Fortress Energy Inc. Announces 2006 Year End Financial Statements, Reserves and First Quarter Operations Update



    CALGARY, April 2 /CNW/ - Fortress Energy Inc., FEI:TSX ("Fortress" or the
"Corporation") is pleased to announce its 2006 year end results and an update
of its first quarter 2007 operations. The 2006 year can be characterized as a
transition year where it has established a new foundation from which we can
achieve significant growth.

    Highlights of the 2006 year are as follows:

    Significant Transactions

    
    On March 10, 2006 Fortress sold:
        -   3.4 million boe's Proven Reserves and
        -   4.7 million boe's of Proven and Probable Reserves
    And realized proceeds of $91.2 million cash consideration representing
    average disposition prices of:
        -   $26.83 per boe Proven and
        -   $19.41 per boe Proven and Probable Reserves.
    The proceeds of the dispositions were sheltered from income tax by
    utilizing surplus tax pools.

    On November 15, 2006, Fortress acquired a private company, Marauder
    Resources West Coast Inc. for total consideration of $40.5 million
    Marauder consisted of:
        -   2.1 million boe's Proven reserves
        -   3.1 million boe's Proven and Probable Reserves
        -   66,000 acres of land
        -   $35 million tax pools.
    The acquisition represented an acquisition cost of:
        -   $19.54 per boe Proven and
        -   $13.15 per boe Proven and Probable Reserves.
    

    The acquisition provides Fortress with a new focus area that is 100%
natural gas, operated, high working interest, significant development
potential, and a number of exploration opportunities resulting in a two year
drilling inventory on Corporation owned lands. The acquisition is consistent
with the Corporation's "acquire and exploit" strategy.

    Reserves (as Evaluated by Sproule Associates Limited based on forecast
    prices and costs)

    At the year end the Corporation had established Total Proven Reserves of
2.8 million boe's and Proven and Probable Reserves of 4.3 million boe's
comprised of 98% natural gas reserves and 2% oil and natural gas liquids.
    Based on average production in January 2007 of 785 boe/d, the reserve
life index is 15.0 years.
    The Net Present Value before income tax of Proven and Probable Reserves
using a 10% discount rate is $64.2 million.
    The Pre-Tax Net Asset Value (less cash paid out to shareholders pursuant
to the Arrangement) is estimated to be $5.82 per share using Proven and
Probable pre-tax reserve values, a 10% discount rate and an undeveloped land
value of $4.6 million based on an evaluation performed by Independent Land
Evaluations Inc.

    First Quarter 2007 Operations Update and Outlook

    The Corporation drilled 11 development wells, 3 exploration wells and
performed 7 recompletions all in the Ladyfern area. The capital expenditure
program has resulted in 8 new producing natural gas wells raising total
combined production to approximately 1000 boe/d. The Corporation is upgrading
the processing capability at the EnCana-owned Ladyfern gas plant by adding
refrigeration to allow the processing of greater volumes of liquids rich gas.
    Through its exploration efforts the Corporation has identified two new
gas accumulations at Mearon South and Square Creek areas. At Square Creek the
Corporation successfully completed an existing wellbore testing 1.5 mmcf/d and
800 mcf/d from two separate zones. Following this initial success two
follow-up locations were drilled, testing gas at rates of 4.6 mmcf/d and 1.5
mmcf/d respectively in the same zone. Fortress owns a 50% working interest in
the wells and has a 26 gross (13 net) sections of land in the area. The
Corporation has identified 6 additional follow-up location on its lands, which
it plans to drill in the 2007/8 winter drilling season.
    At Mearon South the Corporation owns an interest in 14 gross (4.5 net)
sections of land and has re-completed two wells drilled in 2006, one of which
tested gas rates of 400 mcf/d establishing the existence of a new pool.
Further drilling in the area is planned in 2008.
    The Corporation owns an interest in 4 gross (2 net) sections of land in
the Velma area, and owns a 50% interest in two Blue Sky wells capable of
producing in excess of net 200 boe/d production. The Corporation is currently
building a pipeline to tie the wells into the Ladyfern facility, with the
completion expected by the end of April, 2007.

    Reorganization

    At the Special General Meeting of Shareholders held on February 15, 2007,
Shareholders voted 99% in favor of the Arrangement and the reorganization of
the Corporation which was preceded with court approval of the Arrangement on
February 20, 2007. Under the Arrangement, shareholders holding 63,400,000
elected to receive cash and such Shareholders received pro-rated to the
maximum of $30,000,000 of available cash on the basis of $1.30 per share. The
balance was satisfied, along with shareholders who elected or were deemed to
elect to receive the share consideration, by the issuance of one share of
Fortress Energy Inc. for every five Signal shares held. As a result of the
reorganization Fortress has 13,307,815 shares issued and outstanding. As part
of the Arrangement and reorganization of SignalEnergy Inc., the business and
operations of the Corporation carries on under the name Fortress Energy Inc.

    Reserves Data

    The Corporation's Oil and Gas Reserves and Net Present Value of Future
Net Revenues based on forecast prices and costs as of December 31, 2006 are as
follows: (please refer to Annual Information Form filed on SEDAR at
www.sedar.com for additional detailed disclosures):

    
                       Summary of Oil and Gas Reserves
                           As of December 31, 2006
                          Forecast Prices and Costs

                                  Reserves
    -------------------------------------------------------------------------
                   Light/Medium Oil      Natural Gas             NGL
                        (MBbl)              (MMcf)              (MBbl)
                  ------------------  ------------------  ------------------
                   Gross       Net     Gross       Net     Gross       Net
                  --------  --------  --------  --------  --------  --------

    Proved
      Developed
       Producing       6.2       4.9   8,121.7   6,992.4      56.0      44.6
      Developed
       Non-
       Producing         -         -   1,581.4   1,341.9         -         -
      Undeveloped        -         -   7,101.2   6,500.3         -         -
                  --------  --------  --------  --------  --------  --------
    Total Proved       6.2       4.9  16,804.3  14,834.5      56.0      56.0
                  --------  --------  --------  --------  --------  --------
    Probable           3.0       2.4   8,428.1   7,542.0      25.7      20.5
                  --------  --------  --------  --------  --------  --------
    Total Proved
     plus Probable     9.1       7.3  25,232.3  22,376.5      81.7      65.1
                  --------  --------  --------  --------  --------  --------


             Summary of Net Present Values of Future Net Revenue
                           As of December 31, 2006
                          Forecast Prices and Costs

    -------------------------------------------------------------------------
                                         Before Income Tax
                                           Discounted At
                      -------------------------------------------------------
                           0%         5%        10%        15%        20%
                          (M$)       (M$)       (M$)       (M$)       (M$)
                      -------------------------------------------------------
    Proved
      Developed
       Producing        40,027.4   31,974.7   27,155.3   23,869.9   21,445.8
      Developed
       Non-Producing     7,622.7    6,706.6    5,971.0    5,370.1    4,871.9
      Undeveloped       19,892.0   15,429.1   12,113.0    9,594.3    7,645.2
                      -------------------------------------------------------
    Total Proved        67,542.1   54,110.4   45,239.2   38,834.4   33,962.9
                      -------------------------------------------------------
    Probable            35,705.4   25,320.2   19,031.5   14,810.8   11,813.1
                      -------------------------------------------------------
    Total Proved
     plus Probable     103,247.5   79,430.6   64,270.7   53,645.2   45,776.0
                      -------------------------------------------------------


    -------------------------------------------------------------------------
                                         After Income Tax
                                           Discounted At
                      -------------------------------------------------------
                           0%         5%        10%        15%        20%
                          (M$)       (M$)       (M$)       (M$)       (M$)
                      -------------------------------------------------------
    Proved
      Developed
       Producing        40,027.4   31,974.7   27,155.3   23,869.9   21,445.8
      Developed
       Non-Producing     7,622.7    6,706.6    5,971.0    5,370.1    4,871.9
      Undeveloped       14,737.2   11,979.2    9,611.8    7,698.0    6,166.1
                      -------------------------------------------------------
    Total Proved        62,387.4   50,660.4   42,738.0   36,938.1   32,483.8
                      -------------------------------------------------------
    Probable            24,900.2   17,521.1   13,064.4   10,086.2    7,980.9
                      -------------------------------------------------------
    Total Proved
     plus Probable      87,287.6   68,181.5   55,802.4   47,024.3   40,464.7
                      -------------------------------------------------------
    Notes:
    (1) The Sproule Report estimates Fortress' share of future capital
        expenditures necessary to achieve the estimated present worth of
        future net cash flows based on escalating costs from Proved Reserves
        to be $15,595,000 and Proved and Probable Reserves to be $23,165,000.



                    MANAGEMENT'S DISCUSSION AND ANALYSIS
    

    Management's discussion and analysis ("MD&A") should be read in
conjunction with the consolidated financial statements of Fortress Energy Inc.
("Fortress" or the "Company", formerly known as SignalEnergy Inc.) for the
years ended December 31, 2006 and 2005. The consolidated financial statements
have been prepared in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). All tabular amounts in the following discussion are in
thousands of Canadian dollars unless otherwise noted.
    This MD&A provides management's analysis of Fortress' historical
financial and operating performance based on information currently available.
Actual results will vary from estimates and variances may be significant.
Historical results are not indicative of future performance. This MD&A is
dated April 2, 2007.

    Non-GAAP Measurements

    Management uses the term "funds from operations" to analyze operating
performance and leverage, determined as cash flow from operating activities
adjusted for changes in non-cash working capital balances. While widely used
in the oil and gas industry, funds from operations does not have any
standardized meaning prescribed by GAAP and therefore it may not be comparable
to the calculation of similar measures for other entities. The Company
considers funds from operations to be a key measure since it demonstrates the
Company's ability to generate the cash necessary to fund future growth and
repay debt. Funds from operations as presented is not intended to represent
operating cash flow or operating profits for the period, nor should it be
viewed as an alternative to cash flow from operating activities, net income
(loss), or other measures of financial performance calculated in accordance
with GAAP.
    Management also uses certain key performance indicators ("KPI's") and
industry benchmarks such as "operating netbacks" and funds from operations/boe
to analyze financial and operating performance. These KPI's and benchmarks as
presented do not have any standard meaning prescribed by GAAP and therefore
may not be comparable with the calculation of similar measures for other
entities.

    BOE Presentation

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

    Forward Looking Statements

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

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


    HIGHLIGHTS

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

                                                            2006      2005
    -------------------------------------------------------------------------
    Sales volume:
      Natural gas (mcf/d)                                    2,744     5,585
      Oil and NGL's (bbl/d)                                     95       245
      Equivalence at 6:1 (boe/d)                               553     1,176
    Sales price:
      Natural gas ($/mcf)                                     6.95      8.93
      Oil and NGLs ($/bbl)                                   59.94     61.15
      Equivalence at 6:1 ($/boe)                             44.92     55.16
    Financial: (000's)
      Petroleum and natural gas sales                        9,090    23,670
      Net income                                             8,088     2,086
      Net income per share - basic and diluted                0.11      0.04
      Funds from operations                                  2,614    10,933
      Total assets                                         115,654   118,639
      Capital expenditures                                   4,986    11,373
    Net working capital (deficiency)                        37,712   (29,480)
    Weighted average shares outstanding - basic             74,494    55,077
    Weighted average shares outstanding - diluted           74,494    55,370
    Wells drilled:
      Gross                                                      2        32
      Net                                                      0.7        20
      Success rate (%)                                         100        97
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    CORPORATE OVERVIEW

    In February 2006, the Company sold its Ferrier, Carrot Creek, Kaybob and
Redwater properties for net cash proceeds of approximately $91.2 million,
after adjustments. The Company retained its assets in the Chigwell, Bashaw and
Buick Creek areas. After the completion of the sale, the Company announced its
intention to distribute the net proceeds (after repayment of existing
indebtedness) to shareholders.
    On March 27, 2006, Pearl Exploration and Production Ltd. announced its
intention to make an offer (the "Offer") to acquire all of the issued and
outstanding shares of Fortress. The Offer was withdrawn on June 22, 2006 due
to a lack of support by Fortress shareholders.
    In consideration of its fiduciary obligations to maximize shareholder
value, the Company's Board of Directors decided to defer the decision of a
distribution so that it could consider other strategic alternatives. In this
regard, the Company engaged FirstEnergy Capital Corporation ("FirstEnergy") as
its independent financial advisors to consider alternative transactions which
could return greater value to shareholders than the proposed distribution and
the retention or future sale of the remaining operating entity or properties.
    On November 8, 2006, the Company announced that it had entered into an
agreement to acquire Marauder Resources West Coast Inc. ("Marauder") and
proposed to proceed with a plan of arrangement to reorganize its share
capital. The consideration for the acquisition of Marauder was $15.0 million
cash, 16.3 million common shares of Fortress and the assumption of
approximately $8.2 million of indebtedness. Marauder's production at the time
of the acquisition was approximately 440 boe/d with an additional 200 boe/d
behind pipe. In addition, Marauder held 14,000 net acres of undeveloped land
with an average working interest of 54% and options to earn an additional
52,800 gross acres of undeveloped lands with up to 40 development drilling
locations with access to production facilities. Marauder's lands are all
located in the Ladyfern area straddling the borders of Alberta and British
Columbia.
    In conjunction with the acquisition of Marauder, the Company proposed an
arrangement with its shareholders whereby existing shareholders could elect to
receive one share of Fortress (a newly formed Alberta company) for every five
shares of Signal held, $1.30 cash for each Signal share or a combination
thereof provided that the maximum amount of cash to be paid out to
shareholders was $30 million.
    Following the completion of the arrangement and the acquisition of
Marauder, Fortress has approximately 13.3 million common shares outstanding.
The Company's 2007 capital budget is $15 million which will fund the drilling
of 10 infill development wells and 5 exploration wells in the Ladyfern area,
all expected to be drilled by the end of the first quarter of 2007.

    
    QUARTERLY HIGHLIGHTS

    -------------------------------------------------------------------------
                                 2006                        2005
                        Q4     Q3     Q2     Q1     Q4     Q3     Q2     Q1
    -------------------------------------------------------------------------
    Sales volume:
      Natural gas
       (mcf/d)        3,010  1,777  1,833  4,366  6,253  5,990  5,100  4,929
      Oil and NGL's
       (bbl/d)           20     35     69    263    430    242    170    145
      Equivalence at
       6:1 (boe/d)      522    331    375    991  1,472  1,240  1,020    966
    Sales price:
      Natural gas
       ($/mcf)         7.19   5.31   6.04   7.86  11.48   9.22   7.25   6.93
      Oil and NGLs
       ($/bbl)        57.19  65.43  57.08  59.62  65.95  62.88  56.59  47.86
      Equivalence at
       6:1 ($/boe)    44.13  35.46  40.08  50.45  68.31  56.82  45.67  42.53
    Benchmark prices:
      AECO bench
       ($/gj)          6.53   5.39   5.71   7.19  10.84   8.76   6.98   6.49
      Edmonton Par
       ($/bbl)        65.24  80.26  80.43  68.90  72.18  77.80  65.80  61.07
    Financial ($000's):
      Petroleum and
       natural gas
       sales          2,149  1,079  1,362  4,500  9,250  6,483  4,238  3,699
      Net income
       (loss)        (5,635)   (13)   270 13,440    952    536     85    513
      Net income
       (loss) per
       share -
       basic and
       diluted ($)    (0.08) (0.00)  0.00   0.19   0.02   0.01      -   0.01
    Funds from
     operations       1,089    821     17    687  4,223  3,141  2,208  1,361
    Operating costs
     ($/boe)           5.73   8.51  13.13  13.07  12.81   7.20   7.78   7.25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In February 2006, the Company sold its interest in certain oil and gas
assets. The sale resulted in substantially lower sales volumes in the first
three quarters of 2006 when compared to the same period in 2005. Effective
November 15, 2006, the Company acquired Marauder Resources West Coast Inc.
("Marauder") which was producing at a rate of 440 boe/d at the time of
acquisition. Significant increases in sales volumes were realized in the first
and third quarters of 2005 with the acquisitions of Predator Exploration Ltd.
("Predator") and a private oil and gas company in January, and with the
acquisition of Goose River Resources Ltd. ("Goose River") in August. These
three acquisitions added production gains of approximately 750 boe/d at the
time of acquisition. In addition to improved sales volumes throughout 2005,
the Company benefited from significantly increased commodity prices in the
third and fourth quarters of 2005.
    The Company recorded a net loss of $13,000 and a net loss of $5,635,000
in the third and fourth quarters of 2006, respectively, compared to net income
in the previous six calendar quarters. The net loss recorded in the fourth
quarter of 2006 was attributed to a goodwill impairment charge of $4,548,000
and additional costs incurred to fulfill the Company's commitments to the
purchaser of the oil and gas properties that were sold in the first quarter of
2006. The net loss realized in the third quarter was mainly the result of
decreased natural gas prices realized by the Company. Net income for the
second quarter of 2006 is attributed to a future income tax recovery of
$1,068,000 recorded in that period. Net income for the first quarter of 2006
included a gain on the sale of oil and gas properties of $20,087,000, before
adjustments. Net income for the first quarter of 2005 is attributable to the
recognition of a portion of previously unrecognized tax assets as a result of
a 2004 flow-through share renouncement for which the income tax effects were
recorded in March 2005. Net income in the fourth quarter of 2005 improved over
the previous quarter due to record commodity prices and increased sales
volumes resulting from the Goose River acquisition and the Company's drilling
program which included the drilling of 31 gross wells (19 net wells) in the
last half of 2005.
    The Company recorded funds from operations in the fourth quarter of 2006
of $1,089,000 compared to $821,000 for the prior quarter. These increases from
the funds provided from operations for the second quarter of 2006 of $17,000
reflects decreases in royalties, operating expenses, and general and
administrative expenses in the third and fourth quarters of 2006. Funds from
operations in the second quarter of 2006 reflects substantially lower
operating netbacks and certain one-off charges related to the sale of oil and
gas properties and the failed Pearl offer. Funds from operations in the first
quarter of 2006 decreased from the prior quarter due to the sale of oil and
gas properties and substantially lower natural gas prices realized. Funds from
operations improved throughout 2005 as a result of production increases and
record commodity prices realized by the Company.

    
    FOURTH QUARTER HIGHLIGHTS

    -------------------------------------------------------------------------
                                      Three months ended  Three months ended
                                       December 31, 2006   December 31, 2005
    -------------------------------------------------------------------------
                                       ($000's)    $/boe   ($000's)    $/boe
    -------------------------------------------------------------------------

    Petroleum and natural gas sales      2,149     44.13     9,250     68.31
    Royalties (net of ARTC)                (24)    (0.49)   (2,036)   (15.03)
    Operating expenses                    (279)    (5.73)   (1,733)   (12.80)
    -------------------------------------------------------------------------
                                         1,846     37.91     5,481     40.48
    -------------------------------------------------------------------------
    Funds from operations                1,089     22.36     4,223     31.18
    -------------------------------------------------------------------------
    

    The Company's sales volume decreased in the fourth quarter of 2006 to 522
boe/d from 1,472 boe/d for the fourth quarter of 2005. This decrease is
primarily due to the sale of oil and gas properties in the first quarter of
2006. Marauder added sales volumes of 460 boe/d for 46 days from the closing
of this acquisition - or 230 boe/d of additional production in the fourth
quarter of 2006.
    Petroleum and natural gas sales decreased to $2,149,000 for the fourth
quarter of 2006 from $9,250,000 for the comparable period in 2005. This
decrease is due to substantially lower commodity prices and the sale of oil
and gas properties, as previously noted.
    Royalties decreased substantially in the fourth quarter of 2006 due to
previously unrecorded Alberta Royalty Tax Credits of approximately $426,000.
When adding back this previously unrecorded amount, royalties as a percentage
of sales is 20.9% for the fourth quarter of 2006 which is consistent with
22.2% recorded for the fourth quarter of 2005. In addition, the Redwater
property, which was sold in the first quarter of 2006, had a substantially
higher royalty rate due to substantial freehold and overriding royalties
charged on this property, which typically carry a higher charge than crown
royalties. The majority of the properties retained from the sale are on crown
lands.
    Operating expenses decreased to $279,000 for the fourth quarter of 2006,
or $5.73/boe, compared to $1,733,000, or $12.80/boe for the fourth quarter of
2005. This decrease is due to the sale of oil and gas properties in the first
quarter of 2006. Particularly, the Redwater property, posted higher than
average operating costs due to additional costs incurred for compressor and
pump jack rentals, trucking, salt water disposal, and oil treating fees at
third party facilities.
    Funds from operations, decreased to $1,089,000 for the fourth quarter of
2006 compared to $4,223,000 for the fourth quarter of 2005 as a result of
lower commodity prices and the sale of oil and gas assets in the first quarter
of 2006. In addition, the Company incurred significant severance and retention
costs and legal and advisory fees related to the downsizing of the Company as
a result of the sale of oil and gas properties and an unsuccessful takeover
bid for the Company in the first quarter of 2006.

    
    RESULTS OF OPERATIONS

    Sales

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Sales volume:
      Natural gas (mcf/d)                                    2,744     5,585
      Oil and NGL's (bbl/d)                                     95       245
      Equivalence at 6:1 (boe/d)                               553     1,176
    Sales price:
      Natural gas ($/mcf)                                     6.95      8.93
      Oil and NGLs ($/bbl)                                   59.94     61.15
      Equivalence at 6:1 ($/boe)                             44.92     55.16
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Revenues from petroleum and natural gas sales decreased substantially
from 2005 levels, as a result of the sale of oil and gas assets in the first
quarter of 2006 and lower natural gas prices realized by the Company. Sales
improved in the fourth quarter of 2006 over the prior two quarters due to the
acquisition of Marauder which added gas sales of 450 boe/d from the closing.
    Average sales volumes for 2006 were 553 boe/d compared to 1,176 boe/d for
2005. This decrease is a result of the sale of oil and gas properties in the
first quarter of 2006 which was producing at a rate of approximately 1,100
boe/d at the time of sale.
    Natural gas accounted for 83% of sales volumes for 2006 compared to 79%
for 2005. This increase is due to the change in sales mix resulting from the
sale of oil and gas properties in the first quarter of 2006 and the
acquisition of Marauder in November 2006. As a result of the acquisition of
Marauder, the Company's production is now weighted 95% to natural gas. The
natural gas price realized by the Company in 2006 decreased to $6.95/mcf from
$8.93/mcf a year earlier. The average sales price per mcf realized by the
Company is consistent with the AECO spot price, adjusted for heat content and
transportation costs.
    The average price realized by the Company for oil and natural gas liquids
sales for 2006 was $59.94/bbl - a slight decrease from $61.15/bbl for 2005.
The price realized by the Company is slightly lower than the average Edmonton
Par posting as a result of quality differentials and transportation costs.
    All of the Company's production is marketed in the Alberta spot market
and is unhedged.

    
    Royalties

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Royalties (net of Alberta Royalty Tax Credit) ($000's)   1,398     5,262
    $/boe                                                     6.93     12.26
    Percentage of petroleum and natural gas sales             15.4      22.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Royalties, consisting of crown, gross-overriding and freehold royalties
were $1,398,000 for 2006 - a decrease of $3,864,000 from 2005, reflecting the
sale of oil and gas properties and substantially lower sales. Alberta Royalty
Tax Credits of $426,000 recorded in 2006 reduced the overall crown royalty
rate by 4.7%. In addition, in July of 2006, the Company was advised of an
adjustment to its Capital Cost and Custom Processing Fee Adjustments (formerly
"Gas Cost Allowance") that resulted from an under estimation of these amounts
in 2005, resulting in a further reduction to the crown royalty rate of 1.8%.

    
    Operating Expenses

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Operating ($000's)                                       2,161     3,908
    $/boe                                                    10.71      9.10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The Company's operating expenses decreased to $2,161,000 for 2006 from
$3,908,000 for 2005. This decrease can be attributed to the sale of oil and
gas assets. On a per boe basis, operating expenses have increased in 2006 to
$10.71/boe, compared to $9.10/boe in 2005. A substantial portion of this
increase is due to the acquisition of the Redwater property in August 2005
which posted higher than average operating costs due to additional costs
incurred for compressor and pump jack rentals, trucking, salt water disposal,
and oil treating fees at third party facilities. Operating costs have trended
downward in the third and fourth quarters of 2006.

    
    General and Administrative Expenses

    -------------------------------------------------------------------------
                                                              December 31,
    ($000's)                                                 2006      2005
    -------------------------------------------------------------------------
    General and administrative expense                       4,760     3,817
    General and administrative costs capitalized              (410)     (979)
    -------------------------------------------------------------------------
    General and administrative expenses (net)                4,350     2,838
    $/boe                                                    21.57      6.61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    General and administrative expenses increased to $4,760,000 in 2006
compared to $3,817,000 in 2005. This increase is attributed to severance and
retention costs of approximately $959,000 recorded in the period due to the
downsizing that occurred as a result of the sale of oil and gas properties in
February 2006. Also, advisory and legal costs of approximately $360,000
related to the failed Pearl offer were incurred in the second quarter of 2006.
These one-time charges amount to $6.53/boe. The Company's strategy has been to
acquire oil and gas companies and to exploit the acquired assets, which
results in higher levels of administrative and support staff to integrate the
systems and operations of the acquired business than what might otherwise be
required.
    The Company capitalized general and administrative costs of $410,000 in
2006 compared to $979,000 in 2005. This decrease is due to a reduction in
exploration and development activities conducted in the first three quarters
of 2006 due to the sale of oil and gas properties in the first quarter of 2006
and the Board initiated process to review strategic alternatives.

    
    Stock-based Compensation Expense

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Stock-based compensation expense ($000's)                  822     1,080
    Stock-based compensation expense capitalized                 -      (170)
    -------------------------------------------------------------------------
    Stock-based compensation expense, net                      822       910
    $/boe                                                     4.08      2.12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Stock-based compensation expense reflects the value attributed to stock
options granted to employees, officers, directors and consultants to the
Company. Stock-based compensation expense for 2006 was $822,000 compared to
$1,080,000 for 2005. As a result of the sale of oil and gas properties in
February 2006 and the substantial reduction in the Company's asset base, all
stock options outstanding that had not previously vested were vested on
March 1, 2006. Stock-based compensation expense reflects the early vesting of
these options.

    
    Interest Expense

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Interest expense ($000's)                                  498       693
    $/boe                                                     2.47      1.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Interest expense decreased to $498,000 for 2006 from $693,000 for 2005.
The Company repaid its operating loan on February 28, 2006 with the proceeds
from the sale of oil and gas assets. Interest expense for the second, third,
and fourth quarters of 2006 represents accrued interest on unspent
flow-through funds that were raised in December 2005. Interest expense
incurred in prior periods represents interest on the Company's operating loan,
the proceeds of which were used to fund the cash portion of three corporate
acquisitions and the Company's capital program.

    
    Depletion and Depreciation Expense

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Depletion and depreciation expense ($000's)              4,865     8,879
    $/boe                                                    24.12     20.69
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Depletion and depreciation expense was $4,865,000 for 2006 compared to
$8,879,000 for 2005. This decrease results from the sale of oil and gas assets
in the first quarter of 2006. The depletion and depreciation expense rate for
2006 increased to $24.12/boe from $20.69/boe for 2005. This increase is a
result of a reduction in proven reserves for the Bashaw 10-7 and Buick Creek 
B-22-C/94 wells. These reductions were partially offset by new reserves
related to 2 gross (0.7 net) wells in the Bashaw area that were brought onto
production in the third quarter of 2006. The increase in the depletion and
depreciation expense rate for 2006 reflects the mix of the properties sold and
retained, reserve adjustments, and estimated future development costs of
approximately $15.6 million relating to the Marauder properties, which
significantly increases the depletion and depreciation rate.

    
    Accretion of Asset Retirement Obligations

    -------------------------------------------------------------------------
                                                              December 31,
                                                             2006      2005
    -------------------------------------------------------------------------
    Accretion of asset retirement obligations ($000's)          90       253
    $/boe                                                     0.45      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Accretion expense was $90,000 for 2006 compared to $253,000 for 2005. The
sale of oil and gas properties in February 2006 resulted in a reduction in
asset retirement obligations by $3,387,000 which has been assumed by the
purchaser.

    Income Tax

    The Company recorded future income tax expense of $36,000 for 2006
compared to a future income tax recovery for 2005 of $1,100,000. The Company
intends to apply its available tax pools to the sale proceeds to minimize the
overall tax liability. In addition, the Company recorded the income tax effect
of the 2005 flow-through share issuance in the first quarter of 2006 amounting
to $1,022,000. In the first quarter of 2005 the Company recorded a future
income tax recovery of $1,195,000 which reflects the income tax effect of a
2004 flow-through share issuance.

    
    Operating Netback

    -------------------------------------------------------------------------
                                                              December 31,
    ($/per boe)                                              2006      2005
    -------------------------------------------------------------------------
    Petroleum and natural gas sales                          44.92     55.16
    Less: Royalties (net of ARTC)                            (6.93)   (12.26)
          Operating expenses                                (10.71)    (9.10)
    -------------------------------------------------------------------------
    Operating netback                                        27.28     33.80
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Funds from operations                                    12.96     25.48
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The operating netback for 2006 decreased to $27.28/boe from $33.80/boe
for 2005, due to lower commodity prices realized in 2006.
    Funds from operations for 2006 were $12.95/boe compared to $25.48/boe for
2005. This decrease is a result of lower operating netbacks and substantially
higher general and administrative costs Incurred in 2006, as previously noted
in this MD&A.

    
    Net Income

    -------------------------------------------------------------------------
                                                              December 31,
    ($000's except per share amounts)                        2006      2005
    -------------------------------------------------------------------------
    Net income                                               8,088     2,086
    Net income per share - basic and diluted                  0.11      0.04
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The Company recorded net income of $8,088,000 for 2006 compared to net
income of $2,086,000 for 2005. Net income for 2006 is attributed to the gain
on sale of oil and gas assets of $15,835,000. The effect of this gain was
reduced by a goodwill impairment charge of $4,548,000 which resulted from the
Company's assessment of goodwill, based on the latest available information
including the market capitalization of the Company as indicated by the
Company's share price.

    
    Capital Expenditures

    -------------------------------------------------------------------------
                                                              December 31,
    ($000's)                                                 2006      2005
    -------------------------------------------------------------------------
    Land and rentals                                            76     2,317
    Seismic                                                     18       320
    Drilling and completions                                 1,343    13,525
    Equipment and tie-ins                                    2,293     7,013
    Property acquisitions                                      720       840
    Capitalized overhead costs                                 410     1,149
    Other                                                      126       199
    -------------------------------------------------------------------------
                                                             4,986    25,363
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In 2006, the Company recompleted 2 gross (0.7 net) wells and upgraded its
gas gathering systems in the Bashaw area. In addition, the Company conducted
4 workover operations on wells in the Chigwell, Bashaw, and Buick Creek areas.
This reflects a substantial reduction in activity levels compared to the
previous year when the Company drilled 32 gross wells (20 net), mainly in the
last two quarters. This reduction in activity level was facilitated by the
Board initiated process announced in March 2006 to review strategic
alternatives to maximize shareholder value.

    Liquidity and Capital Resources

    Cash provided by operating activities was $741,000 for 2006 compared to
$4,323,000 for 2005. This decrease in cash provided by operating activities is
due to decreased activity in the field due to the sale of oil and gas assets
in the first quarter to 2006, lower operating netbacks and substantially
higher general and administrative expenses realized.
    Cash used in financing activities for 2006 was $19,776,000 compared to
cash provided by financing activities of $25,314,000 for 2005. Cash provided
by financing activities for 2005 represented an increase to the Company's
operating loan to fund three corporate acquisitions and the 2005 drilling
program. In the first quarter of 2006, the Company used the proceeds from the
sale of oil and gas properties to repay its revolving operating loan which had
$28,550,000 drawn at the time of repayment. The exercise of stock options
resulted in cash proceeds to the Company of $3,199,000 in 2006.
    Cash provided by investing activities for 2006 was $55,730,000 compared
to cash used in investing activities of $32,294,000 in 2005. Cash provided by
investing activities for 2006 reflects capital expenditures, a reduction in
non-cash working capital balances as a result of the substantial decrease in
the field activity levels, the proceeds from the sale of oil and gas
properties, and the cash component of the acquisition of Marauder in November.
The cash component of the Marauder acquisition was $23,208,000, consisting of
cash of $15,000,000, transaction and severance costs of $1,660,000, and the
assumption of Marauder's operating line of credit which had $6,548,000 drawn
at the time of acquisition. The line was subsequently repaid by the Company.
Cash used in financing activities for 2005 reflects property and equipment
expenditures, the proceeds of sale on the Company's Twining property for
proceeds of $13,250,000 in the second quarter of 2005, and the cash component
of the purchase price for three companies acquired in 2005. In 2005, the
Company drilled 32 gross (20 net) wells compared to only 2 gross and 0.7 net
wells in 2006. As noted previously in this MD&A, this decrease was the result
of the Board initiated process to review strategic alternatives.

    Securities Outstanding

    Securities outstanding as of the date of this MD&A consist of 13,307,815
issued and outstanding common shares and 970,000 stock options. These figures
reflect the reorganization of Signal on February 20, 2007, which resulted in
the redemption of 23,076,923 common shares for $30 million of cash based on a
redemption price of $1.30 per share. This redemption left 66,539,059 common
shares of Signal which were exchanged for 13,307,815 common shares of
Fortress, based on a conversion factor of one share of Fortress for every five
shares of Signal held. 4,850,000 options of Signal outstanding at the time of
this reorganization were exchanged on a five for one basis resulting in the
issuance of 970,000 options of Fortress. As a result of this reorganization,
Fortress now holds all of the assets formerly held by Signal.

    Off-balance Sheet Arrangements

    The Company has no off-balance sheet arrangements.

    Related Party Transactions

    The Company has no related party transactions.

    Commitments and Contingencies

    The Company has no commodity price, interest rate swaps or fixed price
contracts in place as of December 31, 2006.
    The Company is committed to minimum annual lease payments under operating
leases for office premises and office equipment to March, 2013, as follows:

    
    -------------------------------------------------------------------------
                                                                     ($000's)
    -------------------------------------------------------------------------
    2007                                                                 395
    2008                                                                 431
    2009                                                                 430
    2010                                                                 435
    2011                                                                 439
    Thereafter                                                           549
    -------------------------------------------------------------------------
                                                                       2,679
    -------------------------------------------------------------------------
    

    Subsequent Events

    A Reorganization (the "Reorganization") of SignalEnergy Inc. (Signal"),
including an arrangement (the "Arrangement") under the Companies Act (Quebec),
was approved by the shareholders at a Special General Meeting of Shareholders
held on February 15, 2007 and was effective on February 20, 2007.
    Under the Arrangement, shareholders of Signal could elect to receive
cash, common shares of Fortress, or a combination of both, subject to total
cash available of $30 million. Shareholders representing 63,400,000 common
shares of Signal elected to receive cash which resulted in a cash distribution
to shareholders of $30 million to redeem 23,076,923 common shares of Signal at
$1.30 per share. The remaining 66,539,059 common shares of Signal were
exchanged for common shares of Fortress on a basis of one common share of
Fortress for every five common shares of Signal, resulting in the issuance of
13,307,815 common shares of Fortress.
    On January 15, 2007, after giving effect to the Reorganization, the
Company granted options to acquire 948,000 common shares of the Company at an
exercise price of $4.75 per share, expiring January 15, 2012.
    Upon completion of the Reorganization, Fortress holds all of the assets
formerly held by Signal.

    New Canadian Accounting Pronouncements

    The Canadian Institute of Chartered Accountants (CICA) has issued a
number of accounting pronouncements, some of which may impact the Company's
reported results and financial position in future periods.

    Comprehensive Income/Financial Instruments/Hedges

    The CICA issued new standards in early 2006 for Comprehensive Income
(CICA 1530), Financial Instruments (CICA 3855) and Hedges (CICA 3865), which
will be effective for the reporting year-end 2007. The new standards will
bring Canadian rules in line with current rules in the US. The standards will
introduce the concept of "Comprehensive Income" to Canadian GAAP and will
require that an enterprise (a) classify items of comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Derivative
contracts will be carried on the balance sheet at their mark-to-market value,
with the change in value flowing to either net income or comprehensive income.
Gains and losses on instruments that are identified as hedges will flow
initially to comprehensive income and be brought into net income at the time
the underlying hedged item is settled. It is expected that this standard will
be effective for Fortress' 2007 reporting. Any instruments that do not qualify
for hedge accounting will be marked-to-market with the adjustment (tax
effected) flowing through the income statement.
    Fortress does not currently have any hedges in place so the impact of
these recommendations would not be significant.

    Changes in Accounting Policies and Estimates, and Errors

    In July 2006, the CICA issued a new standard for Changes in Accounting
Policies and Estimates, and Errors (CICA 1300). The new standard applies to
interim and annual financial statements for fiscal years beginning on or after
January 1, 2007. The standard permits changes to accounting policies only when
it is required by a primary source of GAAP, or when the change results in a
reliable and more relevant presentation in the financial statements. The
standard requires expanded disclosure about the effects of changes in
accounting policy, estimates and errors on financial statements, and
disclosure of new primary sources of GAAP that have been issued but have not
yet come into effect and have not been adopted by the Company. Management
expects that this new standard will not have a significant impact on future
financial statements of the Company.

    Disclosure Controls and Procedures

    Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's Chief Executive Officer
and Chief Financial Officer have concluded, based on their evaluation as of
the end of the period covered by the annual filings, that the Company's
disclosure controls and procedures as of the end of such period are effective
to provide reasonable assurance that material information related to the
Company, including its consolidated subsidiaries, is made known to them by
others within those entities. It should be noted that while the Company's
Chief Executive Officer and Chief Financial Officer believe that the Company'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

    Internal controls over financial reporting are defined in MI 52-109 as
"... a process designed by, or under the supervision of, the issuer's chief
executive officer and chief financial officer, or persons performing similar
functions, and effected by the issuer's board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with the issuer's GAAP and includes those policies and
procedures that:
    
    (a) pertain to the maintenance of records that in reasonable detail
        accurately and fairly reflect the acquisitions and dispositions of
        the assets of the issuer;

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

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

    The Company has conducted a review of the design of its internal controls
over financial reporting, with the conclusion that as at December 31, 2006,
the Company's system of internal controls over financial reporting as defined
under MI 52-109 is sufficiently designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with the Company's
GAAP. In its assessment, the Company identified certain material weaknesses in
the design of its internal controls over financial reporting:

    a)  due to the small number of staff, it is not feasible to achieve the
        complete segregation of incompatible duties;

    b)  due to the small number of staff, the Company relies upon third
        parties as participants in the Company's internal controls over
        financial reporting and accounting for income taxes; and

    c)  due to the small number of staff, weaknesses may be caused by the
        number of corporate acquisitions and restructuring activities
        conducted in 2005 and 2006.
    

    The Company believes these weakness are mitigated by: the active
involvement of senior management and the board of directors in all the affairs
of the Company; open lines of communication within the Company; the present
levels of activities and transactions within the Company being readily
transparent; the thorough review of the Company's financial statements by
management, the board of directors and by the Company's auditors. In addition,
the Company is increasing the size of its finance team. However, these
mitigating factors will not necessarily prevent the likelihood that a material
misstatement will not occur as a result of the aforesaid weaknesses in the
Company's internal controls over financial reporting. A system of internal
controls over financial reporting, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of
the internal controls over financial reporting are met.

    BUSINESS RISKS and UNCERTAINTIES

    Fortress' production and exploration activities are concentrated in the
Western Canadian Sedimentary Basin, where activity is highly competitive and
includes a variety of different sized companies ranging from smaller junior
producers to the much larger integrated petroleum companies. Fortress is
subject to the various types of business risks and uncertainties including:
    
        -  finding and developing oil and natural gas reserves at economic
           costs;
        -  production of oil and natural gas in commercial quantities; and
        -  marketability of oil and natural gas produced.
    

    In order to reduce exploration risk, the Company strives to employ highly
qualified and motivated professional employees with a demonstrated ability to
generate quality proprietary geological and geophysical prospects. To help
maximize drilling success, Fortress combines exploration in areas that afford
multi-zone prospect potential, targeting a range of low to moderate risk
prospects with some exposure to select high-risk with high-reward
opportunities. The Company explores in areas where the Company has drilling
experience.
    The Company mitigates its risk related to producing hydrocarbons through
the utilization of the most appropriate technology and information systems. In
addition, the Company seeks to maintain operational control of its prospects.
    Oil and gas exploration and production can involve environmental risks
such as pollution of the environment and destruction of natural habitat, as
well as safety risks such as personal injury. In order to mitigate such risks,
Fortress conducts its operations at high standards and follows safety
procedures intended to reduce the potential for personal injury to employees,
contractors and the public at large. The Company maintains current insurance
coverage for general and comprehensive liability as well as limited pollution
liability. The amount and terms of this insurance are reviewed on an ongoing
basis and adjusted as necessary to reflect changing corporate requirements, as
well as industry standards and government regulations. Fortress may
periodically use financial or physical delivery hedges to reduce its exposure
against the potential adverse impact of commodity price volatility, as
governed by formal policies approved by senior management subject to controls
established by the Board of Directors.

    CRITICAL ACCOUNTING ESTIMATES

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

    Accounting for Petroleum and Natural Gas Operations

    The Company follows the full cost method of accounting whereby all costs
relating to the acquisition of, exploration for and development of oil and gas
reserves are capitalized in a single Canadian cost center. Such costs include
lease acquisition, lease rentals on undeveloped properties, geological and
geophysical costs, drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities.
    The application of the full cost method of accounting requires
management's judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
income tax treatment of the costs incurred.
    Full cost accounting depends on the estimated proven reserves that are
believed to be recoverable from the Company's oil and gas properties. The
process of estimating reserves is complex. It requires significant judgments
and decisions based on available geological, geophysical, engineering, and
economic data. These estimates may change substantially as additional data
from ongoing development activities and production performance becomes
available and as economic conditions impacting oil and gas prices and costs
change. Our reserve estimates are based on current production forecasts,
prices and economic conditions. Fortress' reserves were evaluated by the
independent engineering firm Sproule Associates Ltd.
    Reserve estimates are critical to many of our accounting estimates,
including:

    
        -  Calculating our unit-of-production depletion and future site
           restoration rates. Proven reserve estimates are used to determine
           rates that are applied to each unit-of-production in calculating
           depletion expense.
        -  Assessing when necessary, oil and gas assets for possible
           impairment. Estimated future undiscounted cash flows are
           determined using proven reserves. The criteria used to assess
           impairment, including the impact of changes in reserve estimates,
           are discussed below.
    

    As circumstances change and additional data becomes available, reserve
estimates also change, possibly materially impacting net income. Estimates
made are reviewed and revised, either upward or downward, as warranted by the
new information. Revisions are often required due to changes in well
performance, prices, economic conditions and governmental restrictions.
    Although we make every reasonable effort to ensure that our reserve
estimates are accurate, reserve estimation is an inferential science. As a
result, the subjective decisions, new geological or production information and
a changing environment may impact these estimates. Revisions to our reserve
estimates can arise from changes in oil and gas prices, and reservoir
performance. Such revisions can be either positive or negative.
    It would take a very significant decrease in our proven reserves to limit
our ability to borrow money under our credit facility.

    Impairment of Petroleum and Natural Gas Properties

    The Company reviews its full cost pool for impairment annually. An
impairment provision is recorded whenever events or circumstances indicate
that the carrying value of the Company's properties may not be recoverable.
The impairment provision is based on the excess of carrying value over fair
value. Fair value is defined as the present value of the estimated future net
revenues from production of total proved and probable petroleum and natural
gas reserves, as estimated by the Company on the balance sheet date. Reserve
estimates, as well as estimates for petroleum and natural gas prices and
production costs may change, and there can be no assurance that impairment
provisions will not be required in the future.
    Management's assessment of, among other things, the results of
exploration activities, commodity price outlooks, and planned future
development and sales, impacts the amount and timing of impairment provisions.

    Asset Retirement Obligations

    The asset retirement obligations provision recorded in the consolidated
financial statements is based on an estimate for total costs for future site
restoration and abandonment of the Company's petroleum and natural gas
properties. This estimate is based on management's analysis of production
structure, reservoir characteristics and depth, market demand for equipment,
currently available procedures, and discussions with construction and
engineering consultants. Estimating these future costs requires management to
make estimates and judgments that are subject to future revisions based on
numerous factors, including changing technology, political and regulatory
environments.

    Income Taxes

    The Company records future tax assets and liabilities to account for the
expected future tax consequences of events that have been recorded in its
consolidated financial statements and its tax returns. These amounts are
estimates; the actual tax consequences may differ from the estimates due to
changing tax rates and regimes, as well as changing estimates of cash flows
and capital expenditures in current and future periods. The Company
periodically assesses its ability to realize on its future tax assets. If
Fortress concluded that it is more likely than not that some portion or all of
the deferred tax assets will not be realized under accounting standards, the
tax asset will be reduced by a valuation allowance.

    Goodwill

    The Company recognizes goodwill on corporate acquisitions when the total
purchase price exceeds the fair value of the net identifiable assets and
liabilities of the acquired entity. Goodwill is tested annually at year-end
for impairment or as events occur that could result in impairment. Impairment
is recognized based on the fair value of the Company compared to the book
value of the Company. If the fair value of the Company is less than the book
value, impairment is measured allocating the fair value to the identifiable
assets and liabilities as if the Company had been acquired in a business
combination for its fair value. The excess of the fair value over the amounts
assigned to the identifiable assets and liabilities is the fair value of
goodwill. Any excess of the book value over this implied fair value of
goodwill is the impairment amount. Impairment is charged to the statement of
operations in the period which it occurs. Goodwill is stated at cost less
impairment and is not amortized.

    Claims and Litigation

    The Company is involved in various claims and litigation arising in the
normal course of business. The outcome of these matters is uncertain and there
can be no assurance that such matters will be resolved in the Company's favor.
If the outcome is unfavorable, it could have a materially adverse impact on
the Company's financial position or results of operations.
    With the above risks and uncertainties, the reader is cautioned that
future events and results may vary significantly from that which Fortress
currently foresees.


    MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

    The accompanying consolidated financial statements and all information in
this report are the responsibility of management. The consolidated financial
statements have been prepared by management in accordance with Canadian
generally accepted accounting principles. Financial statements are not precise
since they include certain amounts based upon estimates and judgments. When
alternative accounting methods exist, management has chosen those it deems to
be the most appropriate to ensure fair and consistent presentation. The
financial information presented elsewhere in this report is consistent with
that in the financial statements.
    Management maintains financial and operating systems that include
appropriate and effective internal controls. Such systems are designed to
provide reasonable assurance that the financial information is reliable and
relevant, and the Company's assets are appropriately accounted for and
adequately safeguarded.
    The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board of
Directors carries out this responsibility principally through its Audit
Committee.
    The Audit Committee, with all of its members being outside directors, is
appointed by the Board of Directors and reviews the financial statements and
Management's Discussion and Analysis; assesses the adequacy of the internal
controls of the Company; considers the report of the external auditors;
examines the fees and expenses for audit services; and recommends to the Board
of Directors the independent auditors for appointment by the shareholders. The
Audit Committee reports its findings to the Board of Directors for
consideration when approving the annual financial statements for issuance to
the shareholders.
    These consolidated financial statements have been audited by Ernst &
Young LLP, the external auditors, in accordance with Canadian generally
accepted auditing standards, on behalf of the shareholders. Ernst & Young LLP
have full and free access to, and meet periodically with, the Audit Committee.


    
    "signed"                             "signed"
    J. Cameron Bailey                    Jamie Jeffs, CA
    President & CEO                      Chief Financial Officer
    


    AUDITORS' REPORT

    To the Shareholders of Fortress Energy Inc.

    We have audited the consolidated balance sheets of Fortress Energy Inc.
(formerly SignalEnergy Inc.) as at December 31, 2006 and 2005 and the
consolidated statements of operations and deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
    We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
    In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
December 31, 2006 and 2005 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.

    
                                         "signed"
                                         Ernst & Young LLP
                                         Calgary, Canada

    April 2, 2007                        Chartered Accountants



    -------------------------------------------------------------------------
    FORTRESS ENERGY INC.
    (Formerly SignalEnergy Inc.)
    CONSOLIDATED BALANCE SHEETS
    As at December 31
    (in thousands)
    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    ASSETS
    Current
      Cash and cash equivalents (note 3)             $  36,756     $      61
      Accounts receivable                                7,951        11,269
      Prepaid expenses                                     368           258
      -----------------------------------------------------------------------
                                                        45,075        11,588
    Property and equipment (note 6)                     70,579       102,503
    Goodwill (note 7)                                        -         4,548
    -------------------------------------------------------------------------
                                                     $ 115,654     $ 118,639
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
      Accounts payable and accrued liabilities       $   7,080     $  17,810
      Income taxes payable                                 283           283
      Revolving operating loans (note 8)                     -        22,975
      -----------------------------------------------------------------------
                                                         7,363        41,068

    Future income tax liability (note 9)                 5,052             -
    Asset retirement obligations (note 10)               1,678         4,428
    -------------------------------------------------------------------------
                                                        14,093        45,496
    -------------------------------------------------------------------------

    Commitments and contingencies (notes 11 and 14)

    Shareholders' Equity
      Share capital (note 11)                          157,508       136,817
      Contributed surplus (note 11)                      1,779         2,140
      Deficit                                          (57,726)      (65,814)
      -----------------------------------------------------------------------
                                                       101,561        73,143

    -------------------------------------------------------------------------
                                                     $ 115,654     $ 118,639
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Subsequent events (note 16)

    See accompanying notes to consolidated financial statements.

    On behalf of the Board of Directors:


    "signed"                             "signed"
    J. Cameron Bailey                    Barry Giovanetto
    Director                             Director



    -------------------------------------------------------------------------
    FORTRESS ENERGY INC.
    (Formerly SignalEnergy Inc.)
    CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
    For the years ended December 31
    (in thousands, except per share amounts)
    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    REVENUE
      Petroleum and natural gas sales                $   9,090     $  23,670
      Royalties (net of Alberta Royalty Tax Credit)     (1,398)       (5,262)
      -----------------------------------------------------------------------
                                                         7,692        18,408
      Interest income                                    1,931            59
      -----------------------------------------------------------------------
                                                         9,623        18,467
      -----------------------------------------------------------------------
    EXPENSES
      Operating                                          2,161         3,908
      General and administrative                         4,350         2,838
      Stock-based compensation (note 12)                   822           910
      Interest                                             498           693
      Depletion and depreciation                         4,865         8,879
      Accretion of asset retirement obligations
       (note 10)                                            90           253
      -----------------------------------------------------------------------
                                                        12,786        17,481
      -----------------------------------------------------------------------

    Income (loss) from operations before the
     following                                          (3,163)          986
    -------------------------------------------------------------------------
    OTHER ITEMS
      Gain on sale of oil and gas properties
       and equipment (note 5)                           15,835             -
      Goodwill impairment (note 7)                      (4,548)            -
    -------------------------------------------------------------------------
                                                        11,287             -
    -------------------------------------------------------------------------
    Income before income taxes                           8,124           986
    -------------------------------------------------------------------------
    Income tax expense (recovery) (note (9)
      Current                                                -            95
      Future                                                36        (1,195)
      -----------------------------------------------------------------------
                                                            36        (1,100)
    -------------------------------------------------------------------------
    Net income for the year                              8,088         2,086

    Deficit, beginning of year                         (65,814)      (67,616)
    Distribution to shareholders (note 4 (b))                -          (284)
    -------------------------------------------------------------------------
    Deficit, end of year                             $ (57,726)    $ (65,814)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per share (note 11)
      Basic                                              $0.11         $0.04
      Diluted                                            $0.11         $0.04
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    -------------------------------------------------------------------------
    FORTRESS ENERGY INC.
    (Formerly SignalEnergy Inc.)
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the years ended December 31
    (in thousands)
    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    OPERATING ACTIVITIES
    Net income for the year                          $   8,088     $   2,086
    Items not affecting cash flows:
      Stock-based compensation                             822           910
      Depletion and depreciation                         4,865         8,879
      Accretion of asset retirement obligations             90           253
      Gain on sale of oil and gas properties
       and equipment                                   (15,835)            -
      Goodwill impairment                                4,548             -
      Future income tax expense (recovery)                  36        (1,195)
      -----------------------------------------------------------------------
                                                         2,614        10,933
    Change in non-cash operating working capital
     (note 15)                                          (1,873)       (6,610)
    -------------------------------------------------------------------------
    Cash provided by operating activities                  741         4,323
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Change in revolving operating loan                 (22,975)       22,975
    Share buy back (note 11)                                 -          (579)
    Issuance of common shares on exercise of
     stock options                                       3,199             -
    Issuance of flow-through common shares                   -         3,040
    Share issuance costs                                     -          (122)
    -------------------------------------------------------------------------
    Cash provided by (used in) financing activities    (19,776)       25,314
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Property and equipment expenditures                 (4,986)      (25,363)
    Sale of property and equipment, net of
     transaction costs (note 5)                         91,223        13,990
    Acquisition of businesses (note 4)                 (23,208)      (15,907)
    Change in non-cash investing working capital
     (note 15)                                          (7,299)       (5,014)
    -------------------------------------------------------------------------
    Cash provided by (used in) investing activities     55,730       (32,294)
    -------------------------------------------------------------------------

    Net change in cash                                  36,695        (2,657)
    Cash and cash equivalents - beginning of year           61         2,718
    -------------------------------------------------------------------------
    Cash and cash equivalents - end of year          $  36,756     $      61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow information:
      Interest paid                                  $     498     $     693
      Income taxes paid                                      -             -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    1.  NATURE OF OPERATIONS

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

        Effective February 20, 2007, SignalEnergy Inc. ("Signal") completed a
        reorganization whereby all of its assets were transferred to Fortress
        and a significant number of Signal shares were redeemed for cash
        (refer to note 16).

    2.  SIGNIFICANT ACCOUNTING POLICIES

        (a) Basis of presentation

            The consolidated financial statements of the Company have been
            prepared by management in accordance with Canadian generally
            accepted accounting principles and include the accounts of the
            Company and its wholly-owned subsidiary. All inter-company
            transactions have been eliminated.

            The timely preparation of financial statements requires that
            management make estimates and assumptions that affect the amounts
            reported in the consolidated financial statements and
            accompanying notes. Actual results could differ from estimates.

            In the opinion of management, these consolidated financial
            statements have been properly prepared within reasonable limits
            of materiality and within the framework of the significant
            accounting policies summarized below.

        (b) Joint operations

            Substantially all of the Company's exploration, development and
            production activities are conducted jointly with others and,
            accordingly, these consolidated financial statements reflect only
            the Company's proportionate interest in such activities.

        (c) Cash and cash equivalents

            Cash and cash equivalents include short-term investments with an
            original maturity of three months or less from the date of
            purchase. Cash and cash equivalents are stated at cost, which
            approximates market value.

        (d) Property and equipment

            The Company follows the full cost method of accounting whereby
            all costs relating to the acquisition of, exploration for and
            development of oil and gas reserves are capitalized and
            accumulated in a single Canadian cost center. Such costs include
            lease acquisition, lease rentals on undeveloped properties,
            geological and geophysical, drilling of both productive and
            non-productive wells, production equipment and overhead charges
            directly related to acquisition, exploration and development
            activities.

            Proceeds from the disposition of oil and 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.

            Other capital assets include furniture and fixtures and are
            recorded at cost.

        (e) Depletion and depreciation

            All costs of acquisition, exploration and development of oil and
            gas reserves, associated with plant and equipment costs (net of
            salvage value), and estimated costs of future development of
            proven undeveloped reserves are depleted using the
            unit-of-production method based on estimated gross proven
            reserves as determined by the Company's independent reserve
            engineers.

            Costs of unproved properties and seismic costs on undeveloped
            land are initially excluded from oil and gas properties for the
            purpose of calculating depletion. When proven reserves are
            assigned or the property or seismic costs are considered
            impaired, the cost of the property or the amount of the
            impairment is added to costs subject to depletion.

            The relative volume of oil and natural gas reserves and
            production are converted to equivalent barrels of oil based on
            the relative energy content of one barrel of oil being equal to
            six thousand cubic feet of natural gas.

            Capital assets not related to oil and gas properties are
            depreciated over their estimated useful lives using the
            straight-line method at annual rates of 20% to 100%.

        (f) Impairment of property and equipment

            A ceiling test is performed to recognize and measure impairment,
            if any, of the carrying amount of oil and gas properties and
            equipment by comparing the carrying amount of property and
            equipment to the sum of undiscounted cash flows expected to
            result from the future production of proved reserves and the cost
            of unproved properties less any impairment. Cash flows are based
            on a forecast of prices and costs, adjusted for transportation
            and quality, as provided by the Company's independent reserve
            engineers. Should this result in an excess of carrying value, the
            Company would then measure the amount of impairment by comparing
            the carrying amounts of property and equipment to the sum of the
            estimated net present value of future cash flows from proved plus
            probable reserves and the cost of unproved properties less any
            impairment. A risk-free interest rate is used to arrive at the
            net present value of the future cash flows. Any excess is
            recorded as additional depletion in the period the impairment is
            identified.

            The carrying value of undeveloped properties (land and seismic
            data) is reviewed periodically and written down to net realizable
            value if impairment is determined.

        (g) Asset retirement obligations

            Asset retirement obligations includes the costs of abandonment of
            oil and gas wells, dismantling and removing tangible equipment,
            and returning land to its original condition.

            The fair value of estimated asset retirement obligations is
            recognized in the consolidated financial statements in the period
            in which they are identified and when a reasonable estimate of
            the fair value can be made. The fair value is determined through
            a review of engineering studies, industry guidelines, and
            management's estimate on a site-by-site basis. The asset
            retirement cost, equal to the estimated fair value of the asset
            retirement obligation, is capitalized as part of the cost of the
            related long-lived asset.

            The liability is subsequently adjusted for the passage of time,
            which is recognized as accretion of asset retirement obligations
            expense in the consolidated statement of operations. The
            liability is also adjusted due to revisions in either the timing
            or the amount of the original estimated cash flows associated
            with the liability. The increase in the carrying value of the
            asset is amortized using the unit-of-production method based on
            estimated gross proven reserves, as determined by independent
            engineers. Actual costs incurred upon settlement of the asset
            retirement obligations are charged against the asset retirement
            obligation to the extent of the liability recorded. Any
            difference between the actual costs incurred upon settlement of
            the asset retirement obligation and the recorded liability is
            charged to the property and equipment in the period in which the
            settlement occurs unless the settlement represents abandonment of
            the last well in the cost centre, in which case the difference is
            charged to the consolidated statement of operations.

        (h) Goodwill

            Goodwill, at the time of acquisition, represents the excess of
            purchase price of a business over the fair value of net
            identifiable assets acquired in the business combination. The
            Company assesses the carrying amount of goodwill for impairment
            on an annual basis, or more frequently when changes in
            circumstances indicate that impairment may exist. The amount of
            impairment loss, if any, is charged to the consolidated statement
            of operations in the period the impairment is identified.

        (i) Flow-through shares

            A portion of the Company's exploration and development activities
            is financed through proceeds received from the issuance of
            flow-through shares. Under the terms of the flow-through share
            issues, the tax attributes of the related expenditures are
            renounced to the share subscribers. To recognize the foregone tax
            benefits to the Company, the carrying value of the shares issued
            is reduced by the tax effect of the tax benefits renounced to the
            subscribers. The tax effect of the renouncement is recorded when
            the required documents are filed with the tax authorities and the
            corresponding exploration and development expenditures are
            incurred or are reasonably likely to be incurred within the
            permitted time frame.

        (j) Stock-based compensation

            The Company has a stock-based compensation plan, which is
            described in note 12. The Company accounts for stock-based
            compensation using the fair value method whereby compensation
            expense is recognized over the vesting period based on the fair
            value of stock options at the date of grant. The fair value of
            stock options granted is determined using the Black-Scholes
            option-pricing model and is recorded as compensation expense and
            contributed surplus. Contributed surplus is reduced as stock
            options are exercised and credited to share capital.

        (k) Revenue recognition

            Petroleum and natural gas sales are recognized as revenue when
            the commodities are delivered to purchasers.

        (l) Hedging and forward sales contracts

            In certain circumstances, fixed price commodity contracts or
            commodity derivates contracts may be used to reduce the Company's
            exposure to adverse fluctuations in commodity prices to protect
            future cash flows used to finance the Company's capital
            expenditure program. Gains and losses relating to commodity
            derivative contracts which settle via net cash payment and that
            meet hedge criteria are recognized as part of petroleum and
            natural gas sales concurrent with the hedged transaction. The
            Company does not enter into financial instruments for trading or
            speculative purposes.

            The hedging requirements as amended by Accounting Guideline 13,
            consist of the designation of the instrument as a hedge, the
            identification of the nature of the risk exposure being hedged
            and that there is reasonable assurance that the instrument is
            expected to be an effective hedge throughout its term. In
            addition, in the case of anticipated transactions, it must also
            be probable that the transaction designated as being hedged will
            occur. Should the Company elect to follow hedge accounting, it
            assesses both at the hedge's inception and on an ongoing basis,
            whether the derivative financial instruments that have been
            designated as hedges are highly effective in offsetting changes
            in fair value or cash flows of the hedged items.

            Realized and unrealized gains and losses associated with
            commodity derivative contracts which have been terminated or
            cease to be effective prior to maturity, are deferred as other
            current or non-current assets or liabilities on the
            consolidated balance sheet, as appropriate, and recognized in the
            consolidated statement of operations in the period in which the
            underlying hedged transaction is recognized. In the event a
            designated hedged item is sold, extinguished or matures prior to
            the termination of the related derivative instrument, any
            realized or unrealized gain or loss on such derivative instrument
            is recognized in the consolidated statement of operations.

            Financial instruments not designated as hedges are marked to
            market at the end of each period with any gain/loss recognized
            into income in that period.

        (m) Future income taxes

            The Company follows the liability method of accounting for income
            taxes. Under this method, future tax assets and liabilities are
            determined based on differences between financial reporting and
            tax bases of assets and liabilities and are measured using
            substantively enacted tax rates and laws that will be in effect
            when the differences are expected to reverse. The effect on
            future income tax assets and liabilities of a change in tax rates
            is recognized in net income in the period in which the change is
            substantively enacted. Income tax expense for the period is the
            tax payable for the period and any change during the period in
            future income tax assets and liabilities. A valuation allowance
            is recorded to the extent that the realization of future tax
            assets is not more likely than not.

        (n) Measurement uncertainty

            The amount recorded for depletion and depreciation of oil and gas
            properties and the ceiling test calculation are based on
            estimates of gross proven reserves, production rates, commodity
            prices, future costs and other relevant assumptions. Accruals for
            revenue, royalties and operating costs are prepared based on
            estimates when actual amounts are not known. By their nature,
            these estimates are subject to measurement uncertainty and the
            effect on the financial statements of changes in such estimates
            in future years could be significant.

            Inherent in the fair value calculation of asset retirement
            obligations, are numerous assumptions and judgments including the
            ultimate settlement amounts, inflation factors, credit adjusted
            discount rates, timing of settlement, and changes in legal and
            regulatory environments. To the extent future revisions to these
            assumptions impact the fair value of the existing asset
            retirement obligation liability, a corresponding adjustment is
            made to the property and equipment balance.

        (o) Per share amounts

            The treasury stock method is used in the determination of diluted
            earnings per share. Under this method, the diluted weighted
            average number of shares is calculated assuming the proceeds that
            arise from the exercise of outstanding in-the-money options are
            used to purchase common shares of the Company at their average
            market price for the applicable period.

        (p) Investment tax credits

            Investment tax credits are applied against expenses or the
            related capital assets when it is reasonably certain that they
            will be realized. Ultimate realization will depend on the review
            and approval by the tax authorities concerned.

        (q) Comparative figures

            Certain comparative figures have been reclassified to conform to
            the presentation adopted in the current year.

    3.  CASH AND CASH EQUIVALENTS

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

        ---------------------------------------------------------------------
                                                           2006         2005
                                                              $            $
        ---------------------------------------------------------------------
        Cash on hand                                      1,708           61
        Short-term investment                            35,048            -
        ---------------------------------------------------------------------
                                                         36,756           61
        ---------------------------------------------------------------------

        Short-term investments at December 31, 2006 consist of commercial
        paper, yielding 4.3% per annum, with a term of less than 3 months
        from initiation, and maturing January 15, 2007.

    4.  BUSINESS ACQUISITIONS

        (a) Effective November 15, 2006, the Company acquired all of the
            issued and outstanding common shares of Marauder Resources West
            Coast Inc. ("Marauder") for consideration of $33,990,716,
            consisting of $15,000,000 of cash, 16,349,534 common shares of
            the Company valued at $17,330,506, and transaction and severance
            costs of $1,660,210. The common shares issued were valued at
            $1.06 per share based on the Company's trading price for the
            five-day period prior to and the five-day period immediately
            following the announcement of this transaction.

            The acquisition has been accounted for using the purchase method
            and the results of operations are included in the consolidated
            statement of operations from the effective date of November 15,
            2006. The purchase price was allocated to the assets and
            liabilities, on a preliminary basis, as follows:

            -----------------------------------------------------------------
                                                                           $
            -----------------------------------------------------------------
            Property and equipment                                    46,794
            Non-cash working capital deficiency                       (1,651)
            Future income tax liability                               (3,994)
            Asset retirement obligations                                (610)
            Bank indebtedness                                         (6,548)
            -----------------------------------------------------------------
                                                                      33,991
            -----------------------------------------------------------------
            Consideration:
              Cash                                                    15,000
              16,349,534 common shares                                17,331
              Transaction costs                                        1,660
            -----------------------------------------------------------------
                                                                      33,991
            -----------------------------------------------------------------

        (b) Effective August 9, 2005, the Company acquired all of the issued
            and outstanding common shares of Goose River Resources Ltd.
            ("Goose River") for consideration of $35,366,190, consisting of
            21,250,000 common shares of the Company valued at $23,594,700,
            cash consideration of $9,930,678, additional cash of $953,400
            paid on the buy-out of Goose River stock options, and transaction
            costs of $887,412. The common shares issued were valued at $1.11
            per share based on the Company's trading price for the five-day
            period prior to the announcement of this transaction.

            The acquisition has been accounted for using the purchase method
            and the results of operations are included in the consolidated
            statement of operations from the effective date. The fair values
            of the net assets acquired are as follows:

            -----------------------------------------------------------------
                                                                           $
            -----------------------------------------------------------------
            Property and equipment                                    42,870
            Non-cash working capital deficiency                       (6,829)
            Asset retirement obligations                                (795)
            Cash                                                         120
            -----------------------------------------------------------------
                                                                      35,366
            -----------------------------------------------------------------
            Consideration:
              21,250,000 common shares                                23,595
              Cash                                                    10,884
              Transaction costs                                          887
            -----------------------------------------------------------------
                                                                      35,366
            -----------------------------------------------------------------

            The acquisition resulted in the shareholders of Goose River
            becoming shareholders of two companies: Fortress and G2 Resources
            Ltd. ("G2"), a newly created company. Fortress contributed cash
            of $179,000 and its Sylvan Lake and Foam Lake properties with an
            estimated fair market value of $105,000 to G2 in exchange for
            common shares of G2. These shares of G2 were distributed to the
            shareholders of Fortress in August 2005 with each shareholder
            receiving 0.037537 of a G2 share for each share of Fortress held.

        (c) Effective January 26, 2005, the Company acquired all of the
            issued and outstanding common shares of a private oil and gas
            company for consideration of $5,310,519, consisting of
            1,000,000 common shares of the Company valued at $1,250,000, cash
            consideration of $3,970,380, and transaction costs of $90,139.
            The common shares issued were valued at $1.25 per share based on
            the Company's trading price for the five-day period prior to the
            announcement of this transaction.

            The acquisition has been accounted for using the purchase method
            and the results of operations are included in the consolidated
            statement of operations from the effective date of acquisition.
            The fair values of the net assets acquired are as follows:

            -----------------------------------------------------------------
                                                                           $
            -----------------------------------------------------------------
            Property and equipment                                     6,027
            Non-cash working capital deficiency                         (398)
            Asset retirement obligations                                (318)
            -----------------------------------------------------------------
                                                                       5,311
            -----------------------------------------------------------------
            Consideration:
              1,000,000 common shares                                  1,250
              Cash                                                     3,971
              Transaction costs                                           90
            -----------------------------------------------------------------
                                                                       5,311
            -----------------------------------------------------------------

        (d) Effective January 20, 2005, the Company acquired all of the
            issued and outstanding common shares of Predator Exploration Ltd.
            ("Predator") for consideration of $13,468,443, consisting of
            10,424,097 common shares of the Company valued at $13,030,121 and
            transaction costs of $438,322. The common shares issued were
            valued at $1.25 per share based on the Company's trading price
            for the five-day period prior to the announcement of this
            transaction.

            The acquisition has been accounted for using the purchase method
            and the results of operations are included in the consolidated
            statement of operations from the effective date. The fair values
            of the net assets acquired are as follows:

            -----------------------------------------------------------------
                                                                           $
            -----------------------------------------------------------------
            Property and equipment                                    27,070
            Non-cash working capital deficiency                      (12,461)
            Asset retirement obligations                              (1,563)
            Cash                                                         422
            -----------------------------------------------------------------
                                                                      13,468
            -----------------------------------------------------------------
            Consideration:
              10,424,097 common shares                                13,030
              Transaction costs                                          438
            -----------------------------------------------------------------
                                                                      13,468
            -----------------------------------------------------------------

    5.  PROPERTY DISPOSITION

        Effective February 27, 2006, the Company sold certain oil and gas
        properties, tangible equipment and undeveloped land for cash proceeds
        of $96,446,000. The transaction involved the sale of the Company's
        Ferrier, Carrot Creek, Kaybob, Redwater and certain other minor
        properties (the "Sold Properties"). The Company retained its
        Chigwell, Bashaw and Buick Creek properties (the "Retained
        Properties"). The transaction closed in two stages on February 27
        and March 9, 2006. The transaction costs associated with this
        transaction were $1,163,000. The Company incurred additional costs
        of $4,060,000 to complete its capital commitments to the purchaser.

        The carrying amount of the Sold Properties at the time of sale was
        $82,835,000 and the related asset retirement obligation was
        $3,387,000. The Company recorded a gain on sale of oil and gas
        properties and equipment of $15,835,000.

    6.  PROPERTY AND EQUIPMENT

        ---------------------------------------------------------------------
                                                     Accumulated
                                                      Depletion
                                                         and       Net Book
                                           Cost     Depreciation     Value

        December 31, 2006                    $            $            $
        ---------------------------------------------------------------------
        Oil and gas properties              77,194        6,708       70,486
        Other                                  146           53           93
        ---------------------------------------------------------------------
                                            77,340        6,761       70,579
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
                                                     Accumulated
                                                      Depletion
                                                         and       Net Book
                                           Cost     Depreciation     Value

        December 31, 2006                    $            $            $
        ---------------------------------------------------------------------
        Oil and gas properties             114,170       11,730      102,440
        Other                                  110           47           63
        ---------------------------------------------------------------------
                                           114,280       11,777      102,503
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In 2006 the Company capitalized general and administrative expenses
        of $410,000 (2005 - $1,148,584) which includes stock-based
        compensation expenses of $nil (2005 - $170,000) directly attributable
        to exploration and development activities.

        Estimated future development costs of $15.6 million (December 31,
        2005 - $3.7 million) were included in the calculation of depletion
        expense for the year ended December 31, 2006. As at December 31,
        2006, undeveloped land costs of $3.8 million (December 31, 2005 -
        $10 million) were excluded from assets subject to depletion.

        The Company performed a ceiling test calculation at December 31, 2006
        in which the estimated undiscounted future cash flows associated with
        the Company's proved reserves exceeded the carrying amount of the
        Company's property and equipment. The oil and natural gas prices used
        in the ceiling test calculation are based on the January 1, 2007
        commodity price forecast of our independent reserve evaluators and
        are as follows:

        ---------------------------------------------------------------------
        Year                 Edmonton Light Crude Oil            AECO Gas
                                   (Cdn$/bbl)                  (Cdn$/MMbtu)
        ---------------------------------------------------------------------
        2007                          74.10                        7.85
        2008                          77.62                        8.39
        2009                          70.25                        7.65
        2010                          65.56                        7.48
        2011                          61.90                        7.63
        ---------------------------------------------------------------------

        Prices increase at a rate of 1.5% per year after 2011.  The benchmark
        prices were adjusted for quality and transportation.

        Based on these assumptions, the undiscounted value of net revenues
        from the Company's proved reserves exceeds the carrying value of
        property and equipment at December 31, 2006 and, accordingly, no
        impairment write down was recorded.

    7.  GOODWILL IMPAIRMENT

        The Company assesses the carrying amount of goodwill for impairment
        on an annual basis, or more frequently when changes in circumstances
        indicate that impairment may exist. As part of this assessment, the
        Company considers the latest available information including the
        Company's market capitalization as indicated by the Company's share
        price. As a result of this assessment, the Company has recorded a
        goodwill impairment of $4,548,000 as of December 31, 2006 which has
        been reflected as a non-cash charge to the statement of operations.

    8.  BANK FACILITIES

        On February 28, 2006, the Company used the proceeds from the sale of
        oil and gas properties (note 5) to repay the revolving operating loan
        from its bank, which had $28,550,000 drawn at the time of repayment.

        As at November 15, 2006, the Company's subsidiary, Marauder, had an
        operating loan to maximum of $7 million. The loan was repaid on
        December 15, 2006.

    9.  INCOME TAXES

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

        ---------------------------------------------------------------------
                                                           2006         2005
                                                              $            $
        ---------------------------------------------------------------------
        Net income before tax                             8,124          986
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Expected tax expense at 34.50% (2005 - 33.62%)    2,803          331
        Add (deduct) income tax effect of:
          Non-deductible crown charges                      167          823
          Resource allowance                                (66)        (921)
          Stock based compensation                          284          305
          Non-taxable ARTC                                 (145)           -
          Non-taxable portion of capital gain            (1,800)           -
          Flow-through share renouncement                (1,022)      (1,195)
          Non-deductible expenses and other permanent
          differences                                        20           30
          Large Corporations Tax                              -           95
          Rate adjustments                                 (205)           -
          Change in valuation allowance on
           unrecognized benefit of tax assets                 -         (568)
        ---------------------------------------------------------------------
        Income tax expense (recovery)                        36       (1,100)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Future tax assets and liabilities are comprised of:

        ---------------------------------------------------------------------
                                                           2006         2005
                                                              $            $
        ---------------------------------------------------------------------
        Net book value of property and equipment in
         excess of tax pools                              6,929       16,529
        Scientific research and experimental
         development expenditures                             -      (10,330)
        Non-capital losses carried forward                 (854)      (4,468)
        Asset retirement obligations                       (513)      (1,489)
        Attributed Canadian royalty income                  (88)           -
        Share issue costs                                  (422)        (242)
        ---------------------------------------------------------------------
        Net future income tax liability                   5,052            -
        ---------------------------------------------------------------------

        The Company has non-capital losses for income tax purposes of
        approximately $3.3 million (2005 - $13.3 million) which are available
        for application against future taxable income and which expire in the
        following years:

        ---------------------------------------------------------------------
                                                                           $
        ---------------------------------------------------------------------
        2010                                                           2,708
        2011                                                             630
        ---------------------------------------------------------------------
                                                                       3,338
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company has approximately $2.7 million (2005 - $2.8 million) of
        unclaimed investment tax credits available to reduce the future
        years' income tax payable. These credits will expire in the following
        years:

        ---------------------------------------------------------------------
                                                                           $
        ---------------------------------------------------------------------
        2007                                                             300
        2008                                                             267
        2009                                                              74
        2010                                                             279
        2011                                                           1,013
        2012                                                             734
        ---------------------------------------------------------------------
                                                                       2,667
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At December 31, 2006, the Company has approximately $47.8 million of
        available resource pools and undepreciated capital cost pools, as
        follows:

        ---------------------------------------------------------------------
                                                                           $
        ---------------------------------------------------------------------
        Canadian Oil and Gas Property Expenses                         5,197
        Canadian Development Expenses                                 12,777
        Canadian Exploration Expenses                                 14,450
        Undepreciated Capital Cost                                    15,358
                                                                      ------
        ---------------------------------------------------------------------
                                                                      47,782
                                                                      ------
        ---------------------------------------------------------------------

    10. ASSET RETIREMENT OBLIGATIONS

        The Company's asset retirement obligations result from net ownership
        interests in oil and gas assets including well sites, gathering
        systems and processing facilities. The Company estimates the net
        present value of its total asset retirement obligations at
        December 31, 2006 to be $1.7 million (December 31, 2005 -
        $4.4 million) based on a total future liability of $3.1 million
        (December 31, 2005 - $8.9 million) which will be primarily incurred
        between 2007 and 2029. An inflation rate of 2.0% (2005 - 3.0%) and a
        credit-adjusted risk-free rate of 6.5% (2005 - 6.0%) were used to
        calculate the fair value of the asset retirement obligations.

        ---------------------------------------------------------------------
        Asset Retirement Obligations                                       $
        ---------------------------------------------------------------------
        Balance, December 31, 2004                                     1,633
        Obligations incurred                                             928
        Obligations acquired (note 4)                                  2,676
        Obligations disposed                                          (1,062)
        Accretion expense                                                253
        ---------------------------------------------------------------------
        Balance, December 31, 2005                                     4,428
        Adjustments to assumptions                                       (92)
        Obligations incurred                                              29
        Obligations acquired (note 4)                                    610
        Obligations disposed (note 5)                                 (3,387)
        Accretion expense                                                 90
        ---------------------------------------------------------------------
        Balance, December 31, 2006                                     1,678
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. SHARE CAPITAL

        (a) Authorized:

            Unlimited number of voting common shares without par value.

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

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

            -----------------------------------------------------------------
                                                    December 31, December 31,
            Share capital is comprised of:              2006         2005
                                                          $            $
            -----------------------------------------------------------------
            Common shares                               156,788      136,097
            Additional paid-in capital                      720          720
            -----------------------------------------------------------------
                                                        157,508      136,817
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) Common shares issued and outstanding:

            -----------------------------------------------------------------
                                        Number of
                                         Class A
                                          Voting      Number of
                                          Common       Common
                                          Shares       Shares          $
            -----------------------------------------------------------------

            Balance, December 31, 2004   5,240,754   30,665,772       97,194
            Issued on business
             acquisitions (note 4)                   32,674,097       37,876
            Issued on land
             acquisition (i)                            453,022          634
            Tax effect of flow-through
             share renouncement (ii)                          -       (1,195)
            Normal course issuer
             bid (iii)                                 (512,700)      (1,330)
            Conversion to common
             shares (iv)                (5,240,754)   5,240,757            -
            Issued on flow-through
             offering (v)                             2,000,000        3,040
            Share issuance costs                                        (122)
            -----------------------------------------------------------------
            Balance, December 31, 2005           -   70,520,948      136,097
            -----------------------------------------------------------------
            Issued on business acquisitions
             (note 4)                                16,349,534       17,331
            Tax effect of flow-through share
             renouncement (v)                                         (1,022)
            Issued on exercise of stock
             options (note 11 (f))                    2,745,500        4,382
            -----------------------------------------------------------------
            Balance, December 31, 2006               89,615,982      156,788
            -----------------------------------------------------------------

            (i)   On September 27, 2005, the Company issued 453,022 common
                  shares at $1.40 per share, being the market value, to
                  acquire land interests.

            (ii)  On June 16, 2004, the Company closed a private placement of
                  4,485,000 common shares and 1,615,000 flow-through common
                  shares, raising gross proceeds of $7,848,750 and
                  $3,553,000, respectively. The tax effect of the flow-
                  through shares was renounced at March 31, 2005 at a rate of
                  33.62% and $1,194,519 was recorded as a reduction to share
                  capital with a corresponding increase in future income tax
                  liability.

            (iii) On April 27, 2005, the Company initiated the normal course
                  issuer bid process whereby a maximum of 2,104,493 common
                  shares could be repurchased beginning April 21, 2005 and
                  terminating April 20, 2006. As of the expiry date, the
                  Company had purchased 512,700 common shares of the Company
                  at an average price of $1.13 per share or $578,721. The
                  historical value of these shares of $1,330,000 was removed
                  from share capital and the excess over the purchase price
                  was recorded as an increase in contributed surplus of
                  $751,279.

            (iv)  On August 4, 2005, the Company converted the Class A, non-
                  voting common shares to common shares on a one-for-for
                  basis.

            (v)   On December 1, 2005, the Company closed a private placement
                  of 2,000,000 flow-through common shares at $1.52 per share
                  for total gross proceeds of $3,040,000 ($2,935,000 net of
                  share issuance costs). The full expenditure commitment was
                  renounced to subscribers effective December 31, 2005. The
                  tax effect related to this flow-through offering of
                  $1,022,048 was recorded at March 31, 2006 using a tax rate
                  of 33.62%. As at December 31, 2006, the Company had
                  incurred expenditures of approximately $1.9 million with
                  the remaining expenses incurred in the first quarter of
                  2007.

            (vi)  On December 13, 2006, the Company initiated a normal course
                  issuer bid process whereby a maximum of 4,480,799 common
                  shares could be repurchased beginning December 15, 2006 and
                  terminating December 14, 2007. As at December 31, 2006, the
                  Company had not made any purchases under this normal course
                  issuer bid. Subsequent to December 31, 2006, the Company
                  purchased 407,000 common shares of the Company at an
                  average price of $0.75 per share or $305,705.

        (e) Contributed surplus:

            -----------------------------------------------------------------
                                                                           $
            Balance, December 31, 2004                                   309
              Normal course issuer bid                                   751
              Stock-based compensation expense                         1,080
            -----------------------------------------------------------------
            Balance, December 31, 2005                                 2,140
              Stock-based compensation expense                           822
              Reclassification to share capital for stock options
               exercised                                              (1,183)
            -----------------------------------------------------------------
            Balance, December 31, 2006                                 1,779
            -----------------------------------------------------------------



        (f) Stock option plan:

            The Company grants stock options to employees, officers,
            directors and consultants of the Company pursuant to an incentive
            plan (the "Plan"). Under the Plan, the exercise price of options
            granted cannot be less than the closing market price for the
            Company's common shares on the date of grant. Options typically
            vest over a four-year period and expire five years from the date
            of grant.

            The following table summarizes stock option transactions:

            -----------------------------------------------------------------
                                     2006                      2005
                           --------------------------------------------------
                                          Weighted                  Weighted
                                           average                   average
                                          exercise                  exercise
                              Number        price       Number        price
                                              $                         $
            -----------------------------------------------------------------
            Outstanding,
             beginning of
             year           4,385,500         2.01    2,412,500         2.01
              Granted      (1,530,000)        1.49    2,474,500         1.10
              Exercised    (2,745,500)        1.17     (501,500)        3.28
            -----------------------------------------------------------------
            Outstanding,
             end of year      110,000         4.15    4,385,500         1.35
            -----------------------------------------------------------------
            Exercisable,
             end of year      110,000         4.15    1,011,250         1.90
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            The Company has the following stock options outstanding:

            -----------------------------------------------------------------
                                                            Exercisable at
            Outstanding at December 31, 2006              December 31, 2006

                                    Weighted
                                     average
             Exercise               years to   Exercise     Number   Exercise
               Price       Number    expiry      Price   exercisable    Price
                 $                                 $                      $
            -----------------------------------------------------------------

            3.00 - 4.00   102,000        2.5       3.91    102,000       3.91
            4.00 - 5.00     4,000        4.5       4.40      4,000       4.40
            10.00           4,000        3.1      10.00      4,000      10.00
            -----------------------------------------------------------------
            Outstanding,
             December
             31, 2006     110,000        2.6       4.15    110,000       4.15
            -----------------------------------------------------------------
            -----------------------------------------------------------------


            -----------------------------------------------------------------
                                                            Exercisable at
            Outstanding at December 31, 2006              December 31, 2006

                                    Weighted
                                     average
             Exercise               years to   Exercise     Number   Exercise
               Price       Number    expiry      Price   exercisable    Price
                 $                                 $                      $
            -----------------------------------------------------------------

            1.00 - 1.20 1,910,500        1.4       1.03          -          -
            1.21 - 2.00 2,310,000        3.9       1.39    846,250       1.40
            3.00 - 4.00   102,000        3.3       3.91    102,000       3.91
            4.01 - 5.00    59,000        0.7       4.96     59,000       4.96
            10.00           4,000        4.9      10.00      4,000      10.00
            -----------------------------------------------------------------
            Outstanding,
             December
             31, 2005   4,385,500        2.8       1.35  1,011,250       1.90
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (g) Per share amounts:

            The weighted average number of common shares and Class A, non-
            voting common shares outstanding for the years ended December 31,
            2006 and 2005 are as follows:

            -----------------------------------------------------------------
                                                           2006         2005
            -----------------------------------------------------------------
            Weighted average - basic                 74,494,047   55,076,751
            Weighted average - diluted               74,494,047   55,369,854
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            The dilutive effect of the Company's issuable securities at
            December 31, 2006, which consist of 110,000 (December 31, 2005 -
            4,385,500) stock options to issue common shares, was nil shares
            (2005 - 293,103 shares). The remaining 110,000 options are
            available for dilution in future periods.


    12. STOCK-BASED COMPENSATION

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

        ---------------------------------------------------------------------
                                                           2006         2005
        ---------------------------------------------------------------------
        Risk-free interest rate (%)                        3.51         3.51
        Expected life (years)                               5.0          5.0
        Expected volatility (%)                            60.0         60.0
        Expected dividend yield (%)                           -            -
        ---------------------------------------------------------------------

        The estimated fair value of stock options of $0.71 per share
        (December 31, 2005 - $0.71) is amortized to expense over the vesting
        period on a straight-line basis. In 2006, the Company recorded
        compensation expense of $822,000 related to stock options (2005 -
        $1,080,000) of which $nil was capitalized (2005 - $170,000).

    13. FINANCIAL INSTRUMENTS

        Fair value of financial instruments

        The Company has financial instruments consisting of cash and cash
        equivalents, accounts receivable, accounts payable, and revolving
        operating loan. The carrying value of these instruments approximate
        fair value due to their short-term maturity.

        Credit risk

        A substantial portion of the Company's accounts receivable are with
        customers and joint venture partners in the petroleum and natural gas
        industry and are subject to normal industry credit risk. The Company
        will generally extend unsecured credit to these companies, and
        therefore, the collection of accounts receivable may be affected by
        changes in economic or other conditions and may accordingly impact
        the Company's overall credit risk. Management believes the risk
        will be mitigated by the size, reputation and diversified nature of
        the companies to which they extend credit.

        Commodity price risk management

        At December 31, 2006, the Company had no fixed price contracts
        associated with future production (December 31, 2005 - nil).

        Foreign currency risk

        The Company is exposed to foreign currency fluctuations as crude oil
        and natural gas prices received are referenced to U.S. dollar
        dominated prices.

    14. COMMITMENTS AND CONTINGENCIES

        Royalties

        The Company will pay to various university research centers royalties
        amounting to two - five percent on sales of licensed products related
        to a research contract and acquired technology rights and 15% of
        sublicense revenues from products related to the acquired technology
        rights. At December 31, 2006 and 2005, there were no royalties
        payable under these agreements.

        Office space and equipment

        The Company is committed to minimum annual lease payments under
        operating leases for office premises and office equipment to March,
        2013, as follows:

        ---------------------------------------------------------------------
                                                                           $
        ---------------------------------------------------------------------
        2007                                                             395
        2008                                                             431
        2009                                                             430
        2010                                                             435
        2011                                                             439
        Thereafter                                                       549
        ---------------------------------------------------------------------
                                                                       2,679
        ---------------------------------------------------------------------

        Guarantees

        The Company maintains liability insurance for its directors and
        officers and indemnifies its directors and officers against any and
        all claims or losses reasonably incurred in the performance of their
        service to the Company to the extent permitted by law.

        Claims and Litigation

        The Company is involved in various claims and litigation arising in
        the normal course of business. The outcome of these matters is
        uncertain and there can be no assurance that such matters will be
        resolved in the Company's favor. If the outcome is unfavorable, it
        could have a materially adverse impact on the Company's financial
        position or results of operations.


    15. CHANGE IN NON-CASH WORKING CAPITAL

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

        ---------------------------------------------------------------------
                                                           2006         2005
                                                              $            $
        ---------------------------------------------------------------------
        Accounts receivable                               3,318       (7,126)
        Prepaid expenses                                   (110)         (67)
        Accounts payable and accrued liabilities        (10,729)      14,974
        Income taxes payable                                  -          283
        ---------------------------------------------------------------------
                                                         (7,521)       8,064
        Less: working capital deficiency acquired
         on acquisitions                                 (1,651)     (19,688)
        ---------------------------------------------------------------------
                                                         (9,172)     (11,624)
        Attributable to investing activities             (7,299)      (5,014)
        ---------------------------------------------------------------------
        Attributable to operating activities             (1,873)      (6,610)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    16. SUBSEQUENT EVENTS

        (a) A Reorganization (the "Reorganization") of SignalEnergy Inc.
            ("Signal"), including an arrangement (the "Arrangement") under
            the Companies Act (Quebec), was approved by the shareholders at a
            Special General Meeting of Shareholders held on February 15, 2007
            and was effective on February 20, 2007.

            Under the Arrangement, shareholders of Signal could elect to
            receive cash, common shares of Fortress, or a combination of
            both, subject to total cash available of $30 million.
            Shareholders representing 63,400,000 common shares of Signal
            elected to receive cash which resulted in a cash distribution to
            shareholders of $30 million to redeem 23,076,923 common shares of
            Signal at $1.30 per share. The remaining 66,539,059 common shares
            of Signal were exchanged for common shares of Fortress on a basis
            of one common share of Fortress for every five common shares of
            Signal, resulting in the issuance of 13,307,815 common shares of
            Fortress.

            Fortress was a shell company that was formed for the purposes of
            completing the Reorganization of Signal. Upon completion of the
            Reorganization, Fortress holds all of the assets formerly held by
            Signal.

        (b) After giving effect to the Reorganization, on January 15, 2007
            the Company granted options to acquire 948,000 common shares of
            the Company at an exercise price of $4.75 per share, expiring
            January 15, 2012.
    





For further information:

For further information: Mr. J. Cameron Bailey, President and Chief
Executive Officer, Phone: (403) 290-2450, Fax: (403) 398-3366, Email:
cbailey@fortressenergy.ca; Or Mr. Jamie Jeffs, Chief Financial Officer, Phone:
(403) 290-2470, Fax: (403) 398-3366, Email:jjeffs@fortressenergy.ca;
www.fortressenergy.ca

Organization Profile

FORTRESS ENERGY INC.

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