the period $ (13) $ 536 $ 13,697 $ 1,134
Items not affecting cash flows:
Stock-based compensation
expense - 259 822 839
Depletion and depreciation 818 2,297 3,447 5,797
Accretion of asset retirement
obligations 16 49 75 135
Gain on sale of oil and gas
properties and equipment - - (19,955) -
Future income tax expense
(recovery) - - 3,439 (1,195)
-------------------------------------------------------------------------
Funds from operations 821 3,141 1,525 6,710
Change in non-cash operating
working capital (note 11) 1,388 (1,392) (980) (7,014)
-------------------------------------------------------------------------
Cash provided by (used in)
operating activities 2,209 1,749 545 (304)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in revolving
operating loan - 13,736 (22,975) 21,411
Share buy back - (37) - (579)
Issuance of common shares
on exercise of stock options - - 3,188 -
Share issuance costs - - - (17)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities - 13,699 (19,787) 20,815
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment
expenditures (1,570) (4,447) (5,539) (12,177)
Sale of property and equipment,
net of transaction costs - - 95,345 13,250
Acquisition of businesses,
net of cash acquired - (11,718) - (15,799)
Change in non-cash investing
working capital (note 11) (931) (2,032) (9,643) (8,335)
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities (2,501) (18,197) 80,163 (23,061)
-------------------------------------------------------------------------
Net change in cash (292) (2,749) 60,921 (2,550)
Cash and cash equivalents
- beginning of period 61,274 2,917 61 2,718
-------------------------------------------------------------------------
Cash and cash equivalents
- end of period $ 60,982 $ 168 $ 60,982 $ 168
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash flow
information:
Interest paid - 230 241 453
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


/T/


-------------------------------------------------------------------------
SIGNALENERGY INC.
Notes to Consolidated Financial Statements
September 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:

---------------------------------------------------------------------
September December
30, 2006 31, 2005
$ $
---------------------------------------------------------------------
Cash on hand 510 61
Short-term investment 60,472 -
---------------------------------------------------------------------
60,982 61
---------------------------------------------------------------------
---------------------------------------------------------------------

Short-term investments at September 30, 2006 consist of an investment
in commercial paper 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 September 30, 2006 is
$1,344,000 that is receivable from the purchaser for estimated final
adjustments on the sale. In the nine months ended September 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
Cost Depreciation Book Value
September 30, 2006 $ $ $
---------------------------------------------------------------------
Oil and gas properties 31,051 5,289 25,762
Other 110 55 55
---------------------------------------------------------------------
31,161 5,344 25,817
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
Accumulated
Depletion
and Net
Cost Depreciation Book 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 nine months ended September 30, 2006, the Company capitalized
general and administrative expenses of $170,000 (nine months ended
September 30, 2005 - $867,000) directly attributable to exploration
and development activities. The Company capitalized general and
administrative expenses of $60,000 in the three months ended
September 30, 2006 (three months ended September 30, 2005 -
$318,000).

As at September 30, 2006, undeveloped land costs of $1.2 million
(September 30, 2005 - $10.0 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
September 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 75
---------------------------------------------------------------------
Balance, September 30, 2006 1,116
---------------------------------------------------------------------
---------------------------------------------------------------------

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.

-----------------------------------------------------------------
September December
Share capital is comprised of: 30, 2006 31, 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) 2,745,500 4,371
-----------------------------------------------------------------
Balance, September 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 September 30, 2006, the Company has not
incurred any expenditures in relation to this flow-through
share obligation and, accordingly, for the nine months ended
September 30, 2006, the Company has recorded income tax of
$124,000, which has been included in interest expense in the
statement of operations.

(ii) During the nine months ended September 30, 2006, options to
purchase common shares were exercised for proceeds of
$3,188,000. The additional $1,183,000 credited to share
capital 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 822
Reclassification to share capital for stock
options exercised (1,183)
-----------------------------------------------------------------
Balance, September 30, 2006 1,779
-----------------------------------------------------------------

(d) Stock option plan:

The following table summarizes stock option transactions during
the period:

-----------------------------------------------------------------
September 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, September 30, 2006 110,000 4.15
-----------------------------------------------------------------

The Company has the following stock options outstanding:

-----------------------------------------------------------------
Exercisable
at
September
Outstanding at September 30, 2006 30, 2006
Weighted
average
years to Exercise
Exercise Price Number expiry Price Number
$ $
-----------------------------------------------------------------
3.00 - 4.00 102,000 2.5 3.91 102,000
4.01 - 5.00 4,000 4.5 4.40 4,000
10.00 4,000 3.1 10.00 4,000
-----------------------------------------------------------------
Outstanding,
September 30, 2006 110,000 2.6 4.15 110,000
-----------------------------------------------------------------

(e) Per share amounts:

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

-----------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Weighted average
- basic 73,266,448 59,085,830 72,152,877 50,319,001
Weighted average
- diluted 73,266,448 61,240,355 72,152,877 52,736,731
-----------------------------------------------------------------
-----------------------------------------------------------------

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:

---------------------------------------------------------------------
September September
30, 2006 30, 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 nine months ended
September 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 Nine months ended
September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Income (loss) before tax (13) 543 17,136 (61)
---------------------------------------------------------------------
---------------------------------------------------------------------
Expected tax expense (recovery)
at 34.5% (2005 - 37.62%) (4) 204 5,912 (23)
Add (deduct) income tax
effect of:
Non-deductible crown charges 14 283 124 627
Resource allowance (13) (206) (52) (501)
Stock-based compensation - 98 284 316
Flow-through share
renouncement - - (1,022) (1,195)
Non-deductible expenses
and other permanent
differences 1 2 19 11
Large Corporations Tax - 7 -
Rate adjustments 2 - (1,826) -
Change in valuation
allowance on unrecognized
benefit of tax assets - (381) - (430)
---------------------------------------------------------------------
Income tax expense (recovery) - 7 3,439 (1,195)
---------------------------------------------------------------------
---------------------------------------------------------------------

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

---------------------------------------------------------------------
September December
30, 2006 31, 2005
---------------------------------------------------------------------
Net book value of property and equipment
in excess of tax pools 5,187 16,529
Scientific research and experimental
development expenditures - (10,330)
Non-capital losses carried forward (126) (4,468)
Asset retirement obligation (326) (1,489)
Attributed Canadian royalty income (64) -
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 Nine months ended
September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Accounts receivable 192 (2,728) 4,481 (3,071)
Prepaid expenses (112) 54 (57) 88
Accounts payable and accrued
liabilities 377 5,940 (15,047) 6,857
Income taxes payable - (7) - 118
---------------------------------------------------------------------
457 3,259 (10,623) 3,992
Less: working capital acquired on
acquisitions - (6,683) - (19,341)
---------------------------------------------------------------------
457 (3,424) (10,623) (15,349)
Attributable to investing
activities (931) (2,032) (9,643) (8,335)
---------------------------------------------------------------------
Attributable to operating
activities 1,388 (1,392) (980) (7,014)
---------------------------------------------------------------------
---------------------------------------------------------------------

12. COMMITMENTS

The Company is committed to a minimum annual lease payment under an
operating lease for office premises to August 31, 2011, as follows:

---------------------------------------------------------------------
$
---------------------------------------------------------------------
Balance of 2006 41,000
2007 165,000
2008 165,000
2009 165,000
2010 165,000
2011 110,000
---------------------------------------------------------------------
811,000
---------------------------------------------------------------------

13. SUBSEQUENT EVENTS

On November 8, 2006, the Company announced that it had entered into
an agreement to acquire a private oil and gas company ("PrivateCo")
and proposes to proceed with a plan of arrangement (the
"Arrangement") to reorganize its share capital.

The consideration for the acquisition of PrivateCo will be
$15.0 million cash and approximately 16.3 million common shares of
Signal and the assumption of approximately $8.2 million of
indebtedness, net of working capital. Closing of the acquisition is
expected to occur on or before November 15, 2006, subject to
regulatory approval.

In conjunction with the acquisition, Signal will propose an
arrangement with its shareholders whereby existing shareholders can
elect to receive one share of a newly created company ("Amalco") for
each five Signal shares held, $1.30 cash for each share or a
combination thereof provided that the maximum amount of cash to be
paid out to shareholders is $30 million.

Following the completion of the Arrangement and the acquisition of
PrivateCo and assuming that the Company takes up and pays for
$30 million of common shares, Signal will have approximately
13.2 million common shares outstanding.

Contact Information