TUSK Energy Corporation
TSX : TSK

TUSK Energy Corporation

March 18, 2008 01:05 ET

TUSK Energy Corporation: Financial and Operating Results for the Three Months and Year Ended December 31, 2007

CALGARY, ALBERTA--(Marketwire - March 18, 2008) - TUSK Energy Corporation ("TUSK" or the "Corporation") (TSX:TSK) is pleased to announce its financial and operating results for the three months and year ended December 31, 2007.



HIGHLIGHTS
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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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($000s, except per
share amounts)
Financial
Oil and gas
revenue 20,242 6,327 220 77,155 16,733 361
Funds from
operations (1) 6,911 2,934 136 33,950 7,337 363
Per share -
basic
and diluted 0.08 0.06 33 0.38 0.16 138
Net income (loss) (3,990) (2,343) 70 (6,528) (3,940) 66
Per share - basic
and diluted (0.04) (0.05) (20) (0.07) (0.08) (13)
Capital
expenditures
(net) 19,942 13,698 46 106,931 66,419 61
Working capital
(deficiency) (56,570) 11,958 (573) (56,570) 11,958 (573)
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Operations
Sales volumes
Oil (bbls/d) 1,496 673 122 1,572 441 256
Natural gas
(mcf/d) 14,004 3,636 285 13,808 2,427 469
Natural gas
liquids (bbls/d) 107 26 312 97 16 506
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Combined (boe/d) 3,937 1,305 202 3,970 862 361
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Operating netbacks
($/boe) (2)
Average selling
prices 55.89 52.68 6 53.25 53.19 -
Royalties (10.51) (10.47) - (10.32) (10.16) 2
Operating
expenses (12.56) (6.94) 81 (10.15) (10.17) -
Transportation
expenses (2.76) (2.42) 14 (2.64) (3.60) (27)
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Operating netback 30.06 32.85 (8) 30.14 29.26 3
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(000s)
Share Data
Weighted average
outstanding 89,084 51,662 72 88,931 46,851 90
Equity
outstanding
- end of year
Common shares 90,442 88,880 2 90,442 88,880 2
Stock options 8,482 8,866 (4) 8,482 8,866 (4)
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(1) Funds from operations is a non-GAAP measure that represents net income
(loss) before depletion, depreciation and amortization, future taxes,
stock-based compensation, gain on investment, commodity derivatives and
asset retirement obligation expenditures. See further discussion under
Non-GAAP Measures in the Management's Discussion and Analysis.

(2) Operating netback is a non-GAAP measure that represents specific revenue
and expenses on a per unit of production basis. Natural gas has been
converted to boe at a ratio of 6 mcf : 1 bbl.


LETTER TO SHAREHOLDERS

TUSK is pleased to announce its financial and operating results for the three months and year ended December 31, 2007 and the filing of the results of the independent evaluation of its reserves.

Filing of Year-End Reserves Information

TUSK has filed a Statement of Reserves Data and Other Oil and Gas Information as required by National Instrument 51-101 of the Canadian Securities Administrators. These filings contain oil and gas reserves information, the report of the independent qualified reserves evaluator and the report of management and directors. These documents are available at www.sedar.com.

2007 Year in Review

The Corporation's operating and financial highlights for 2007 include the following:

- Completed the acquisition and integration of Zenas Energy Corp.

- Negotiated the Conroy area farm-in and commenced development activities

- Acquired additional working interests in the Gage property located in the Peace River Arch area, increasing TUSK's interest to over 90%

- Completed the Mega/Gutah battery in the Northern area, received enhanced recovery approval from the ERCB and converted one well to a water injection well

- Drilled the first horizontal well at Gutah, with good results

- Negotiated the release of one drilling rig under long-term contract and revised the terms of a second rig under contract

- Drilled 44 gross (20.6 net) wells in 2007 with only 3 gross (0.8 net) wells drilled and abandoned

- Increased average daily sales volumes to 3,970 boe/d from 862 boe/d in 2006

- Generated revenue of $77,155,000 and funds from operations of $33,950,000 ($0.38 per share)

TUSK posted record sales volumes, revenue and funds from operations in 2007. Average daily sales volumes were 3,970 boe/d in 2007, up from 862 boe/d in 2006. During 2007, sales volumes were split 58% natural gas and 42% oil and natural gas liquids ("NGLs"). Oil and gas revenue was $77,155,000 in 2007, a 361% improvement over 2006. The Corporation's average selling prices were $74.52/bbl for oil and $6.40/mcf for natural gas in 2007. Funds from operations were $33,950,000 in 2007 ($0.38 per share) compared to $7,337,000 ($0.16 per share) in 2006. Year-over-year operating netbacks and corporate cash netbacks remained relatively constant at $30.14/boe (2006 - $29.26/boe) and $23.43/boe (2006 - $23.33/boe), respectively.

Capital expenditures totaled $109,700,000 in 2007, up from $66,419,000 in the prior year. During 2007, TUSK drilled 44 gross (20.6 net) wells, resulting in 33 gross (14.3 net) gas wells, 8 gross (5.5 net) oil wells and 3 gross (0.8 net) wells abandoned. Expenditures in 2007 were allocated to the following areas: Northern - 36%; Peace River Arch - 23%; Elleh - 20%; Conroy - 18%; and corporate - 3%.

In 2007, TUSK increased its proved plus probable reserves by 41% to 13.2 mmboe. A summary of estimated reserves and the net present value of future net revenue as at December 31, 2007 is set out in the tables below (based on forecast prices and costs).



Company Interest Reserves
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Crude Oil Natural Oil
Reserves Category and NGLs Gas Equivalent
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(mbbls) (mmcf) (mboes)
Total proved 2,312 40,430 9,051
Total probable 1,185 18,004 4,185
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Total proved plus probable 3,497 58,434 13,236
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Net Present Value of Future Net Revenue
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Before Income Tax Discounted at (%/year)
Reserves Category 0 5 10
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($000s)
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Total proved 235,696 175,400 141,796
Total probable 123,660 81,477 60,132
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Total proved plus probable 359,356 256,877 201,928
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In 2007, finding and development costs for proved reserves were $25.97/boe before the inclusion of future development costs ("FDCs") and $31.09/boe including FDCs. Finding and development costs for proved plus probable reserves were $20.28/boe exclusive of FDCs and $28.15/boe including FDCs. TUSK's 2007 finding and development costs includes capital expenditures incurred preparing for 2008. In the Northern area, 2007 capital expenditures of $38,600,000 included $16,000,000 on tangible equipment and facilities. The Corporation increased its interest in the Mega battery and invested in additional infrastructure. At Conroy, the rate of reserves booked to capital spent was affected by the earning provisions of the farm-in and $9,000,000 invested in facilities and pipelines. These expenditures were incurred in anticipation of drilling in both areas in 2008. Finding and development costs at Elleh as well as the Claire and Gage areas of the Peace River Arch were very competitive.

In 2008, our capital expenditure plans are focused on those areas where we can add production and reserves at reasonable cost. Our finding and development cost objective for 2008 is a rate below $20.00/boe.

Northeastern British Columbia Asset Swap

On March 7, 2008, TUSK announced that it had entered into an agreement to swap its interests in the Elleh area for certain interests in the Conroy area plus $12,000,000. The transaction is expected to close on March 31, 2008.

At Elleh, TUSK currently holds a 50% non-operated interest in wells, facilities and undeveloped lands that contributed an average of 7.9 mmcf/d of natural gas and 33 bbls/d of NGLs (1,349 boe/d) to TUSK's 2007 sales volumes. At Conroy, TUSK is farming into a large block of lands and existing production and infrastructure. To date, TUSK has drilled 15 wells, completed four standing wells and constructed a gas plant, gathering system extension and sales line at Conroy. The new wells were placed on-stream in February 2008. After the swap, TUSK will hold the farm-in earned interest and the farmor's interest, which includes a 100% working interest in two gas plants and 85 kilometres of pipelines, existing long-life reserves, 116 development drilling locations (half of which are summer accessible) and a royalty interest in 32,000 acres of lands. TUSK will not hold any interests in the Elleh area.

The impact of the swap on TUSK's reserves is neutral. At December 31, 2007, the Corporation's proved plus probable reserves assignments included 5.9 mmboe at Elleh and 2.4 mmboe at Conroy. At March 31, 2008, TUSK expects to book a total of 48 bcfe or 8.0 mmboe in respect of the Conroy project. Furthermore, compared to Elleh, Conroy gas has a higher net present value per unit of reserves because it is liquids rich, has a higher heat content and can be produced over a shorter time frame.

The impact of the swap on TUSK's production is significant. A comparison of estimated sales volumes for 2008 indicates that the swap will result in a 200 boe/d decline in average daily volumes but a 500 boe/d increase in the year-end exit rate. The climbing rates are a result of high declines on initial flush production at Elleh versus the ability to drill through the summer and fall at Conroy. Presently, TUSK has 25 wells budgeted for summer drilling at Conroy.

The swap greatly enhances TUSK's asset base. We will have two high quality light oil project areas in Alberta (the Northern and Peace River Arch areas) and the high BTU gas property at Conroy in British Columbia. After the swap, TUSK will operate 90% of its production. High interest, operated properties gives our Corporation more control over the speed at which we can grow our production and reserves.

2008 is Off to a Good Start

Year-to-date in 2008, our Corporation's accomplishments have included:

- Completing the first phase of the Conroy development plan, placing 15 new wells on- stream and commissioning the new gas plant and pipelines

- Negotiating the above-mentioned swap transaction

- Drilling 4 gross (3.25 net) horizontal wells at Gutah, resulting in 3 gross (3.0 net) producing wells and 1 gross (0.25 net) standing well

- Increasing production to current rates of over 5,000 boe/d

- Commencing the planning for a 25-well summer drilling program at Conroy

Outlook

TUSK has experienced a successful drilling program during the 2007/2008 winter season and recently announced a major asset swap transaction. The drilling results increased our confidence in the Corporation's ability to substantially grow both the production and reserves from our current asset base, while the swap dramatically increases the control we have over our assets as well as the predictability of timing and cost of capital investment activities.

Oil prices recently reached record highs of over US$100.00/bbl and natural gas prices have firmed to above US$8.00/mcf after a period of lower prices in 2007. Futures markets indicate that expectations are for this trend to continue throughout 2008. TUSK currently has a production mix that is approximately 42% oil and 58% natural gas, which insulates our Corporation from volatility in either commodity. From time to time, TUSK hedges commodity prices. Currently, we own "put contracts" for 1,000 bbls/d of 2008 oil production and have no derivatives in place for natural gas. Consequently, we have all of the upside in commodity prices and some downside protection.

Finally, TUSK has remained steadfast to our principles of maintaining a strong balance sheet. Our budget for 2008 has capital spending equal to funds from operations with debt to funds from operations at 1:1. We have the financial strength to weather softer commodity prices, should that happen, and the financial flexibility to react to opportunities as they arise.

Guidance

TUSK estimates that with the completion of the swap and capital expenditures of $60,000,000, 2008 production will average between 5,200 boe/d and 5,600 boe/d. Assuming oil prices of WTI US$90.00/bbl and natural gas prices of CDN$7.25/mcf at AECO, we expect debt levels and funds from operations will be the same, $60,000,000. This represents over 25% growth in production by spending only funds from operations on known identified projects currently in TUSK's asset base.

In closing, I would like to thank all of our dedicated staff for their efforts this past year and our shareholders for their continued support.

On behalf of the Board of Directors, John R. Rooney Chief Executive Officer

March 17, 2008

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis of financial condition and results of operations ("MD&A") was prepared by management and reviewed and approved by the Board of Directors of TUSK Energy Corporation ("TUSK" or the "Corporation"). The discussion and analysis is a review of TUSK's operational and financial results based on Canadian generally accepted accounting principles ("GAAP"). Its focus is primarily a discussion of the operational and financial performance for the three months and years ended December 31, 2007 and 2006 and should be read in conjunction with the audited financial statements and accompanying notes for the years then ended. The discussion and analysis has been prepared as of March 13, 2008.

Forward-Looking Statements

The information herein contains forward-looking statements and assumptions, such as those relating to results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, actual results may differ materially from those predicted. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise, and as such, undue reliance should not be placed on forward-looking statements. Unless required by law, the Corporation does not undertake any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

This MD&A contains the terms "funds from operations", "funds from operations per share", "operating netback", "cash netback" and "corporate netback". These terms do not have any standardized meaning under GAAP, and therefore, may not be comparable with the calculation of similar measures presented by other issuers. Funds from operations is calculated based on cash provided by operating activities before changes in non-cash working capital. TUSK believes that, in conjunction with results presented in accordance with GAAP, these measures assist in providing a more complete understanding of certain aspects of the Corporation's results of operations and its ability to finance capital expenditures. Funds from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of earnings per share. Funds from operations as presented should not be considered an alternative to, or more meaningful than, cash provided by operating activities as determined in accordance with GAAP as an indicator of the Corporation's performance. The table below reconciles cash provided by operating activities to funds from operations.



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Quarter Ended Year Ended
December 31, December 31,
($000s) 2007 2006 2007 2006
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Cash provided by operating activities
(per GAAP) 4,415 1,940 28,110 6,129
Changes in non-cash working capital 2,045 994 5,389 1,208
Asset retirement obligation expenditures 451 - 451 -
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Funds from operations 6,911 2,934 33,950 7,337
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BOE Presentation

Barrels of oil equivalent may be misleading, particularly if used in isolation. The boe conversion ratio of 6 mcf of natural gas : 1 bbl of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

ACQUISITION OF ZENAS ENERGY CORP. AND COMPARISON TO PRIOR PERIODS

Effective December 31, 2006, TUSK entered into a business combination with Zenas Energy Corp. ("Zenas") whereby TUSK acquired all of the issued and outstanding shares of Zenas pursuant to a plan of arrangement. The former shareholders of Zenas received 1.033 shares of TUSK for each outstanding Zenas share. A total of 37,204,118 TUSK shares were issued to complete the transaction. TUSK and Zenas amalgamated on January 1, 2007 and continued as TUSK Energy Corporation. The Zenas acquisition resulted in a 72% increase in the number of shares outstanding and other significant changes. As a result, a comparison of certain 2007 financial and operating information to 2006 may not be meaningful.

CHANGE IN YEAR-END

In connection with the acquisition of Zenas and to align the reporting of its financial and operating results with industry standard, TUSK changed its year-end to December 31 from March 31 effective December 31, 2006. This resulted in a nine-month fiscal period ending on December 31, 2006. For the purposes of this MD&A, prior period comparative information conforms to a December 31 year-end.

NORTHEASTERN BRITISH COLUMBIA ASSET SWAP

On March 7, 2008, TUSK announced that it had entered into an agreement to swap its interests in the Elleh area for certain interests in the Conroy area plus $12,000,000. The transaction is expected to be completed by March 31, 2008. The cash portion of the transaction will be adjusted to reflect an effective date of January 1, 2008 and other purchase price adjustments typical to a transaction of this nature. Following the transaction, TUSK will have no interests in the Elleh area. At Conroy, TUSK will hold and operate a 100% working interest in two gas plants and 85 kilometres of pipelines, close to 100% working interest in 125,000 acres of mineral rights and a royalty interest in 32,000 acres of mineral rights. TUSK estimates that there are currently 116 drilling locations in the area, half of which are summer accessible. The asset swap will result in the termination of certain of TUSK's farm-in commitments in the Conroy area. The cash proceeds will increase TUSK's liquidity. The 100% working interest will give TUSK more control over the project's development. Certain forward-looking information in this MD&A assumes the completion of the swap.



FINANCIAL AND OPERATING RESULTS

Sales Volumes

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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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Oil (bbls/d) 1,496 673 122 1,572 441 256
Natural gas (mcf/d) 14,004 3,636 285 13,808 2,427 469
NGLs (bbls/d) 107 26 312 97 16 506
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Combined (boe/d) 3,937 1,305 202 3,970 862 361
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Sales volumes were 3,970 boe/d in 2007, up from 862 boe/d in 2006. Higher volumes were primarily the result of the Zenas acquisition, which added new production effective January 1, 2007, and additional volumes from new wells drilled in late 2006 and throughout 2007. By area, 2007 sales volumes included Peace River Arch (Clair, Puskwa, Gage) at 2,047 boe/d, Elleh at 1,349 boe/d, Northern (Mega, Gutah, Venus) at 521 boe/d and other at 53 boe/d. The Conroy project contributed a very small amount of natural gas late in the fourth quarter of 2007. Wells drilled at Conroy during the 2007/2008 winter drilling season were placed on-stream in February 2008.

The majority of TUSK's 2006 sales volumes came from the Northern and Peace River Arch areas. The Elleh property and additional properties in the Peace River Arch area were added through the Zenas acquisition.

Fourth quarter 2007 sales volumes were 3,937 boe/d compared to 1,305 boe/d for the same period in 2006. The year-over-year changes described above were the primary reasons for the increase. Fourth quarter 2007 sales volumes were 11% lower than the 4,415 boe/d experienced in the third quarter of the year. The majority of the quarter-over-quarter decline occurred at Elleh, where third quarter volumes included flush production from new wells. Lower volumes in the Northern area contributed to the decrease as production was temporarily curtailed while artificial lift was installed.

During the last quarter of 2007, oil and NGLs accounted for 41% and natural gas 59% of TUSK's sales volumes. Going forward, TUSK expects the weighting to natural gas to increase due to expected growth in the Conroy area.



Commodity Prices and Risk Management

Benchmark Prices

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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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Crude oil
WTI (US$/bbl) 90.68 60.21 51 72.31 66.22 9
Edmonton Light
(CDN$/bbl) 86.41 64.49 34 76.35 72.77 5
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Natural gas
AECO (CDN$/mcf) (1) 6.00 6.36 (6) 6.61 6.98 (5)
AECO (CDN$/GJ) 5.69 6.03 (6) 6.26 6.62 (5)
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Foreign exchange rate
US to Canadian dollar 1.019 0.878 16 0.931 0.882 6
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(1) AECO selling price per mcf is based on a conversion factor of
1.055 mcf per GJ.



Realized Selling Prices

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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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Oil ($/bbl) 84.76 58.55 45 74.52 64.32 16
Natural gas ($/mcf) 6.13 7.90 (22) 6.40 6.96 (8)
NGLs ($/bbl) 69.38 24.77 180 61.30 35.96 70
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Combined ($/boe) 55.89 52.68 6 53.25 53.19 -
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Throughout 2007 and 2006, TUSK's oil and natural gas sales volumes were sold at posted prices, and therefore, changes to realized selling prices were primarily due to changes in market conditions. The difference between realized selling prices and the recognized benchmark or posted price is often called the "differential". The primary reasons for a differential include quality adjustments (compared to the benchmark) and transportation (to the benchmark selling point). A corporate differential can change as a result of new production, production being shut-in or changes to delivery points. TUSK produces light oil, which results in a modest differential to posted prices. In 2007, TUSK's overall oil differential was $1.65/bbl in the fourth quarter and $1.83/bbl for the year. TUSK's corporate oil differentials were lower in 2007 than in 2006 due to three factors. First, new production was introduced at the beginning of 2007 as a result of the Zenas acquisition. Second, the value of local quality adjustments was reduced due to market conditions. Third, TUSK made operational changes in the field in order to transport oil from one of its producing areas to a delivery point that had better pricing. TUSK's natural gas sold for an average price of $6.40/mcf in 2007, down 8% from $6.96/mcf in 2006. Comparing the fourth quarter of 2007 to the same period in 2006, natural gas selling prices declined 22% to $6.13/mcf. In addition to a decline in the benchmark price, the comparison also includes adjustments recorded in the fourth quarter of 2006 that resulted in an anomalous selling price.

In September 2007, TUSK purchased a US$65.00/bbl put on 1,000 bbls/d of oil for the period January 1 to December 31, 2008. This arrangement is effectively a floor price linked to WTI pricing. TUSK paid $781,000 to enter into the contract and would have received $109,000 if the contract was settled on December 31, 2007. The $109,000 is recorded on the balance sheet as a current asset and the $672,000 difference between the cost of the put and the year-end value is included in the statement of operations as an unrealized loss. TUSK has no other commodity price arrangements in place but may enter into additional contracts to limit its exposure to oil and natural gas price fluctuations.



Revenue

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Quarter Ended December 31, Year Ended December 31,
($000s) 2007 2006 % Change 2007 2006 % Change

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Oil 11,666 3,624 222 42,747 10,358 313
Natural gas 7,894 2,642 199 32,241 6,163 423
NGLs 682 61 1,018 2,167 212 922
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Combined 20,242 6,327 220 77,155 16,733 361
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Comparing 2007 to 2006, oil and gas revenue increased 361% to $77,155,000. Higher oil volumes and selling prices combined for a 313% increase in oil revenue. Natural gas revenue improved 423% to $32,241,000 as significantly higher sales volumes offset an 8% decline in selling prices.

Oil and gas revenue for the fourth quarter of 2007 was $20,242,000, up from $6,327,000 in the fourth quarter of 2006. Oil revenue increased 222% to $11,666,000 as a result of higher sales volumes and selling prices. Natural gas revenue increased 199% to $7,894,000 as significantly higher sales volumes overcame a 22% decline in selling prices.



Royalties

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Quarter Ended December 31, Year Ended December 31,
($000s) 2007 2006 % Change 2007 2006 % Change
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Crown (net of ARTC in 2006) 3,385 1,059 220 13,310 2,485 436
Freehold 257 76 238 766 413 85
Gross overriding 166 123 35 875 297 195
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Total 3,808 1,258 203 14,951 3,195 368
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Royalties as a % of revenue 18.8 19.9 (6) 19.4 19.1 2
Royalties per boe ($/boe) 10.51 10.47 - 10.32 10.16 2
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Royalties were $14,951,000 in 2007, up 368% from $3,195,000 in 2006. The overall increase was primarily due to a commensurate increase in revenue. The majority of TUSK's royalty is paid to provincial governments (Crown royalty), which amounted to 89% of total royalties in 2007 (2006 - 84%). Crown royalties in 2006 were reduced by Alberta Royalty Tax Credits ("ARTC"). The ARTC program resulted in an 8% reduction in total royalties in 2006. The Alberta government announced the cancellation of the ARTC program effective January 1, 2007. Compared to the prior year, 2007 Crown royalty as a percentage of total royalties increased as more of TUSK's wells produce from Crown mineral rights, most notably in British Columbia.

Fourth quarter 2007 royalties were $3,808,000, up 203% from $1,258,000 recorded in 2006. The overall increase was a result of higher revenue, offset by a small decrease in the effective royalty rate to 18.8% from 19.9% . Comparing the fourth quarter of 2007 to the same period in 2006, royalties per unit were virtually unchanged at $10.51/boe (Q4 2006 - $10.47/boe).

TUSK expects 2008 royalties to be within the 19% to 21% range.

On October 25, 2007, the Alberta government announced a new royalty framework ("NRF") to take effect January 1, 2009. TUSK has two project areas, Elleh and Conroy, that are located in British Columbia and a small portion of its Alberta production that does not attract Alberta Crown royalty. Due to uncertainties and lack of sufficient details with which to determine royalties for some product types under the proposed NRF, independent evaluation firms have agreed that year-end reserves reports should be prepared using the existing royalties. However, public oil and gas companies may elect to comment on (disclose) the impact of the proposed NRF as per Section 5.2 of the Canadian Securities Association National Instrument NI 51-101F1. TUSK has elected to disclose this impact on the Corporation. To satisfy these needs, sensitivity cases reflecting a range of the potential impact of the NRF using a consultant's consensus methodology in calculating the new royalties has been provided by the Corporation's independent engineers and is summarized below.

The undiscounted before tax present value ("BT-PV") impact of this proposed change in royalties is between $13,885,000 and $17,256,000, representing a reduction of between 4% and 5% of the base case undiscounted BT-PV of $359,356,000 in the value of TUSK's reserves at December 31, 2007. When discounted at 10%, the BT-PV impact of the NRF to TUSK is estimated at between $10,609,000 and $12,832,000, representing a reduction of between 5% and 6% in the base case BT-PV at 10% of $201,928,000.

Corporate capital expenditure plans, some of which are not recognized in TUSK's independent reserves evaluation, suggest the 2009 cash flow impact will be less than indicated above as expansion/risk capital is being deployed outside of Alberta.



Operating Expenses

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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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Total ($000s) 4,551 834 446 14,700 3,200 359
Per boe ($/boe) 12.56 6.94 81 10.15 10.17 -
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Operating expenses were $14,700,000 in 2007, up from $3,200,000 in 2006. The increase was caused by a 361% growth in sales volumes as the year-over-year unit rate remained almost constant.

Fourth quarter 2007 operating expenses were $4,551,000 ($12.56/boe) compared to $834,000 ($6.94/boe) in the same period of 2006. High water handling costs at Mega/Gutah in the Northern area was the primary reason for the increase. Produced water was trucked to third party disposal facilities pending regulatory approvals for a new enhanced recovery/pressure maintenance water disposal facility. Approvals have been received and TUSK has converted one existing well to a water injection well and an enhanced recovery program commenced in early 2008. Going forward, TUSK expects operating expenses to be in the $9.00/boe to $10.00/boe range.



Transportation Expenses

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Quarter Ended December 31, Year Ended December 31,
2007 2006 % Change 2007 2006 % Change
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Total ($000s) 999 291 243 3,822 1,134 237
Per boe ($/boe) 2.76 2.42 14 2.64 3.60 (27)
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Transportation expenses were $3,822,000 ($2.64/boe) in 2007, up from $1,134,000 ($3.60/boe) incurred in 2006. The year-over-year increase was due to higher production volumes offset by a reduction in the cost per boe. Lower transportation expenses per boe was caused primarily by the commissioning of the new battery in the Mega/Gutah area in mid-2006 and the addition of new production with lower transportation rates commencing with the Zenas acquisition at the beginning of 2007.

Compared to the same period in 2006, fourth quarter 2007 transportation expenses rose 243% to $999,000 as a result of an increase in sales volumes and the rate per boe. Modest changes in transportation expenses per boe are expected as new wells are placed on-stream or pipeline commitments or delivery points for existing production are changed.



General and Administrative ("G&A") Expenses

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Quarter Ended December 31, Year Ended December 31,
($000s) 2007 2006 % Change 2007 2006 % Change
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Total 1,747 1,919 (9) 9,766 5,628 74
Overhead recoveries (262) (205) 28 (1,106) (1,238) (11)
Capitalized (330) (446) (26) (2,584) (1,552) 66
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Expensed 1,155 1,268 (9) 6,076 2,838 114
Expensed per boe ($/boe) 3.19 10.56 (70) 4.19 9.02 (54)
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Total G&A costs for 2007 were $9,766,000, up from $5,628,000 in the prior year. Compared to 2006, amounts incurred in 2007 reflect a much larger entity. In addition, first quarter 2007 results included significant one-time severance and retention costs regarding staff rationalization efforts following the TUSK/Zenas business combination. Consistent with industry practice, TUSK burdens company-operated wells, facilities and most capital projects with an overhead recovery charge. Overhead recoveries were $1,106,000 in 2007 versus $1,238,000 a year ago. Compared to 2006, TUSK operated a higher number of wells in 2007 but a relatively lower percentage of its capital projects. TUSK capitalizes G&A costs that relate directly to exploration and development activities to oil and natural gas properties. The capitalized amounts are comprised primarily of personnel and related costs. In 2007, TUSK capitalized $2,584,000 or 26% (2006 - $1,552,000 or 28%) of total G&A costs. After overhead recoveries and capitalized amounts, expensed G&A was $6,076,000 ($4.19/boe) in 2007 compared to $2,838,000 ($9.02/boe) in 2006.

Fourth quarter 2007 total G&A costs were $1,747,000, down from $1,919,000 incurred in the same period of 2006. Comparing the last quarters of 2007 and 2006, overhead recoveries increased and capitalized overhead decreased. Higher recoveries were caused primarily by a larger capital expenditure program in 2007. As a percentage of total overhead, capitalized overhead fell in 2007 as a result of a more conservative capitalization policy. G&A costs expensed were $1,155,000 ($3.19/boe) in the fourth quarter of 2007, down from $1,268,000 ($10.56/boe) in the fourth quarter of 2006. In 2008, TUSK expects G&A costs expensed to be in the $3.00/boe to $3.25/boe range.

Financing Charges

Financing charges were $1,812,000 and $818,000 for the year and three months ended December 31, 2007, respectively. Financing charges are comprised primarily of interest paid on TUSK's credit facility and also includes standby charges, commitment fees and guarantee fees paid for letters of credit. In 2007, financing charges were comprised of bank interest and standby charges of $1,639,000, commitment and guarantee fees of $145,000 and other charges totaling $28,000. TUSK did not incur financing charges in 2006.

Contract Termination Expense

During the fourth quarter of 2007, TUSK entered into an agreement to reduce its commitments regarding the use of two drilling rigs. The agreement, which included the payment of $2,000,000, allowed TUSK to terminate its obligation with respect to one rig and reduce the obligation regarding the second rig (see "Contractual Obligations - Drilling Rigs").

Stock-Based Compensation Expense

Stock-based compensation expense was $2,346,000 in 2007, down from $2,553,000 in 2006. Stock-based compensation for 2007 was comprised of three components: amortization of the expense for stock options granted prior to 2007 but include 2007 in the vesting period, amortization for options granted in 2007 and any expense adjustment required as a result of current year forfeitures. During 2007, 2,177,500 stock options were granted at an average exercise price of $1.63 per share. All of these options vest over three years. Some of the stock options forfeited in 2007 included accelerated vesting provisions, which resulted in additional stock-based compensation costs. Consistent with industry practice, TUSK capitalizes a portion of total stock-based compensation to oil and natural gas properties. Stock-based compensation expense is exclusive of the amount capitalized. Capitalized amounts are calculated with reference to options granted to personnel who are directly related to exploration and development activities. In 2007, stock-based compensation capitalized to oil and natural gas properties was $1,332,000, up from $1,049,000 in 2006.

Fourth quarter 2007 stock-based compensation expense was $625,000, down from $1,546,000 recorded in the 2006 three-month period. During 2006, 61% of stock-based compensation expense was recorded in the fourth quarter of the year. In late 2006, TUSK granted options to a number of new employees and existing employees in connection with the Zenas acquisition. Some of the options vested on the date of grant, which resulted in an immediate expense recognition.

Gain on Sale of Investment

During the second quarter of 2007, TUSK disposed of its investment in a publicly traded oil and gas company for proceeds of $7,367,000. The shares had an original cost of $4,271,000 and the sale resulted in a gain of $3,097,000. For financial statement purposes, the carrying value of this investment was adjusted to fair value at each balance sheet date and an unrealized gain or loss recorded. This accounting treatment was adopted prospectively effective January 1, 2007, and as a result, an unrealized gain of $2,483,000 (before tax) was recorded as at January 1, 2007 and a realized gain of $614,000 was recorded during the first half of 2007.



Depletion, Depreciation and Accretion ("DD&A") Expense

----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
($000s) 2007 2006 % Change 2007 2006 % Change
----------------------------------------------------------------------------
Depletion and
depreciation
of oil and gas
properties 11,818 4,327 173 40,517 9,423 330

Accretion of asset
retirement
obligations 82 25 228 284 65 337

Depreciation of
office
equipment and
leasehold
improvements 28 16 75 118 46 157
----------------------------------------------------------------------------
Total 11,928 4,368 173 40,919 9,534 329
Per boe ($/boe) 32.93 36.38 (9) 28.24 30.30 (7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


DD&A expense for 2007 totaled $40,919,000 ($28.24/boe), up from $9,534,000 ($30.30/boe) in 2006. Almost all of TUSK's DD&A expense was comprised of depletion and depreciation of oil and gas properties, which is based on a ratio of production volumes for the period to proved reserves assignments. The year-over-year increase was primarily the result of the growth in production volumes as the small decline in the rate per boe had a modest effect on the overall expense.

Fourth quarter 2007 DD&A expense was $11,928,000 ($32.93/boe) compared to $4,368,000 ($36.38/boe) for the same period in 2006. The higher expense was caused by a 202% increase in volumes offset by the decrease in the unit rate per boe. TUSK's DD&A rate per boe is high and reflects cumulative capital expenditures relative to proved reserves assignments as evaluated by an independent third party. Some of TUSK's properties are in the early stages of development and substantial capital has been invested in infrastructure. Expenditures at the early stages of project development often result in higher DD&A rates per boe. TUSK's portfolio includes projects that are past the initial phase where reserves are being added at favourable costs. These projects typically have a positive effect on corporate DD&A rates per boe. Going forward, a reduction in the corporate DD&A rate per boe will depend on TUSK's ability to increase proved reserves assignments in early stage project areas where capital has been committed, expand in areas where expenditures are known to be efficient and enter new areas where reserves can be added at low cost.

Provision for Income Taxes

For the year and quarter ended December 31, 2007, TUSK recorded a reduction in future income taxes of $2,845,000 and $2,279,000, respectively. The recoveries were the result of losses before taxes for both periods. The provision for income taxes includes the effects of a reduction in future federal and provincial income tax rates in effect during the period. For 2007, future income tax recoveries were recorded at approximately 30% of the net loss. In 2006, TUSK recorded losses before taxes for the year and the last quarter and recorded income tax recoveries of $810,000 and $637,000 for these periods, respectively.

TUSK has approximately $244,000,000 of available income tax deductions and does not expect to incur cash taxes in 2008. The following table summarizes TUSK's available income tax deductions as at December 31, 2007:



Income Tax Deductions

----------------------------------------------------------------------------
Annual
($000s) Amount Rate (%)
----------------------------------------------------------------------------
Non-capital losses 3,700 100
Canadian Exploration Expenses 39,000 100
Canadian Development Expenses 93,300 30
Canadian Oil and Gas Property Expenses 44,600 10
Undepreciated capital costs 56,900 25 - 100
Other 6,500 7 - 20
----------------------------------------------------------------------------
244,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from Operations

Funds from operations totaled $33,950,000 in 2007 ($0.38 per share), up from $7,337,000 ($0.16 per share) for 2006. Results for 2007 reflect a much larger entity due to the Zenas acquisition at the beginning of the year and ongoing exploration and development throughout 2007. Oil and gas revenue is an indicator of the magnitude of change, which increased to $77,155,000 in 2007 from $16,733,000 in 2006. Funds from operations in 2007 were reduced by a $2,000,000 payment made in connection with an agreement TUSK entered into to amend the terms of two long-term drilling rig contracts.

Fourth quarter 2007 funds from operations were $6,911,000 ($0.08 per share) compared to $2,934,000 ($0.06 per share) in the fourth quarter of 2006. Notable differences between the two reporting periods include significantly higher sales volumes (2007 - 3,937 boe/d; 2006 - 1,305 boe/d), the $2,000,000 payment referred to above, higher operating costs primarily related to water handling of Mega/Gutah and 2007 financing charges of $818,000 (2006 - $nil).



Cash Netbacks

----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
($/boe) 2007 2006 % Change 2007 2006 % Change
----------------------------------------------------------------------------
Oil and gas revenue 55.89 52.68 6 53.25 53.19 -
Royalties (net of ARTC in
2006) (10.51) (10.47) - (10.32) (10.16) 2
Operating expenses (12.56) (6.94) 81 (10.15) (10.17) -
Transportation expenses (2.76) (2.42) 14 (2.64) (3.60) (27)
----------------------------------------------------------------------------
Operating netback 30.06 32.85 (8) 30.14 29.26 3
G&A expenses (3.19) (10.56) (70) (4.19) (9.02) (54)
Financing charges (2.26) - - (1.25) - -
Interest income - 1.92 (100) 0.11 3.09 (96)
Contract termination (5.52) - - (1.38) - -
Current income taxes -- (0.23) (100) - - -
----------------------------------------------------------------------------
Corporate netback 19.09 23.98 (20) 23.43 23.33 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Comparing 2007 to 2006, operating netbacks increased modestly to $30.14/boe from $29.26/boe primarily as a result of lower transportation expenses. Corporate cash netbacks were virtually unchanged at $23.43/boe in 2007 compared to $23.33/boe in 2006. On a per unit basis, year-over-year changes include lower G&A expenses, decreased interest income and the introduction of financing charges in 2007.

Operating netbacks decreased $2.79/boe to $30.06/boe in the fourth quarter of 2007 from $32.85/boe in the same period of 2006 as the benefit of higher oil prices was offset by increased operating costs. Corporate netbacks declined $4.89/boe to $19.09/boe in the last quarter of 2007 from $23.98/boe in the last quarter of 2006 as lower per unit G&A expenses was offset by higher financing charges and contract termination costs.

Net Income (Loss)

TUSK recorded a net loss of $6,528,000 in 2007 ($0.07 per share), up from a loss of $3,940,000 ($0.08 per share) in 2006. The 2007 statement of operations includes a number of expenses that did not occur in 2006, most of which increased the net loss. These items include one-time expenses incurred in the first quarter of 2007 in connection with the TUSK/Zenas business combination, financing charges of $1,812,000, contract termination costs of $2,000,000 and an unrealized loss on commodity derivatives of $672,000. In 2007, TUSK recorded a gain on the sale of investment of $614,000, which reduced the net loss.

TUSK posted a net loss of $3,990,000 ($0.04 per share) for the fourth quarter of 2007 compared to a net loss of $2,343,000 ($0.05 per share) during the same period of 2006. In addition to the year-over-year changes discussed above and exclusive of increases in sales volumes, fourth quarter 2007 results were negatively affected by relatively higher operating costs and benefited from lower stock-based compensation.




Capital Expenditures

----------------------------------------------------------------------------
Quarter Ended December 31, Year Ended December 31,
% %
($000s) 2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------------
Land acquisition and
retention 78 186 (58) 1,500 3,608 (58)
Geological and geophysical (316) 2,149 (115) 9,837 16,503 (40)
Drilling and completions 10,814 10,182 6 53,181 38,420 38
Well equipping and facilities 9,882 719 1,274 33,228 6,121 443
Property acquisitions - - - 9,044 - -
Capitalized overhead 330 446 (26) 2,584 1,552 66
Office (16) 16 (200) 326 215 52
----------------------------------------------------------------------------
Total 20,772 13,698 52 109,700 66,419 65
Dispositions (830) - - (2,769) - -
----------------------------------------------------------------------------
Net 19,942 13,698 46 106,931 66,419 61
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Capital expenditures totaled $109,700,000 in 2007, up from $66,419,000 in 2006. Expenditures by area in 2007 were as follows: Northern - $38,643,000; Peace River Arch - $26,083,000; Elleh - $22,013,000; Conroy - $20,051,000; capitalized overhead - $2,584,000; and office - $326,000. TUSK drilled 44 gross (20.6 net) wells in 2007, resulting in 33 gross (14.3 net) gas wells, 8 gross (5.5 net) oil wells and 3 gross (0.8 net) abandonments. Capital expenditures in the Northern area were primarily at Mega/Gutah and included $20,600,000 on drilling and completing 8 gross (6.2 net) wells and $16,700,000 on tangible equipment. Peace River Arch expenditures included $9,000,000 on a property acquisition, $5,578,000 on drilling and completing 13 gross (2.9 net) wells, $6,600,000 on seismic and $3,700,000 on tangible equipment. At Elleh, a little over $16,600,000 was spent drilling and completing 13 gross (6.5 net) gas wells. Conroy expenditures included $10,500,000 on facilities, pipelines and well equipping, and $9,200,000 on drilling and completing 10 gross (5.0 net) wells.

For the year ended December 31, 2007, proceeds on disposal of property and equipment totaled $2,769,000.

In the fourth quarter of 2007, capital expenditures were $20,772,000. Most of this was spent at Conroy and included $9,200,000 on tangible equipment and $7,700,000 on drilling and completions. Fourth quarter capital expenditures also included $1,700,000 in the Peace River Arch area where TUSK drilled 2 gross (0.2 net) wells.

OUTLOOK

TUSK had a successful 2007/2008 winter drilling season and recently announced a major asset swap transaction (see "Northeastern British Columbia Asset Swap" above). The drilling results increase the Corporation's confidence in the productive capability of its assets and the asset swap increases control over the direction and pace of development of a major project area.

Oil prices recently reached record highs of over US$100.00/bbl and natural gas prices have firmed to above US$8.00/mcf. TUSK has a balance of production that is approximately 42% oil and 58% natural gas, which insulates it from volatility in either commodity. Currently, TUSK has no arrangements in place that would limit its ability to take advantage of higher commodity prices.

TUSK has a strong balance sheet. Estimates for 2008 indicate capital spending equal to funds from operations and debt to cash flow at 1:1. The Corporation has the financial strength to weather softer commodity prices, should that happen, and the financial flexibility to react to opportunities as they arise.

The Corporation estimates that with the completion of the Elleh for Conroy swap, 2008 production will average between 5,200 boe/d and 5,600 boe/d with a capital budget of $60,000,000. Assuming a WTI oil price of US$90.00/bbl and an AECO natural gas price of CDN$7.25/mcf, TUSK expects debt levels and funds from operations will be the same, $60,000,000. This represents over 25% growth in production by spending only cash flow on known identified projects currently in TUSK's asset base.

LIQUIDITY AND CAPITAL RESOURCES

TUSK has a $75,000,000 demand credit facility comprised of a $60,000,000 revolving/operating line and a $15,000,000 acquisition/development line. The facility is available through two Canadian chartered banks. The interest rate charged on the facility is based on a pricing grid that is debt to cash flow sensitive. An increase in the Corporation's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime plus 1.0% . The interest rate charged on the acquisition/development line is + of 1% higher than the rate charged on the revolving/operating line. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

In December 2007, TUSK completed a non-brokered private placement of 1,562,500 flow-through common shares at a price of $1.60 per share for proceeds of $2,500,000. Pursuant to the terms of the offering, TUSK committed to incur $2,500,000 on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes and to renounce the CEE to the flow-through share subscribers effective December 31, 2007. The Corporation has until December 31, 2008 to incur the qualifying expenditures. No qualifying expenditures were incurred in 2007.

In 2007, TUSK's capital expenditure program totaled $109,700,000 and was financed primarily by cash of $27,187,000, an increase in bank debt of $40,873,000 and funds from operations of $33,950,000. Smaller sources of financing included proceeds on the sale of investments, proceeds on the disposition of property and equipment and the new equity described above.

At December 31, 2007, TUSK had a working capital deficiency of $56,570,000, which included bank debt of $40,873,000. With existing bank lines of $75,000,000, TUSK enters 2008 with available liquidity of $18,430,000. Capital expenditures for 2008 are presently budgeted at approximately $60,000,000, which can be financed by funds from operations. Upon completion of the Northeastern British Columbia asset swap described above, the majority of TUSK's 2008 capital expenditure program will be discretionary. TUSK will incur non-discretionary expenditures in 2008, such as oil and gas well operating expenses, interest expense and G&A costs. TUSK expects to finance all of these expenditures with funds from operations.

On an ongoing basis, TUSK will typically utilize three sources of funding to finance its capital expenditure program: internally generated cash flow from operations, debt, where deemed appropriate, and new equity issues, if available on favourable terms. Commodity prices and production volumes have the largest impact on TUSK's ability to generate adequate cash flow to meet all of its obligations. A prolonged decrease in commodity prices would negatively affect the Corporation's cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If TUSK's capital expenditure program does not result in sufficient additional reserves and/or production, the Corporation's ability to raise additional equity would be negatively impacted.

OUTSTANDING SHARE DATA

As of December 31, 2007, TUSK had 90,442,222 common shares and 8,481,833 stock options outstanding. From January 1, 2008 to the date of this MD&A, there were no changes to TUSK's outstanding securities.

CONTRACTUAL OBLIGATIONS

Conroy Area Work Commitment

Under a farm-in agreement, TUSK committed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon six standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d of natural gas. Fifteen of the new drill wells and the gathering system must be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment must be completed by April 30, 2009. A portion of the work commitment was completed in 2007 and TUSK plans to complete the balance in 2008. The balance of the commitment is expected to cost approximately $46,000,000. At December 31, 2007, this commitment was secured by a $6,000,000 letter of guarantee. The letter of guarantee was returned in early 2008.

In March 2008, TUSK entered into an agreement (which is expected to close on March 31, 2008), that effectively cancels the above-mentioned farm-in and the related commitments (see "Northeastern British Columbia Asset Swap").

Drilling Rigs

As of December 31, 2007, TUSK is obligated to utilize one drilling rig for a minimum of 165 days per year over a four-year period or pay a stand-by fee of $6,800 per day.

Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013. The annual payments due pursuant to this obligation are as follows: 2008 - $513,000; 2009 - $536,000; 2010 to 2012 - $540,000; and 2013 - $44,000.



----------------------------------------------------------------------------
Payment Due by Period
------------------------------------------------
Less Than 1 - 3 4 - 5 After
($000s) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Bank debt 40,873 40,873 - - -
Drilling rigs 4,488 1,122 2,244 1,122 -
Office space 2,713 513 1,076 1,080 44
----------------------------------------------------------------------------
Total 48,074 42,508 3,320 2,202 44
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CONTINGENCIES

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments the Corporation withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July 2007, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6,800,000. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

OFF-BALANCE SHEET ARRANGEMENTS

Except for the items discussed under the caption "Contractual Obligations", there were no off-balance sheet arrangements at December 31, 2007.

RELATED PARTY TRANSACTIONS

An officer of the Corporation is a director and significant shareholder of a private company that provides project management and systems support services to TUSK. In 2007, this company was paid $241,000 (2006 - $127,000). Of this amount, $139,000 was charged to G&A expenses, $91,000 to operating expenses and $11,000 to property and equipment. December 31, 2007 accounts payable and accrued liabilities includes $34,000 regarding these services.

A company controlled by an officer of the Corporation holds a royalty on certain TUSK operated properties. In 2007, royalties of $217,000 were paid to this company (2006 - $102,000). All of the payments made in 2007 were charged to royalties. December 31, 2007 accounts payable and accrued liabilities includes $26,000 regarding these royalties.

Three TUSK directors are also directors and minor shareholders of a private oil and gas company. In 2007, TUSK provided the services of an employee to this company on a cost recovery basis. The recovery was $61,000 and is included in G&A expenses. December 31, 2007 accounts receivable includes $24,000 due from this company.

A TUSK director is also a director of a publicly traded oil and gas company in which TUSK held a significant interest (see "Gain on Sale of Investment"). TUSK disposed of its interest in this company during the second quarter of 2007. Prior to the disposition, TUSK provided accounting and administrative services to the company for a fee of $6,000 per month and the recovery of certain out-of-pocket costs. In 2007, TUSK received a total of $50,000 (2006 - $80,000) from this company, all of which is included in G&A expenses.

The above-mentioned transactions were provided at commercial rates and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.



SUBSEQUENT EVENTS

See "Northeastern British Columbia Asset Swap".

SELECTED ANNUAL INFORMATION

----------------------------------------------------------------------------
Year Ended
--------------------------------------
December 31, December 31, March 31,
($000s, except per share amounts) 2007 2006 (1) 2006 (1)
----------------------------------------------------------------------------
Oil and gas revenue 77,155 16,733 11,790
Funds from operations 33,950 7,337 5,079
Per share - basic and diluted 0.38 0.16 0.14
Net income (loss) (6,528) (3,940) (1,335)
Per share - basic and diluted (0.07) (0.08) (0.04)
Total assets 311,455 277,360 122,751
Total long-term liabilities 16,833 11,780 2,830
----------------------------------------------------------------------------
(1) TUSK changed its fiscal year-end to December 31 from March 31 effective
December 31, 2006. This resulted in a nine-month fiscal period ending
December 31, 2006. To provide more meaningful information for the year
ended December 31, 2007, the immediately prior period comparative
information conforms to a December 31 year-end.


SELECTED QUARTERLY INFORMATION

----------------------------------------------------------------------------
2007
(unaudited) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
($000s, except per share amounts)
Financial Highlights
Oil and gas revenue 20,242 20,560 20,153 16,200
Royalties (3,808) (3,546) (4,216) (3,381)
----------------------------------------------------------------------------
Interest income - 1 9 146
Operating (4,551) (3,765) (3,064) (3,320)
Transportation (999) (1,171) (873) (779)
G&A (1,155) (1,074) (1,117) (2,730)
Financing charges (818) (586) (408) -
Contract termination (2,000) - - -
Income taxes-current - - - -
----------------------------------------------------------------------------
Funds from operations 6,911 10,419 10,484 6,136
Per share
- basic and diluted 0.08 0.12 0.12 0.07
Commodity derivatives (627) (45) - -
Stock-based compensation (625) (707) (537) (477)
Gain on investment - - 1,105 (491)
DD&A (11,928) (10,741) (9,960) (8,290)
Future income taxes 2,279 99 (226) 693
----------------------------------------------------------------------------
Net income (loss) (3,990) (975) 866 (2,429)
Per share
- basic and diluted (0.04) (0.01) 0.01 (0.03)
----------------------------------------------------------------------------
Issue of shares (net) 2,480 - - -
Capital expenditures 20,774 7,899 33,045 47,983
Proceeds on disposal (832) - (1,937) -
Corporate acquisition - - - -
Working capital (56,570) (45,128) (47,416) (27,899)
Shareholders' equity 222,536 229,074 229,172 227,564
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Highlights
Sales volumes
Oil and NGLs (bbls/d) 1,603 1,806 1,730 1,531
Natural gas (mcf/d) 14,004 15,652 14,115 11,413
Total (boe/d) 3,937 4,415 4,083 3,433
----------------------------------------------------------------------------
Selling prices
Oil ($/bbl) 84.76 79.13 70.11 63.20
Natural gas ($/mcf) 6.13 5.25 7.17 7.37
NGLs ($/bbl) 69.38 61.85 60.27 50.60
----------------------------------------------------------------------------
Operating netbacks ($/boe)
Selling price 55.89 50.62 54.24 52.48
Royalties (10.51) (8.73) (11.35) (10.94)
Operating expenses (12.56) (9.27) (8.25) (10.74)
Transportation expenses (2.76) (2.88) (2.35) (2.52)
----------------------------------------------------------------------------
Field netbacks 30.06 29.74 32.29 28.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------

SELECTED QUARTERLY INFORMAT

----------------------------------------------------------------------------
2006
(unaudited) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
($000s, except per share am
Financial Highlights
Oil and gas revenue 6,327 4,657 3,348 2,401
Royalties (1,258) (678) (774) (485)
----------------------------------------------------------------------------
Interest income 230 318 207 216
Operating (834) (1,089) (633) (644)
Transportation (291) (161) (295) (387)
G&A (1,268) (793) (407) (370)
Financing charges - - - -
Contract termination - - - -
Income taxes-current 28 (28) - -
----------------------------------------------------------------------------
Funds from operations 2,934 2,226 1,446 731
Per share
- basic and diluted 0.06 0.04 0.03 0.02
Commodity derivatives - - - -
Stock-based compensation (1,546) (407) (396) (204)
Gain on investment - - - -
DD&A (4,368) (2,154) (1,648) (1,364)
Future income taxes 637 (85) (85) 343
----------------------------------------------------------------------------
Net income (loss) (2,343) (420) (683) (494)
Per share
- basic and diluted (0.05) (0.01) (0.02) (0.01)
----------------------------------------------------------------------------
Issue of shares (net) 98,721 - 47,402 158
Capital expenditures 13,698 11,273 17,715 23,733
Proceeds on disposal - - - -
Corporate acquisition 100,140 - - -
Working capital 11,957 24,724 34,384 3,250
Shareholders' equity 226,587 127,793 128,205 80,188
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Highlights
Sales volumes
Oil and NGLs (bbls/d) 699 502 318 305
Natural gas (mcf/d) 3,636 2,493 2,362 1,191
Total (boe/d) 1,305 918 711 504
----------------------------------------------------------------------------
Selling prices
Oil ($/bbl) 58.55 71.23 72.16 57.61
Natural gas ($/mcf) 7.90 6.02 6.02 7.90
NGLs ($/bbl) 24.77 55.72 40.18 38.10
----------------------------------------------------------------------------
Operating netbacks ($/boe)
Selling price 52.68 55.14 51.72 52.97
Royalties (10.47) (8.03) (11.96) (10.71)
Operating expenses (6.94) (12.90) (9.77) (14.20)
Transportation expenses (2.42) (1.90) (4.55) (8.53)
----------------------------------------------------------------------------
Field netbacks 32.85 32.31 25.44 19.53
----------------------------------------------------------------------------
----------------------------------------------------------------------------


QUARTERLY REVIEW - 2007

The TUSK/Zenas business combination was effective at the beginning of the year and the three months ended March 31, 2007 was the first reporting period of the combined entity. Sales volumes for the three months ended March 31, 2007 were 3,433 boe/d, oil and gas revenue was $16,200,000 and funds from operations were $6,136,000 ($0.07 per share). G&A costs in the quarter included severance and retention payments made in connection with the integration of TUSK and Zenas. First quarter 2007 capital expenditures were $47,983,000 and included the drilling of 21 gross (11.5 net) wells. Drilling by area was as follows: Northern (Mega\Gutah) - 8 gross (6.2 net) wells; Elleh - 7 gross (3.5 net) wells; and Peace River Arch - 6 gross (1.8 net) wells. In addition to drilling, first quarter capital expenditures included approximately $7,000,000 spent on facilities and infrastructure (mostly in the Northern area at Mega/Gutah) and approximately $3,000,000 on seismic (primarily at Elleh). Capital expenditures for the first quarter of 2007 were financed primarily with cash on hand and debt.

Second quarter 2007 sales volumes averaged 4,083 boe/d, oil and gas revenue was $20,153,000, funds from operations were $10,484,000 ($0.12 per share) and net income was $866,000 ($0.01 per share). Compared to the first quarter of 2007, operating expenses declined to $8.25/boe (Q1 2007 - $10.74/boe) and G&A expenses were consistent with expectations. Results for the second quarter of 2007 also benefited from a gain on investment of $1,105,000. Second quarter capital expenditures were $33,045,000 and included the drilling of 8 gross (3.4 net) wells, 6 gross (3.0 net) wells at Elleh and 2 gross (0.4 net) wells in the Peace River Arch area. During the second quarter of 2007, TUSK completed a $9,000,000 acquisition of additional interests in an oil property located at Gage in the Peace River Arch area. TUSK did not drill any wells in the Northern area during the second quarter but did spend $4,400,000 in the area, primarily on facilities and re-completions. TUSK received $1,937,000 regarding the sale of minor oil and gas properties during the second quarter. Second quarter 2007 capital expenditures were financed primarily by debt, funds from operations and the proceeds on the sale of investment.

Sales volumes averaged 4,415 boe/d in the third quarter of 2007 with new wells coming on-stream in the Elleh and Peace River Arch areas. Oil and gas revenue was $20,560,000 for the third quarter, which reflected softening natural gas prices compared to the second quarter. Third quarter funds from operations were $10,419,000 ($0.12 per share) and the net loss was $975,000 ($0.01 per share). During the third quarter, TUSK purchased a US$65.00/bbl put option on 1,000 bbls/d of oil for the period January 1 to December 31, 2008. The cost of the contract was $781,000 and is effectively a floor price linked to WTI pricing. The contract was fair valued (mark-to-market) at the end of the quarter resulting in a charge to earnings of $45,000. Capital expenditures in the third quarter of 2007 were $7,899,000, somewhat less than funds from operations. TUSK drilled 3 gross (0.5 net) wells during the quarter, all in the Peace River Arch area. TUSK commenced development of the Conroy area during the third quarter, spending $3,056,000 on preliminary engineering, surveying, surface costs and tangible equipment. Third quarter capital expenditures also included ongoing work on the all-weather road in the Northern area.

Fourth quarter 2007 sales volumes of 3,937 boe/d were 11% lower than the third quarter. The quarter-over-quarter decline was caused by lower volumes in the Elleh and Northern areas and a lack of new wells placed on production. At Elleh, new wells placed on-stream earlier in the year came off flush production, while in the Northern area, facility issues affected volumes. Growth in production volumes is typically driven by capital expenditures. Commencing in the third quarter and throughout the fourth quarter, a large portion of TUSK's capital expenditure program was directed to the Conroy area. For the most part, new wells at Conroy will come on-stream in early 2008. Fourth quarter 2007 revenue was $20,242,000, down modestly from the third quarter as higher commodity prices all but overcame lower volumes. Funds from operations totaled $6,911,000 ($0.08 per share) and the net loss was $3,990,000 ($0.04 per share). Compared to the third quarter, fourth quarter results were affected by higher operating expenses and financing charges, increased commodity derivatives charges and contract termination costs. Higher operating expenses were caused primarily by third party water handling charges in the Northern area and increased financing charges were caused by higher debt levels. The mark-to-market valuation of the put contract described in the preceding paragraph resulted in an unrealized loss on commodity derivatives of $627,000 in the fourth quarter, up from $45,000 in the third quarter. During the fourth quarter, TUSK entered into an agreement to reduce its obligation with respect to the contractual commitment on the use of two drilling rigs. The Corporation paid $2,000,000 to eliminate the commitment for one rig and reduce the commitment for the second. Capital expenditures in the fourth quarter of 2007 were $20,774,000 and included the drilling of 12 gross (5.2 net) wells, of which 10 gross (5.0 net) wells were drilled in the Conroy area and 2 gross (0.2 net) in the Peace River Arch area. Over 80% of fourth quarter capital expenditures were spent in the Conroy area and, in addition to drilling and completions, included costs for pipeline and facilities construction. Proceeds on disposal of minor oil and natural gas properties were $832,000 in the fourth quarter. Late in the fourth quarter of 2007, TUSK raised $2,500,000 through the issuance of 1,562,500 flow-through common shares at $1.60 per share.

QUARTERLY REVIEW - 2006

First quarter 2006 sales volumes were 504 boe/d, oil and gas revenue was $2,401,000, funds from operations were $731,000 ($0.02 per share) and the net loss was $$494,000 ($0.01 per share). Results for the quarter were negatively impacted by high operating and transportation expenses. Capital expenditures were $23,733,000 and included the drilling of 10 gross (4.3 net) wells. Most of the capital was directed to the Northern area where 8 gross (3.7 net) wells were drilled.

The second quarter of 2006 was an active period for TUSK. Compared to the first quarter, sales volumes increased 41% to 711 boe/d, oil and gas revenue rose 39% to $3,348,000 and funds from operations almost doubled to $1,446,000 ($0.03 per share). Increased funds from operations was due primarily to higher volumes and lower per unit operating and transportation expenses. Capital expenditures were $17,715,000 in the quarter and included the drilling of 5 gross (2.1 net) wells, 4 gross (1.6 net) of which were drilled in the Peace River Arch area. The Corporation entered into two noteworthy transactions early in the quarter: the Puskwa-Peoria acquisition and the Cutbank seismic agreement. The Puska-Peoria acquisition involved production of approximately 240 boe/d, a working interest in a natural gas facility and related infrastructure and undeveloped mineral rights in the Peace River Arch area. Under the Cutbank seismic agreement, TUSK committed $20,000,000 to four seismic programs to earn mineral rights and an option to drill. Cutbank is located in northeastern British Columbia. Late in the quarter, the Corporation completed a $50,000,000 prospectus offering of common shares priced at $4.10 per share and flow-through shares priced at $5.15 per share.

Third quarter 2006 sales volumes were 918 boe/d, up 29% from the second quarter of the year. Oil and gas revenue was $4,657,000, funds from operations were $2,226,000 ($0.04 per share) and the net loss was $420,000 ($0.01 per share). Operationally, per unit operating expenses rose compared to the previous quarter pending completion of infrastructure. G&A expenses increased in response to higher staffing levels. Capital expenditures were $11,273,000 and included the drilling of 4 gross (1.5 net) wells. All of the drilling took place in the Peace River Arch area. During the quarter, an oil battery was completed in the Northern area, additional mineral rights were purchased in the Peace River Arch area and two of the four Cutbank seismic programs were substantially completed.

In the last quarter of 2006, TUSK's sales volumes averaged 1,305 boe/d, a 42% improvement over the previous quarter due primarily to the addition of new wells in the Northern area. Compared to the third quarter, fourth quarter 2006 oil and natural gas revenue was $6,327,000 as increased volumes and higher realized natural gas prices offset lower oil prices. On a quarter-over-quarter basis, per unit operating expenses declined primarily as a result of new infrastructure. For the three months ended December 31, 2006, funds from operations were $2,934,000 ($0.06 per share) and the net loss was $2,343,000 ($0.05 per share). The quarterly loss was negatively affected by higher stock-based compensation and positively affected by a future income tax recovery. Capital expenditures were $13,698,000 in the quarter and included the drilling of 9 gross (3.5 net) wells, of which 7 gross (2.3 net) wells were drilled in the Peace River Arch area and 2 gross (1.2 net) wells were drilled in the Northern area. In November 2006, TUSK announced that it had entered into an agreement with Zenas Energy Corp. under which TUSK and Zenas would combine pursuant to a Plan of Arrangement. The transaction was effective December 31, 2006 and TUSK issued 37,204,118 common shares to acquire all of the outstanding shares of Zenas.

FINANCIAL INSTRUMENTS

Commodity Price Risk Management

In September 2007, TUSK entered into a crude oil hedging transaction for 1,000 bbls/d for the period January 1 to December 31, 2008. This transaction consisted of the purchase of a US$65.00/bbl put option at a cost of $781,000. TUSK would have received $109,000 if the contract was settled on December 31, 2007. This amount has been recorded on the balance sheet as a current asset.

Credit Risk

TUSK's accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. To mitigate this risk, TUSK sells its production to a number of purchasers under normal industry sale and payment terms.

Foreign Currency Exchange Risk

TUSK is exposed to foreign currency fluctuations as commodity prices received are referenced in U.S. dollar denominated prices.

Fair Value of Financial Instruments

TUSK's financial instruments recognized in the balance sheet consist of accounts receivable, accounts payable and accrued liabilities and bank indebtedness. The fair value of these financial instruments approximates their carrying amounts due to their short terms to maturity or the indexed rate of interest on the bank indebtedness.

Interest Rate Risk

Interest rate risk exists principally with respect to TUSK's bank loan that bears interest at floating rates.

BUSINESS RISKS AND UNCERTAINTIES

TUSK's production and exploration activities are concentrated in the Western Canadian Sedimentary Basin where activity is highly competitive and includes companies ranging from smaller junior producers to the much larger integrated petroleum companies. The Corporation is subject to 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

- Marketability of oil and natural gas produced

- Substantial capital requirements and access to capital markets

- Environmental risks

- Insurance

- Reliance on operators and key employees

- Third party credit risk

- Changes in legislation and incentive programs

In order to reduce exploration risk, TUSK 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, the Corporation 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, high reward opportunities. TUSK also explores in areas where it has significant drilling experience.

TUSK mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems. In addition, the Corporation seeks to maintain operational control of the majority 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 risk, TUSK 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 Corporation 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. TUSK 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. At December 31, 2007, TUSK had no fixed price contracts in place.

CHANGES IN ACCOUNTING POLICIES

Financial Instruments, Hedging and Comprehensive Income

Effective January 1, 2007, TUSK adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges" and section 1530, "Comprehensive Income". These new standards have been adopted prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Financial Instruments

CICA section 3855 establishes a framework for classifying and measuring financial instruments. Under this section, financial instruments must be initially recognized at their fair value on the balance sheet date. Each financial instrument must be included in one of five categories set out in the standard: financial assets and liabilities held for trading, financial assets held to maturity, loans and receivables, financial assets available for sale or other financial liabilities. All financial instruments, with the exception of loans and receivables, held to maturity investments and other financial liabilities measured at amortized cost, are reported on the balance sheet at fair value. Subsequent measurement and changes in fair value will depend on their initial classification. Unrealized gains and losses on financial instruments classified as held for trading are recognized in earnings in the period incurred. Gains and losses on assets available for sale are recognized in other comprehensive income, and are charged to earnings when the asset is derecognized.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless they qualify for the normal sale and purchase exception. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case changes in fair value are recorded in other comprehensive income, to the extent the hedge is effective, and in earnings, to the extent it is ineffective.

Hedging

Section 3865 establishes standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional. At the inception of a hedge, TUSK must formally document the designation of the hedge, the risk management objectives, the hedging relationships between the hedged items and the hedging items and the methods for testing the effectiveness of the hedge. Assessments are made, both at inception of the hedge and on an ongoing basis, to determine if the derivatives designated as hedges are highly effective in offsetting changes in fair values or cash flows of hedged items.

For cash flow hedges that have been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income related to this transaction is immediately reclassified to earnings.

Comprehensive Income

Section 1530 establishes standards for reporting and presenting comprehensive income and other comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources and other comprehensive income comprises revenues, expenses, gains and losses that, in accordance with generally accepted accounting principles, are recognized in comprehensive income but excluded from net income.

Accounting Changes

Effective January 1, 2007, TUSK adopted the revised recommendations of CICA section 1506, "Accounting Changes". Under the revised standards, voluntary changes in accounting policies are permitted only if they result in financial statements that provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. These standards are effective for all changes in accounting policies, changes in accounting estimates and corrections of prior period errors initiated in periods beginning on or after January 1, 2007.

Pending Accounting Pronouncements

Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued the Canadian Institute of Chartered Accountants ("CICA") section 3862, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments for a company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

Sections 3862 and 3863 are effective for TUSK on January 1, 2008. TUSK is currently determining the impact of these additional disclosure requirements.

Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with or consequences of non-compliance, and an explanation of how TUSK is meeting its objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 is effective for TUSK on January 1, 2008. TUSK is currently determining the impact of these additional disclosure requirements.

International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards of Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while the IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy that must be addressed.

TUSK is currently assessing the impact of these new standards on its financial statements.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Depletion and Depreciation Expense

TUSK uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to unproved properties, and estimated future development costs are amortized using the unit-of-production method based on estimated proved reserves. Changes in estimated proved reserves or future development costs have a direct impact on depletion and depreciation expense. Certain costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they would be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expense.

Full Cost Accounting Ceiling Test

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of costs and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment would be charged as additional depletion and depreciation expense.

Asset Retirement Obligations

TUSK records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost. The total future asset retirement obligation is an estimate based on TUSK's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligation is an estimate that is subject to measurement uncertainty and any change would impact the liability.

Income Taxes

The determination of TUSK's income and other tax liabilities require interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by TUSK is accumulated and communicated to the Corporation's management as appropriate to allow timely decisions regarding required disclosure. TUSK's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded, based on their evaluation as of the end of the period covered by the Corporation's annual filings for the most recently completed financial year, that the Corporation's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Corporation is made known to them by others within the Corporation. It should be noted that while TUSK's CEO and CFO believe that the Corporation's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

TUSK's CEO and CFO are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Management has designed internal controls over financial reporting as at December 31, 2007.

In addition, Multiple Instrument 52 - 109 requires CEOs and CFOs to certify they have designed internal controls over financial reporting, or caused it to be designed under their supervision.

There is substantial overlap in systems and controls between the definition of disclosure controls and procedures and internal controls over financial reporting. TUSK has designed controls for this process and has conducted an evaluation that has identified several potential weaknesses in its controls. Based on management's ongoing assessment of the review of the design of internal controls over financial reporting, during the fourth quarter it was noted that due to the limited number of staff at TUSK, it is not feasible to achieve complete segregation of incompatible duties. The limited number of staff has also led the Corporation to identify a weakness with respect to accounting for complex and non-routine accounting transactions as TUSK does not have sufficient number of finance personnel with technical accounting knowledge to address all complex and non-routine accounting matters that may arise. Neither of these weaknesses has resulted in a misstatement in its interim or annual financial statements; however, as there is no guarantee that material misstatement would not be prevented or detected, these items have been classified as material weakness.

Several internal controls over financial reporting have been designed, which provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Management and the Board of Directors reviews are utilized to mitigate the risk of material misstatement in financial reporting and to ensure internal controls remain effective.

It should be noted that a control system, including the Corporation's disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

ADDITIONAL INFORMATION

Additional information regarding TUSK Energy Corporation is available on SEDAR at www.sedar.com or on TUSK's website at www.tusk-energy.com.



BALANCE SHEETS
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As at December 31, 2007 2006
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($000s)
Assets
Current
Cash and cash equivalents - 27,187
Investments (note 3) 258 4,528
Accounts receivable 14,504 18,476
Prepaid expenses and deposits 595 759
Commodity derivatives (note 10) 109 -
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15,466 50,950
Property, plant and equipment (note 4) 295,989 226,410
----------------------------------------------------------------------------
311,455 277,360
----------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 31,163 38,993
Bank loan (note 5) 40,873 -
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72,036 38,993
Future income taxes (note 6) 12,717 8,850
Asset retirement obligations (note 7) 4,166 2,930
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Shareholders' equity
Share capital (note 8) 223,754 227,078
Contributed surplus (note 8) 9,962 6,284
Deficit (11,180) (6,775)
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222,536 226,587
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311,455 277,360
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Commitments and contingencies (notes 8 and 12)
Subsequent events (notes 5, 8 and 14)
See accompanying notes.


On behalf of the Board of Directors,
"signed" "signed"

Dennis D. Chorney James E. Lawson
Director Director


STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT

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Year Ended December 31, 2007 2006
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($000s, except per share amounts)
Revenue
Oil and gas revenue 77,155 16,733
Royalties (net of Alberta Royalty Tax Credit in 2006) (14,951) (3,195)
Unrealized loss on commodity derivatives (note 10) (672) -
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61,532 13,538
Interest income 156 971
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61,688 14,509
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Expenses
Operating 14,700 3,200
Transportation 3,822 1,134
General and administrative 6,076 2,838
Financing charges 1,812 -
Contract termination (note 12) 2,000 -
Stock-based compensation (note 8) 2,346 2,553
Gain on sale of investment (note 3) (614) -
Depletion, depreciation and accretion 40,919 9,534
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71,061 19,259
----------------------------------------------------------------------------
Loss before taxes (9,373) (4,750)
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Income taxes
Current - -
Future (reduction) (2,845) (810)
----------------------------------------------------------------------------
(2,845) (810)
----------------------------------------------------------------------------
Net loss and comprehensive loss (6,528) (3,940)
Deficit, beginning of year (6,775) (2,753)
Change of accounting policies (net of tax of $360)
(note 2) 2,123 -
Normal course issuer bid - (82)
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Deficit, end of year (11,180) (6,775)
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Net loss per share (note 8)
Basic and diluted (0.07) (0.08)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.


STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------------
Year Ended December 31, 2007 2006
----------------------------------------------------------------------------
($000s)
Operating activities
Net loss for the year (6,528) (3,940)
Items not involving cash:
Stock-based compensation 2,346 2,553
Gain on sale of investment (614) -
Depletion, depreciation and accretion 40,919 9,534
Commodity derivatives 672 -
Future tax expense (reduction) (2,845) (810)
Asset retirement obligations expenditures (451) -
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33,499 7,337
Change in non-cash working capital (note 11) (5,389) (1,208)
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28,110 6,129
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Financing activities
Increase in bank loan 40,873 -
Issue of share capital 2,500 50,507
Normal course issuer bid - (493)
Share issue costs (20) (2,964)
Change in non-cash working capital (note 11) 20 -
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43,373 47,050
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Investing activities
Expenditures on property and equipment (109,700) (66,419)
Proceeds on disposition of property and equipment 2,769 -
Proceeds on sale of investment (note 3) 7,367 -
Acquisition - 2,973
Investment - (258)
Change in non-cash working capital (note 11) 894 9,245
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(98,670) (54,459)
----------------------------------------------------------------------------
Decrease in cash and cash equivalents (27,187) (1,280)
Cash and cash equivalents, beginning of year 27,187 28,467
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Cash and cash equivalents, end of year - 27,187
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Interest paid 1,572 -
Taxes paid - -
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See accompanying notes.


NOTES TO FINANCIAL STATEMENTS

Year Ended December 31, 2007 and 2006
(tabular amounts in 000s, except share and per share amounts)


Nature of Business and Basis of Presentation

TUSK Energy Corporation ("TUSK" or the "Corporation") is involved in the exploration, development and production of petroleum and natural gas in Alberta and British Columbia. TUSK was incorporated on September 24, 2004 and commenced operations on November 2, 2004 pursuant to a Plan of Arrangement among TUSK Energy Inc., TKE Energy Trust and TUSK. Under the Plan of Arrangement, certain assets of TUSK Energy Inc. were transferred to TUSK.

TUSK acquired Zenas Energy Corp. ("Zenas") through a Plan of Arrangement on December 31, 2006. TUSK and Zenas were amalgamated on January 1, 2007.

The financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles.

1. Summary of Significant Accounting Policies

(a) Oil and Natural Gas Operations

Capitalized Costs

TUSK follows the full cost method of accounting for oil and natural gas operations, whereby all costs of acquiring, exploring for and developing oil and natural gas reserves are capitalized and accumulated in one cost centre. Such costs include those related to lease acquisition, geological and geophysical activities, rentals on non-producing mineral leases, drilling of productive and non--productive wells, tangible production equipment, asset retirement costs and that portion of general and administrative expenses directly attributable to exploration and development activities.

Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such disposition would alter the depletion and depreciation rate by 20% or more.

Depletion and Depreciation

Depletion and depreciation of oil and natural gas properties is calculated using the unit-of- production method based on production volumes, before royalties, in relation to total proved reserves as estimated by independent engineers. Natural gas volumes are converted to equivalent oil volumes based on a relative energy content of six thousand cubic feet of natural gas to one barrel of oil. In determining costs subject to depletion, TUSK includes estimated future costs to be incurred in developing proved reserves and excludes estimated salvage values. The cost of undeveloped properties is excluded from costs subject to depletion until it is determined that proved reserves are attributable to the property or impairment has occurred.

Ceiling Test

Petroleum and natural gas properties are evaluated at least annually to determine whether the carrying amount in each cost centre is recoverable and that it does not exceed the fair value of the properties in the cost centre.

The carrying amounts are assessed to be recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves plus the lower of cost and market of unproved properties exceeds the carrying amount of the cost centre. When the carrying amount is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties that contain no probable reserves. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free interest rate.

Asset Retirement Obligations

Asset retirement obligations include the abandonment of oil and natural gas wells, the dismantling and removal of tangible equipment such as oil batteries and natural gas facilities and returning the land to its original condition. TUSK recognizes an asset retirement obligation ("ARO") in the period in which it is identified and a reasonable estimate of the fair value can be made. Fair value is estimated based on the present value of the estimated future cash outflows to abandon the asset, discounted at TUSK's credit-adjusted risk-free interest rate. The fair value of the estimated ARO is recorded as a long-term liability with a corresponding amount capitalized to oil and natural gas properties. The amount capitalized is charged to earnings through the depletion and depreciation of oil and gas properties. The ARO liability is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings. Revisions to the original estimated cost or the timing of the cash outflows may result in a change to the ARO. Actual costs incurred to settle an ARO reduce the long-term liability.

Joint Interest

Substantially all of TUSK's exploration and production activities are conducted jointly with other companies. These financial statements reflect only TUSK's proportionate interest in such activities.

(b) Depreciation

Depreciation of office equipment and leasehold improvements is provided for on a declining balance basis at a rate of 30% per annum. One-half of this rate is applied in the year of purchase.

(c) Income Taxes

TUSK uses the asset and liability method of accounting for income taxes. Under this method, income tax assets and liabilities are recorded to recognize future income tax inflows and outflows arising from the recovery or settlement of assets and liabilities at carrying values. Income tax assets are also recognized for the benefits from tax losses and deductions that cannot be identified with particular assets or liabilities, provided those benefits are more likely than not to be realized. Future income tax assets and liabilities are determined based on substantively enacted tax laws and rates that are anticipated to apply in the period of realization.

(d) Flow-Through Shares

Flow-through shares are issued at a fixed price and the proceeds are used to fund qualifying exploration and development expenditures within a defined period. The qualifying deductions funded by the flow-through arrangements are renounced to investors in accordance with Canadian tax legislation. To recognize the foregone tax benefits of flow-through shares, share capital is reduced and a future income tax liability is recorded for the estimated future tax cost of the renounced expenditures, when the expenditures are renounced.

(e) Revenue Recognition

Revenue from the sale of oil and natural gas is recognized based on volumes delivered to customers at contractual delivery points and rates. The costs associated with the delivery, including operating and maintenance costs, transportation and production-based royalty expenses are recognized in the same period in which the related revenue is earned and recorded.

(f) Stock-Based Compensation

Stock-based compensation expense for stock options granted to employees, officers, directors and consultants is accounted for using the fair value method. Under this method, stock-based compensation expense is recorded over the vesting period of the option, based on the fair value of the option on the date of grant. The fair value of each option granted is estimated using the Black-Scholes option pricing model that takes into account on the date of grant the exercise price and expected life of the option, the price of the underlying security, the expected volatility and dividends (if any) on the underlying security and the risk-free interest rate. Options granted to consultants, to the extent unvested, are fair valued on subsequent reporting dates.

Stock-based compensation expense is recorded with a corresponding increase in contributed surplus. Consideration received on the exercise of an option, together with the amount previously charged to contributed surplus, is recorded as an increase in share capital. Stock option forfeitures will be accounted for as they occur.

(g) Per Share Information

Basic per share information is calculated using the weighted average number of common shares outstanding during the year. Diluted per share information is calculated using the treasury stock method, which recognizes the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method assumes that any proceeds received by TUSK upon the exercise of in-the-money stock options plus the unamortized portion of stock-based compensation would be used to buy back common shares at the average market price for the period. The weighted average number of shares outstanding is then adjusted by the net change.

(h) Measurement Uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies. Such estimates primarily relate to unsettled transactions and events at the balance sheet date. Actual results could differ from those estimated.

The amounts recorded for the provision for depletion, depreciation and accretion (including any ceiling test write-down), asset retirement obligation costs and the valuation of undeveloped property costs are based on commodity prices, future costs, management's future development plans and other relevant assumptions. The amounts recorded for stock-based compensation are based on estimates of the expected volatility of TUSK's share price, expected lives of the options, expected future dividend rates and TUSK's risk-free interest rate. The amounts recorded for commodity derivatives are based on expected future commodity prices and volatility. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

(i) Cash and Cash Equivalents

Cash and cash equivalents consist of cash in the bank, less outstanding cheques and cash equivalents with an original maturity of less than three months.

(j) Investments

TUSK classifies its investments as either held-for-trading or available for sale. Held-for- trading investments are fair valued at each balance sheet date with changes in fair value recognized in earnings. Available for sale investments are fair valued at each balance sheet date with changes in fair value recognized in other comprehensive income. As at December 31, 2007, TUSK's investment was classified as held-for-trading.

2. Changes in Accounting Policies

(a) Financial Instruments, Hedging and Comprehensive Income

Effective January 1, 2007, TUSK adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments -- Recognition and Measurement", section 3865, "Hedges" and section 1530, "Comprehensive Income". These new standards have been adopted prospectively. At January 1, 2007, an adjustment was made to increase investments by $2,483,000 and the future income tax liability by $360,000 with a corresponding decrease to the deficit of $2,123,000.

Financial Instruments

CICA section 3855 establishes a framework for classifying and measuring financial instruments. Under this section, financial instruments must be initially recognized at their fair value on the balance sheet date. Each financial instrument must be included in one of five categories set out in the standard: financial assets and liabilities held for trading, financial assets held to maturity, loans and receivables, financial assets available for sale or other financial liabilities. All financial instruments, with the exception of loans and receivables, held to maturity investments and other financial liabilities measured at amortized cost, are reported on the balance sheet at fair value. Subsequent measurement and changes in fair value will depend on their initial classification. Unrealized gains and losses on financial instruments classified as held for trading are recognized in earnings in the period incurred. Gains and losses on assets available for sale are recognized in other comprehensive income and are charged to earnings when the asset is derecognized.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless they qualify for the normal sale and purchase exception. All changes in fair value are included in earnings unless cash flow hedge or net investment accounting is used, in which case changes in fair value are recorded in other comprehensive income, to the extent the hedge is effective, and in earnings, to the extent it is ineffective.

Hedging

Section 3865 establishes standards for when and how hedge accounting may be applied. Hedge accounting continues to be optional. At the inception of a hedge, TUSK must formally document the designation of the hedge, the risk management objectives, the hedging relationships between the hedged items and the hedging items and the methods for testing the effectiveness of the hedge. Assessments are made, both at inception of the hedge and on an ongoing basis, to determine if the derivatives designated as hedges are highly effective in offsetting changes in fair values or cash flows of hedged items.

For cash flow hedges that have been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income related to this transaction is immediately reclassified to earnings.

Comprehensive Income

Section 1530 establishes standards for reporting and presenting comprehensive income and other comprehensive income. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources and other comprehensive income comprises revenues, expenses, gains and losses that, in accordance with generally accepted accounting principles, are recognized in comprehensive income but excluded from net income.

(b) Accounting Changes

Effective January 1, 2007, TUSK adopted the revised recommendations of CICA section 1506, "Accounting Changes". Under the revised standards, voluntary changes in accounting policies are permitted only if they result in financial statements that provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. These standards are effective for all changes in accounting policies, changes in accounting estimates and corrections of prior period errors initiated in periods beginning on or after January 1, 2007.

(c) Pending Accounting Pronouncements

Financial Instruments - Disclosures and Presentation

In December 2006, the Accounting Standards Board ("AcSB") issued CICA section 3862, "Financial Instruments -- Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments for a company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.

Sections 3862 and 3863 are effective for TUSK on January 1, 2008. TUSK is currently determining the impact of these additional disclosure requirements.

Capital Disclosures

In December 2006, the AcSB issued new CICA section 1535, "Capital Disclosures" requiring disclosures regarding an entity's objectives, policies and processes for managing capital. These disclosures include a description of what TUSK manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into TUSK's management of capital, whether the requirements have been complied with, or consequences of non-compliance and an explanation of how TUSK is meeting is objective for managing capital. In addition, quantitative data about capital and whether TUSK has complied with all capital requirements are also required.

Section 1535 is effective for TUSK on January 1, 2008. TUSK is currently determining the impact of these additional disclosure requirements.

(d) International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards of Canada are to converge with IFRS. The AcSB has indicated that Canadian entities will need to begin reporting under IFRS by the first quarter of 2011 with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while the IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy that must be addressed.

TUSK is currently assessing the impact of these new standards on its financial statements.

3. Investments

In 2007, TUSK disposed of its investment in a publicly traded oil and gas company to an unrelated third party for proceeds of $7,367,000. A director of TUSK is also a director of this company (see note 13).

TUSK invested $258,000 in common shares of a private drilling company. The investment is carried at fair value, which approximates cost.



4. Property, Plant and Equipment

----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Oil and natural gas properties 349,878 239,989
Office equipment and leasehold improvements 627 302
----------------------------------------------------------------------------
350,505 240,291
Accumulated depletion and depreciation (54,516) (13,881)
----------------------------------------------------------------------------
295,989 226,410
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The 2007 depletion and depreciation calculation excluded unproved properties of $39,619,000 (2006 - $27,500,000, which does not include $22,000,000 of undeveloped land acquired as a result of the Zenas acquisition, see note 9) and salvage values of $6,064,000 (2006 - $13,400,000). The calculation includes future development costs of $42,258,000 (2006 - $9,500,000).

In 2007, general and administrative costs of $2,584,000 (2006 - $1,552,000) were capitalized to oil and natural gas properties. In 2007, TUSK also capitalized to oil and natural gas properties a total of $1,880,000 (2006 - $1,529,000) comprised of $1,332,000 (2006 - $1,049,000) of stock-based compensation and the related future income taxes of $548,000 (2006 - $454,000).

TUSK performed a ceiling test calculation at December 31, 2007, resulting in the future cash flows from proved plus probable reserves (discounted at 5% per annum) and the lower of cost and market of unproved properties exceeding the carrying value of oil and gas assets. The following table summarizes the future benchmark prices used in the ceiling test:



----------------------------------------------------------------------------
Crude Oil Natural Gas
---------------------------------------------
Year West Texas Edmonton AECO
----------------------------------------------------------------------------
(US$/bbl) (CDN$/bbl) (CDN$/mmbtu)
2008 92.00 91.10 6.75
2009 88.00 87.10 7.55
2010 84.00 83.10 7.60
2011 82.00 81.10 7.60
2012 82.00 81.10 7.60
2013 82.00 81.10 7.60
2014 82.00 81.10 7.80
2015 82.00 81.10 7.97
2016 82.02 81.12 8.14
2017 83.66 82.76 8.31
Thereafter (2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Future prices incorporate a $1.00 US/CDN exchange rate for 2008 and
thereafter.
(2) Escalated at 2% per year thereafter.


5. Bank Loan

TUSK has a $75,000,000 demand credit facility comprised of a $60,000,000 revolving/operating line and a $15,000,000 acquisition/development line. The facility is available through two Canadian chartered banks. The interest rate charged on the facility is payable monthly and is based on a pricing grid that is debt to cash flow sensitive. An increase in TUSK's debt to cash flow ratio will cause an increase in the interest rate. The interest rate is calculated quarterly and ranges from the bank's prime rate to prime rate plus 1.0%. At December 31, 2007, the effective annual interest rate was 6.25% on the revolving/operating line and 6.50% on the acquisition/development line. The credit facility is secured by a $150,000,000 fixed and floating charge debenture on the assets of TUSK and a general assignment of book debts.

At December 31, 2007, TUSK had a $6,000,000 letter of guarantee outstanding (see note 12). The letter of guarantee was released in February 2008.

6. Future Income Taxes

(a) Tax Expense

The provision for income tax differs from the result that would be obtained by applying the combined Canadian federal and provincial tax rate to the net loss before income taxes. The principal reasons for this difference are as follows:



----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Loss before taxes (9,373) (4,750)
Corporate tax rate 32.12% 34.50%
----------------------------------------------------------------------------
Expected income tax reduction (3,011) (1,639)
Add (deduct):
Non-deductible stock-based compensation 754 881
Non-deductible Crown charges - 330
Resource allowance - (292)
Tax rate change (878) (137)
Pool differences 358 -
Non taxable portion of capital gains (99) -
Other 31 47
----------------------------------------------------------------------------
Future tax reduction (2,845) (810)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(b) Future Income Taxes

Future income taxes consist of the following temporary differences:

----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Net book value in excess of tax basis of oil and
natural gas properties (16,950) (12,104)
Asset retirement obligations 1,146 908
Non-capital losses 1,041 -
Share issue costs 1,588 2,334
Commodity derivative 185 -
Other 273 12
----------------------------------------------------------------------------
Future income tax liability (12,717) (8,850)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2007, TUSK had cumulative income tax deductions of approximately $244,000,000 available to reduce future taxable income, including non-capital losses of approximately $3,800,000 that expire in the years 2015 and 2026.

7. Asset Retirement Obligations

TUSK's asset retirement obligations result from net ownership interests in petroleum and natural gas assets, including wellsites, gathering systems and processing facilities. TUSK estimates the net present value of its total asset retirement obligations to be $4,166,000, based on a total undiscounted amount of cash flows required to settle its asset retirement obligations of approximately $10,933,000. A credit-adjusted risk-free rate of 7.5% to 10.0% and an inflation rate of 2.0% were used to calculate the fair value of the asset retirement obligation. These obligations are expected to be paid between 2008 and 2037 and will be funded from general corporate resources at the time of abandonment. The following table reconciles TUSK's asset retirement obligations:



----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of year 2,930 499
Liabilities acquired 331 1,895
Liabilities incurred 650 459
Obligations settled (451) -
Changes in prior period estimates/revisions 422 12
Accretion expense 284 65
----------------------------------------------------------------------------
Balance, end of year 4,166 2,930
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Share Capital

(a) Authorized

An unlimited number of common shares and preferred shares without nominal or par value.



(b) Issued and Outstanding
----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------
($000s)
Balance, January 1, 2007 88,879,722 227,078
Issue of flow-through common shares 1,562,500 2,500
Share issue costs - (20)
Income tax effect of share issue costs - 6
Income tax effect of flow-through shares - (5,810)
----------------------------------------------------------------------------
Balance, December 31, 2007 90,442,222 223,754
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------
($000s)
Balance, January 1, 2006 40,415,371 84,182
Issued for the purchase of Zenas (note 9) 37,204,118 98,610
Issued for cash
Common shares 7,310,000 29,971
Flow-through common shares 3,890,000 20,034
Exercise of stock options 223,333 502
Normal course issuer bid (163,100) (411)
Exercise of stock options - -
Reclassification of contributed surplus - 189
Share issue costs - (2,964)
Income tax effect of share issue costs - 998
Income tax effect of flow-through shares - (4,033)
----------------------------------------------------------------------------
Balance, December 31, 2006 88,879,722 227,078
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) Share Capital Offerings

In December 2007, TUSK completed a non-brokered private placement of 1,562,500 flow-through common shares at a price of $1.60 per share for proceeds of $2,500,000. Pursuant to the terms of the offering, TUSK committed to incur $2,500,000 on expenditures that qualify as Canadian Exploration Expense ("CEE") for income tax purposes and to renounce the CEE to the flow-through share subscribers effective December 31, 2007. The related estimated future tax cost will be recorded on the date of renouncement, which occurred during the first quarter of 2008. TUSK has until December 31, 2008 to incur the qualifying expenditures. No qualifying expenditures were incurred in 2007.

In June 2006, TUSK completed a prospectus offering comprised of 7,310,000 common shares at a price of $4.10 per share for proceeds of $29,791,000 and 3,890,000 flow-through common shares at a price of $5.15 per share for proceeds of $20,033,500. Pursuant to the terms of the offering, TUSK renounced income tax deductions of $20,033,500 to the flow-through share subscribers effective December 31, 2006. The related estimated future tax cost of $5,810,000 was recorded in 2007, the year the renouncement occurred.

(d) Per Share Amounts

The table below summarizes the weighted average number of common shares used in calculating net earnings (loss) per share.



----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Weighted average number of common shares
outstanding - basic and diluted 88,931,092 46,851,447
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The weighted average number of shares outstanding was not increased for outstanding stock options for purposes of calculating diluted loss per share as the effect would be anti-dilutive.

(e) Stock Options

TUSK has a stock option plan (the "Plan") whereby options to purchase common shares may be granted to directors, officers, employees and certain other persons providing consulting services to TUSK on an ongoing basis. All options granted will be in compliance with the requirements of any stock exchange on which TUSK's shares are listed. Options granted under the Plan will have an exercise price that is not less than the price allowed by regulatory authorities, will be non-transferable and will be exercisable for a period not to exceed 10 years. The maximum number of common shares reserved for issuance under the Plan, from time to time, cannot exceed 10% of the common shares then outstanding. The number of common shares reserved for issuance to any individual director, officer or employee cannot exceed 5% of the issued and outstanding common shares. Options may be exercised no later than 90 days following cessation of the optionee's position with TUSK, provided that if the cessation of office, directorship, employment or consulting relationship was by reason of death, the option may be exercised up to 12 months after such death, subject to the expiry date of the options.

The following table sets forth a reconciliation of TUSK's stock option plan for the two years ended December 31, 2007:



----------------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
----------------------------------------------------------------------------
($/share)
Outstanding, January 1, 2007 8,866,000 3.20
Granted 2,177,500 1.63
Forfeited (2,561,667) 3.15
----------------------------------------------------------------------------
Outstanding, December 31, 2007 8,481,833 2.81
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding, January 1, 2006 3,575,000 3.24
Granted 5,676,000 3.18
Forfeited (161,667) 4.40
Exercised (223,333) 2.25
----------------------------------------------------------------------------
Outstanding, December 31, 2006 8,866,000 3.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The following table summarizes stock options outstanding at December 31,
2007:

----------------------------------------------------------------------------
Weighted
Weighted Number of Average Number of
Average Options Remaining Options
Exercise Price Outstanding Contractual Life Exercisable
----------------------------------------------------------------------------
($/share) (years)
1.50 - 2.00 2,110,000 4.6 -
2.01 - 3.00 4,128,500 3.4 3,158,157
3.01 - 4.00 736,666 3.6 256,662
4.01 - 4.95 1,506,667 2.9 1,186,667
----------------------------------------------------------------------------
8,481,833 3.6 4,601,486
----------------------------------------------------------------------------


(f) Stock-Based Compensation

The fair value of each option granted was estimated on the date of grant using the Black- Scholes options pricing model. The weighted average fair value of the options granted and the assumptions used in the model are set forth in the table below.



----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Fair value of options granted ($/share) 0.68 1.46
Risk-free interest rate (%) 3.4 3.1
Expected life (years) 4.0 5.0
Expected volatility (%) 54 51
Expected dividend yield (%) - -
----------------------------------------------------------------------------


(g) Contributed Surplus

The following table reconciles TUSK's contributed surplus:



----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Balance, beginning of year 6,284 2,871
Stock-based compensation expensed 2,346 2,553
Stock-based compensation capitalized 1,332 1,049
Transfer to share capital on exercise of options - (189)
Balance, end of year 9,962 6,284
----------------------------------------------------------------------------


9. Acquisition of Zenas Energy Corp.

On December 31, 2006, TUSK acquired all of the issued and outstanding shares of Zenas Energy Corp. ("Zenas") pursuant to a plan of arrangement. The previous shareholders of Zenas received 1.033 shares of TUSK for each outstanding Zenas share. TUSK and Zenas amalgamated on January 1, 2007 and continued as TUSK. The transaction was accounted for as a business combination using the purchase method.



----------------------------------------------------------------------------
($000s)
Cost of acquisition:
TUSK shares issued (note 8) 98,610
Transaction costs 1,530
----------------------------------------------------------------------------
100,140
----------------------------------------------------------------------------
Allocated at estimated fair values:
Cash 4,503
Accounts receivable 4,588
Prepaid expenses 366
Property, plant and equipment 114,555
Accounts payable and accrued liabilities (14,303)
Future income taxes (7,674)
Asset retirement obligations (1,895)
----------------------------------------------------------------------------
100,140
----------------------------------------------------------------------------


10. Financial Instruments

(a) Commodity Price Risk Management

In September 2007, TUSK entered into a crude oil hedging transaction for 1,000 bbls/d for the period January 1 to December 31, 2008. This transaction consisted of the purchase of a US$65.00/bbl put option at a cost of $781,000. TUSK would have received $109,000 if the contract was settled on December 31, 2007. This amount has been recorded on the balance sheet as a current asset.

(b) Credit Risk

TUSK's accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. To mitigate this risk, TUSK sells its production to a number of purchasers under normal industry sale and payment terms.

(c) Foreign Currency Exchange Risk

TUSK is exposed to foreign currency fluctuations as commodity prices received are referenced in U.S. dollar denominated prices.

(d) Fair Value of Financial Instruments

TUSK's financial instruments recognized in the balance sheet consist of accounts receivable, accounts payable and accrued liabilities and bank indebtedness. The fair value of these financial instruments approximates their carrying amounts due to their short terms to maturity or the indexed rate of interest on the bank indebtedness.

(e) Interest Rate Risk

Interest rate risk exists principally with respect to TUSK's bank loan that bears interest at floating rates.

11. Cash Flow Information

Changes in non-cash working capital were as follows:



----------------------------------------------------------------------------
($000s) 2007 2006
----------------------------------------------------------------------------
Changes in non-cash working capital balances:
Accounts receivable 3,972 (4,982)
Prepaid expenses and deposits 164 (210)
Cash paid for commodity derivative (781) -
Accounts payable and accrued liabilities (7,830) 13,229
----------------------------------------------------------------------------
(4,475) 8,037
----------------------------------------------------------------------------
Changes in non-cash working capital related to:
Operating activities (5,389) (1,208)
Financing activities 20 -
Investing activities 894 9,245
----------------------------------------------------------------------------
(4,475) 8,037
----------------------------------------------------------------------------


12. Commitments and Contingencies

(a) Conroy Area Work Commitment

Under a farm-in agreement, TUSK committed to drill, complete and tie-in or abandon 40 wells, complete and tie-in or abandon six standing wells, construct approximately 6.5 miles of gathering system as well as a gas plant and sales line capable of processing at least 10 mmcf/d. Fifteen of the new drill wells and the gathering system are required to be completed by April 30, 2008, while the gas plant and sales line must be completed by June 30, 2008. The remainder of the commitment is required to be completed by April 30, 2009. At December 31, 2007, this commitment was secured by a $6,000,000 letter of guarantee. The letter of guarantee was released in February 2008.

In March 2008, TUSK entered into an agreement to swap its interests in the Elleh area for certain interests in the Conroy area plus $12,000,000. This transaction, which is expected to close on March 31, 2008, effectively cancels the above-mentioned farm-in and the related commitments (see note 14).

(b) Drilling Rigs

During the fourth quarter of 2007, TUSK entered into an agreement to reduce its commitment regarding the use of two drilling rigs. The agreement, which included the payment of $2,000,000, allowed TUSK to terminate its obligation with respect to one rig and reduce the obligation regarding the second rig. As of December 31, 2007, TUSK is obligated to utilize one drilling rig for a minimum of 165 days per year over a four-year period or pay a standby fee of $6,800 per day.

(c) Office Space

TUSK has a lease commitment for office space that expires on January 31, 2013, which is summarized in the table below.



----------------------------------------------------------------------------
Year Amount
----------------------------------------------------------------------------
($000s)
2008 513
2009 536
2010 540
2011 540
2012 540
2013 44
----------------------------------------------------------------------------


(d) Dispute

In May 2007, TUSK was served with a statement of claim demanding payment of $1,067,000 plus interest. The action is a result of payments TUSK withheld from a contractor responsible for the construction of a capital project that required extensive repairs after its initial completion. The repairs also resulted in lengthy delays before the project could be put in service. In July 2007, TUSK filed a statement of defence and a counterclaim for repair costs incurred and lost revenue totaling $6,800,000. The amounts paid, or received, by TUSK to settle this dispute will be recorded in the period the amounts become known.

13. Related Party Transactions

An officer of TUSK is a director and significant shareholder of a private company that provides project management and systems support services to TUSK. In 2007, this company was paid $241,000 (2006 - $127,000). Of this amount, $139,000 was charged to general and administrative expenses, $91,000 to operating expenses and $11,000 to property and equipment. December 31, 2007 accounts payable and accrued liabilities includes $34,000 regarding these services.

A company controlled by an officer of TUSK holds a royalty on certain TUSK operated properties. In 2007, royalties of $217,000 were paid to this company (2006 - $102,000). All of the payments made in 2007 were charged to royalties. December 31, 2007 accounts payable and accrued liabilities includes $26,000 regarding these royalties.

Three TUSK directors are also directors and minority shareholders of a private oil and gas company. In 2007, TUSK provided the services of an employee to this company on a cost recovery basis. The recovery was $61,000 and is included in general and administrative expenses. December 31, 2007 accounts receivable includes $24,000 due from this company.

A TUSK director is also a director of a publicly traded oil and gas company in which TUSK held a significant interest (see note 3). TUSK disposed of its interest in this company during the second quarter of 2007. Prior to the disposition, TUSK provided accounting and administrative services to the company for a fee of $6,000 per month and the recovery of certain out-of-pocket costs. In 2007, TUSK received a total of $50,000 (2006 - $80,000) from this company, all of which is included in general and administrative expenses.

The above-mentioned transactions were provided at commercial rates and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

14. Subsequent Event

On March 7, 2008, TUSK announced that it had entered into an agreement to swap its interests in the Elleh area for certain interests in the Conroy area plus $12,000,000. The transaction is expected to be completed by March 31, 2008. The cash portion of the transaction will be adjusted to reflect an effective date of January 1, 2008 and other purchase price adjustments typical to a transaction of this nature. After the transaction, TUSK will have no interests in the Elleh area. At Conroy, TUSK will hold and operate a 100% working interest in the two gas plants and 85 kilometres of pipelines, close to 100% working interest in 125,000 acres of mineral rights and a royalty interest in 32,000 acres of mineral right.



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

Abbreviations
bbl barrel
bbls/d barrels per day
bcfe billion cubic feet equivalent
boe barrels of oil equivalent
boe/d barrels of oil equivalent per day
GJ gigajoule
mbbls thousand barrels of oil
mboe thousand barrels of oil equivalent
mcf thousand cubic feet
mcf/d thousand cubic feet per day
mmboe million barrels of oil equivalent
mmcf million cubic feet
mmcf/d million cubic feet per day

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In addition to the forward-looking statements contained in the Management's Discussion and Analysis, this news release contains forward-looking statements with respect to TUSK and its operations and may contain reserves, resources and cash flow estimates, drilling plans, debt levels, production expectations, finding and development objectives, opinions, forecasts, projections, guidance and other statements that are not statements of fact. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, it can provide no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this release include, but are not limited to, the lack of precision around estimates of reserves and resources, performance of the Corporation's oil and gas properties, volatility in market prices for oil and gas, estimations of future costs, geological, technical, drilling and processing problems, changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry, and such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Corporation, including in the Management's Discussion and Analysis and the Annual Information Form. The reader is cautioned that the foregoing list of important factors is not exhaustive. These statements speak only as of the date of this news release and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, other than as required by law. The forward-looking statements contained in this release are expressly qualified by this cautionary statement.

In particular, the estimate of the discovered gas initially in place and the remaining recoverable resources are based on assumptions relating to wells drilled, production in the area and geological and seismic interpretation. There is no certainty that these properties will be commercially viable to produce any portion of the resources that have not been categorized as reserves at this point. The contingencies that currently prevent the classification of certain of the resources as reserves are future drilling and well productivity results, capital costs required to render production economic, applicable regulatory considerations, commodity pricing and other relevant factors. Further, the aggregate of the exploration and development costs incurred in 2007 and the change during 2007 in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year.

Contact Information

  • TUSK Energy Corporation
    John Rooney
    CEO
    (403) 264-8875
    or
    TUSK Energy Corporation
    Michael Makinson
    CFO
    (403) 264-8875
    Website: www.tusk-energy.com