ProspEx Announces 2008 Second Quarter Results



    (All amounts are in Canadian dollars, unless stated otherwise)

    CALGARY, July 31 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") is pleased to provide its financial and operating results for the
three and six month period ended June 30, 2008.
    "ProspEx achieved significant production growth during the second quarter
as a result of a successful winter drilling program" said John Rossall,
President and Chief Executive Officer. "Our summer drilling program is now
underway in West Central Alberta, with drilling operations in the Deep Basin
scheduled to start within the next week."

    
    HIGHLIGHTS

    -   Production for the second quarter of 2008 was 4,285 barrels of
        oil equivalent ("boe") per day, a 13% increase over the prior
        quarter.
    -   In the first quarter, ProspEx drilled two wells in the Kakwa area
        that have now been on production for over three months. Current
        production from these two wells totals about 600 (360 net) boe
        per day. The Company believes that these two wells have defined a
        significant new opportunity that could require either four vertical
        wells per section or horizontal drilling with multi-stage fracturing
        to fully develop.
    -   The Company expanded its three dimensional ("3D") seismic coverage in
        Edson, Kakwa and Ricinus with the acquisition of approximately
        320 square kilometers of new data. This data will allow ProspEx to
        select drilling locations to follow up on successful winter drilling.
    -   ProspEx's summer drilling program started in late June, and
        two (1.5 net) wells have been drilled and cased to date in the
        third quarter in Harmattan and Willesden Green in West Central
        Alberta. An additional well is currently being drilled at Harmattan.
    -   Cash flow before changes in operating non-cash working capital items
        for the quarter was $14.9 million, an increase of 33% compared to the
        prior year due to higher commodity prices. Cash flow increased from
        the prior quarter due to growth in volumes and higher commodity
        prices.
    -   The Company showed earnings of $2.3 million in the second quarter,
        despite a $2.8 million unrealized mark to market loss on financial
        instruments, as natural gas prices at quarter end had increased
        significantly compared to the pricing of financial instruments put in
        place earlier this year.
    -   Net debt excluding after tax unrealized financial instrument losses
        was $43.2 million at June 30, 2008 compared to $55.8 million at the
        end of the prior quarter, reflecting the increased cash flow over the
        quarter and reduced capital spending due to the spring break-up
        period and the proceeds from the previously announced disposition of
        Granum area assets.
    

    OPERATIONAL REVIEW

    Capital Program

    Capital expenditures for exploration and development before acquisitions
and dispositions were $8.6 million during the second quarter of 2008.
Approximately half of this total was spent on land and seismic, with the
Company expanding its 3D seismic coverage in Edson, Kakwa and Ricinus. In
Edson, approximately 200 square kilometers of seismic was acquired to extend
ProspEx's coverage along the prospective play fairway. At Kakwa, an additional
60 square kilometers of seismic data was acquired offsetting successful wells
drilled in the first quarter, and to provide "template" data over recent
industry drilling in the area. This additional data provides the Company with
3D seismic coverage over essentially all of its lands in Kakwa. At Ricinus, 60
square kilometers of 3D seismic was obtained to evaluate potential exploration
opportunities on recently consolidated lands.
    Drilling and completions expenditures were modest in the second quarter
due to the annual spring break-up period. No wells were rig released in the
second quarter. ProspEx's summer drilling program began in late June with two
(1.5 net) wells drilled in West Central Alberta since the end of the second
quarter. This drilling includes a successful trend extension well at Harmattan
(100% working interest) and a successful development well (50% working
interest) at Willesden Green. An infill well (50% working interest) at
Harmattan is currently being drilled. Following this Harmattan well, drilling
activity will shift to the Ricinus area, where three (2.3 net) wells are
planned.
    Drilling operations are scheduled to begin at Wapiti in the Deep Basin in
the next week. After this initial Wapiti well, drilling activity will resume
later in the third quarter at Kakwa, where ProspEx enjoyed significant success
during the first quarter of 2008. Two of the first quarter Kakwa wells have
been on production since late March and are now producing at stable gross
rates of 1.5 and 2.0 million cubic feet ("mmcf") per day. Three dimensional
seismic has been used to define the prospective fairway tested by these two
wells and based on the Company's interpretation of the seismic data, ProspEx
estimates that the pool may be three to seven sections in areal extent.
Internal estimates as of the date of this release indicate that gross gas in
place volumes may range from 20 to 55 billion cubic feet ("bcf"), depending on
the average net pay thickness, porosity and productive area of the pool. At
this time ProspEx is not able to further define the resources described above
due to the early state of development of the pool. ProspEx has an average
working interest of 55% in this pool.
    Please note that the foregoing estimate does not represent recoverable
natural gas and there is no certainty that any additional portion of the
resources will be discovered. If discovered, there is no certainty that it
will be commercially viable to produce any portion of the resources.
    Given the large resource estimate relative to productivity, the Company
believes that this trend may require up to four vertical wells per section to
fully develop, or may be a good candidate for horizontal drilling with
multi-stage fracturing technology. The first wells in the Kakwa program will
be vertical wells to delineate the prospective fairway, followed by vertical
or horizontal development wells contingent on delineation drilling and further
technical analysis.
    ProspEx has also identified an additional analogous exploration
opportunity using 3D seismic on its Kakwa lands which will be tested as part
of the upcoming drilling program. ProspEx has six to eight wells planned in
its fall and winter drilling program in the Kakwa area. The Company has an
inventory of 12 (6.4 net) locations on undrilled sections within the two Kakwa
play fairways.
    At Edson, the 8-13-54-19W5 well (ProspEx 35% working interest) was
successfully drilled and production tested in the Devonian Wabamun formation
during the first quarter. The pipeline tie-in for this well has been licensed
and longer delivery equipment has been ordered, with production now expected
to commence late in 2008. The operator of the Edson lands is advancing four
additional locations through the regulatory process: two follow-ups to the
8-13 well, and two exploratory locations. ProspEx has developed an inventory
of 10 (3.5 net) additional drilling locations on Company land utilizing 3D
seismic.
    At Salter, a horizontal well was drilled and completed in the first
quarter in the Mississippian Rundle Group in a Foothills structure.
Relicensing of the existing pipeline to this well site is in progress to
accommodate production from the horizontal well, and is expected to be on
stream at the end of the third quarter, at a facilities restricted rate of 2
mmcf per day. ProspEx has a 40% working interest in the production from this
well.
    In Southern Alberta, surface acquisition is underway for a ten well
program at Medallion that is expected to commence late in the third quarter.
    The previously announced disposition of properties in the Granum area
effective April 1, 2008 was closed during the second quarter. The
consideration received was $5.6 million, prior to closing adjustments. These
properties include approximately 110 boe per day of net production and
2,660 net acres of undeveloped land.
    Subsequent to quarter end, ProspEx closed an acquisition of partner
interests in the Ricinus area for consideration of $3.35 million, subject to
normal closing adjustments, effective July 1, 2008. These properties include
approximately 60 boe per day of net production and 400 net acres of
undeveloped land. This acquisition is a follow up to the previous acquisition
that closed in January, 2008, further consolidating the Company's Ricinus
lands.
    Also subsequent to quarter end, the Company disposed of its lands in the
Shaw area (2,500 net undeveloped acres), which were due to expire in August of
this year, for consideration of $1.0 million.

    
    Production

    Production (boe/d)   Q2 2008    Q1 2008    Q4 2007    Q3 2007    Q2 2007
    -------------------------------------------------------------------------
    Southern Alberta       1,009      1,109      1,134      1,190      1,122
    West Central Alberta   1,904      1,236      1,305      1,466      1,397
    Deep Basin             1,362      1,425      1,472      1,589      1,713
    Other                     10         11         11          9          9
    -------------------------------------------------------------------------
    Total                  4,285      3,781      3,922      4,254      4,241
    

    Production for the second quarter of 2008 was 4,285 boe per day, 13%
greater than the prior quarter. New production was brought on stream at Kakwa
in the Deep Basin, as discussed above, and at Harmattan in West Central
Alberta, where three (3.0 net) wells were tied into the local midstream plant.
Subsequent to the quarter end, the three Harmattan wells were offline for
approximately five days due to a fire at a third party gas processing
facility, but have since resumed production.
    Second quarter 2008 production of 4,285 boe per day is only 1% greater
than the same quarter in 2007. This was expected as the Company elected to
pursue a measured pace of capital spending in the second half of 2007 due to
low natural gas prices, resulting in full year 2007 capital spending of only
$48.6 million. Consequently, new production additions have only just offset
production declines. With a 2008 capital budget of $65.0 million, the Company
is positioned to grow its production through 2009.

    
    2008 Guidance Summary

    Annual production                             4,200 to 4,500 boe per day
    Capital expenditures                          $65 million
    Operating costs                               $8.50 per boe
    General and administration ("G&A") costs      $2.15 per boe
    Royalties                                     20%
    

    Guidance for 2008 is summarized in the table above. Guidance regarding
capital expenditures, operating costs, G&A costs and royalties may constitute
"financial outlooks" as contemplated by National Instrument 51-102 of the
Canadian Securities Administrators entitled Disclosure Obligations. The
purpose of such financial outlooks is to forecast the anticipated operating
results of the Company in 2008. Please be advised that the information may not
be appropriate for other purposes.
    The Company's total 2008 capital budget, including acquisition
expenditures and disposition proceeds, is unchanged at $65.0 million. Guidance
with respect to annual average production guidance, operating costs, royalties
and G&A expenses is also unchanged.

    Reader's Advisory

    ProspEx is a Calgary based junior oil and gas company focused on
exploration for natural gas in the Western Canadian Sedimentary Basin.
    Certain information contained in this press release constitutes
forward-looking information or statements including, without limitation,
information and statements respecting: anticipated cash flow, capital
expenditures, production forecasts, production additions and deletions,
reserves and resources additions and deletions, additions to and deletions
from the Company's historical and future capital programs, acquisitions or
dispositions, operating expenses, G&A, royalties, expected timing of the
tie-in of wells, expected timing of the receipt of regulatory approvals and
expected timing of the completion of facilities projects.
    Statements relating to "reserves" and "resources" are forward-looking
information as they involve the implied assessment, based on certain estimates
and assumptions that, among others, the reserves and resources described exist
in the quantities predicted or estimated.
    Forward-looking information and statements are often, but not always,
identified by the use of words such as "anticipate", "seek", "believe",
"expect", "hope", "plan", "intend", "forecast", "target", "project",
"guidance", "may", "might", "will", "should", "could", "estimate", "predict"
or similar words or expressions suggesting future outcomes or language
suggesting an outlook. By their very nature, forward-looking information and
statements involve inherent risks and uncertainties, both general and
specific, and risks that predictions, forecasts, projections and other
forward-looking information and statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number of
important factors could cause the actual results to vary materially from the
forward-looking information or statements. These factors include, but are not
limited to: the volatility of oil and gas prices; production and development
costs and capital expenditures; the imprecision of reserve and resource
estimates and estimates of recoverable quantities of oil, natural gas and
liquids; the Company's ability to replace and expand oil and gas reserves;
environmental claims and liabilities; incorrect assessments of value when
making acquisitions or dispositions; increases in debt service charges; the
loss of key personnel; the marketability of production; defaults by third
party operators; unforeseen title defects; fluctuations in foreign currency
and exchange rates; inadequate insurance coverage; compliance with
environmental laws and regulations; changes in tax and royalty laws; the
Company's ability to access external sources of debt and equity capital; and
the Company's ability to obtain equipment in a timely manner to carry out
development activities. Further information regarding these factors may be
found under the headings "Risk Factors" and "Industry Conditions" in the
Company's most recent Annual Information Form, under the heading "Business
Risks" in the Company's Management's Discussion and Analysis for the year
ended December 31, 2007, and in the Company's most recent consolidated
financial statements, management information circular, quarterly reports,
material change reports and news releases available under the Company's
profile on SEDAR (www.sedar.com). Readers are cautioned that the foregoing
list of factors that may affect future results is not exhaustive. When relying
on our forward-looking statements to make decisions with respect to the
Company, investors and others should also carefully consider information set
forth in the section "Forward-Looking Information" of the Company's most
recent Annual Information Form respecting the assumptions upon which the
Company bases certain forward-looking information and the uncertainties
inherent in such assumptions.
    The Company does not assume responsibility for the accuracy and
completeness of the forward-looking information or statements and such
information and statements should not be taken as guarantees of future
outcomes. Subject to applicable securities laws, the Company does not
undertake any obligation to revise these forward-looking information or
statements to reflect subsequent events or circumstances. Furthermore, the
forward-looking information contained in this press release are made as of the
date of this document and the Company does not undertake any obligation to
update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by applicable law. The forward-looking information and statements
contained in this press release are expressly qualified by this cautionary
statement.
    The term boe may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet to one barrel is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. The aggregate of
the exploration and development costs incurred in the most recent financial
year and the change during that year in estimated future development costs
generally will not reflect total finding and development costs related to
reserves additions for that year.

    
    ProspEx Resources Ltd.
    Consolidated Highlights
    For the period ended

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
    (unaudited)              2008          2007          2008          2007
    -------------------------------------------------------------------------
    FINANCIAL ($000's)
    Oil and gas revenue     24,567        17,554        41,945        31,625
    Net earnings             2,261         2,235           151           441
    Cash flow(1)            14,926        11,189        24,108        18,722
    Total assets           192,681       171,361       192,681       171,361
    Total net debt(2)       43,224        39,336        43,224        39,336

    Net earnings per share
     ($ per share)
      Basic                   0.04          0.04          0.00          0.01
      Diluted                 0.04          0.04          0.00          0.01
    Cash flow per share
     ($ per share)(1)
      Basic                   0.26          0.21          0.42          0.35
      Diluted                 0.25          0.20          0.41          0.33
    Weighted average
     common shares (000's)
      Basic                 57,082        53,912        56,814        53,859
      Diluted               58,709        56,560        58,400        56,429

    PRODUCTION VOLUMES
      Natural gas (mcf/d)   19,957        21,108        19,510        18,945
      Natural gas liquids
       (bbls/d)                851           513           694           402
      Oil (bbls/d)             108           210            88           147
                               ---           ---           ---           ---
      Total (boe/d)          4,285         4,241         4,033         3,707

    SALES PRICES
      Natural gas ($/mcf)     9.47          7.31          8.74          7.70
      Natural gas liquids
       ($/bbl)               79.09         48.47         71.88         48.48
      Oil ($/bbl)           126.37         65.22        114.49         63.66
                            ------         -----        ------         -----
      Total ($/boe)          63.00         45.48         57.14         47.14

    NETBACKS ($/boe)
      Price                  63.00         45.48         57.14         47.14
      Unrealized financial
       instrument (loss)
       gain                  (7.13)         3.96         (9.94)        (2.53)
      Royalties             (11.97)        (3.97)       (10.38)        (6.47)
      Operating costs        (8.39)        (7.86)        (9.23)        (7.66)
      Transportation         (1.00)        (1.01)        (0.98)        (1.02)
      General and
       administrative        (2.02)        (2.13)        (2.25)        (2.18)
                             ------        ------        ------        ------
      Total                  32.49         34.47         24.36         27.28

    CAPITAL ($000's)
      Drilling and
       completions           2,094         1,552        12,145        10,869
      Facilities             1,908         3,801         6,620         9,732
      Land and lease         1,354         1,369         2,913         3,557
      Seismic                2,562           311         2,826         1,015
      Capitalized general
       and administrative      697           718         1,494         1,234
      Net property
       acquisitions
       (dispositions)       (5,448)            -         6,050             -
      Other capital assets      99            34           159           108
                                --            --           ---           ---
      Total                  3,266         7,785        32,207        26,515
    (1) Cash flow is defined as cash flow from operations before changes in
        operating non-cash working capital.
    (2) Total net debt is defined as long term debt less working capital
        (or plus working capital deficiency) excluding unrealized financial
        instrument gain (loss) and associated future tax assets
        (liabilities).
    

    Cash flow and total net debt do not have standardized measures prescribed
by Canadian generally accepted accounting principles and therefore may not be
comparable with calculation measures for other issuers.

    MANAGEMENT DISCUSSION & ANALYSIS

    Management's Discussion and Analysis ("MD&A") is management's assessment
of the financial and operating results of ProspEx Resources Ltd. ("ProspEx" or
the "Company") as well as a prospective view of the Company's activities. The
MD&A is for the three and six months ended June 30, 2008, and was prepared as
at July 31, 2008. The MD&A should be read in conjunction with the audited
consolidated financial statements and MD&A for the year ended December 31,
2007 together with the notes related thereto. The reader should be aware that
historical results are not necessarily indicative of future performance.

    RESULTS OF OPERATIONS

    The second quarter of 2008 was highlighted by continued strengthening of
the commodity price environment along with record production levels. Natural
gas prices strengthened 30% to $9.47 per million cubic feet ("mcf") from $7.31
per mcf in the same quarter last year. Operationally, the Company saw a 13%
increase in production from the first quarter of 2008 to 4,285 barrels of oil
equivalent ("boe") per day. Increases in production levels reflect the
successful completion of a winter drilling program in the Company's growth
areas.

    Net Earnings and Cash Flow

    Cash flow for the second quarter of 2008 was $14.9 million, an increase
of 33% from the same period of 2007. This was driven by a 39% increase in
average realized prices.
    During the second quarter of 2008, the Company reported net earnings of
$2.3 million which is a 1% increase over the same period in 2007 and an
improvement of $4.4 million from 2008's first quarter net loss. The increase
in earnings was due to stronger prices and production growth during the second
quarter of 2008. For the six months ending June 30, 2008, net earnings were
$0.2 million compared to $0.4 million from the same period of 2007.

    
    Revenue

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
    ($000's)                 2008          2007          2008          2007
                         ----------------------------------------------------
    Natural gas           $ 18,605      $ 14,004      $ 32,344      $ 25,634
    Realized gain (loss)
     on financial
     instruments            (1,407)           39        (1,307)          768
                         ----------------------------------------------------
    Total natural gas       17,198        14,043        31,037        26,402
    Oil                      1,245         1,245         1,832         1,692
    Natural gas liquids      6,124         2,266         9,076         3,531
                         ----------------------------------------------------
    Oil and gas revenue     24,567        17,554        41,945        31,625
    Unrealized financial
     instrument (loss)
     gain                   (2,781)        1,529        (7,300)       (1,701)
                         ----------------------------------------------------
    Total revenue         $ 21,786      $ 19,083      $ 34,645      $ 29,924
                         ----------------------------------------------------
    

    Second quarter oil and gas revenue increased by $7.0 million or 40% to
$24.6 million in 2008 from the second quarter of 2007, as a result of a slight
volume increase and a 39% increase in average prices. The Company experienced
significant increases in natural gas liquids ("NGL") revenues as a result of
new liquid rich production in both the Ricinus and Harmattan areas. Second
quarter 2008 total revenue increased by $2.7 million or 14% from the same
period in 2007 for the reasons mentioned above, partially offset by an
increase in the unrealized financial instrument loss of $4.3 million.
    For the six months ending June 30, 2008 oil and gas revenue increased by
$10.3 million or 33% due to a 9% increase in production as well as a 21%
increase in average prices.

    
    Production
                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    Area (boe/d)
    ------------
    Deep Basin               1,362         1,713         1,393         1,270
    West Central Alberta     1,904         1,397         1,570         1,283
    Southern Alberta         1,009         1,122         1,059         1,142
    Other Areas                 10             9            11            12
                             -----         -----         -----         -----
                             4,285         4,241         4,033         3,707
                         ----------------------------------------------------
    Product
    -------
    Natural gas (mcf/d)     19,957        21,108        19,510        18,945
    Natural gas liquids
     (bbls/d)                  851           513           694           402
    Oil (bbls/d)               108           210            88           147
                             -----         -----         -----         -----
    Total (boe/d)            4,285         4,241         4,033         3,707
                         ----------------------------------------------------
    

    Production for the second quarter of the year averaged 4,285 boe per day,
an increase of 13% over the first quarter and 1% over the same period of 2007.
Production growth was mainly attributable to the West Central Alberta area due
to a property acquisition in the Ricinus area and drilling success in both
Harmattan and Ricinus. Production in the Deep Basin was lower in the quarter
due to natural declines and facility downtime in the Wapiti area partially
offset by new production in Kakwa.
    ProspEx's overall production mix for the second quarter of 2008 was 78%
natural gas with the remaining 22% being NGLs and oil. On a year to date
basis, production was 81% natural gas and 19% NGLs and oil. NGLs and oil
volumes have increased in the current year due to the liquid rich production
brought on in the Harmattan and Ricinus areas.

    
    Commodity Pricing

    ProspEx             Three months  Three months   Six months    Six months
     Average Prices         ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    Natural gas ($/mcf)
      Sales price         $  10.25      $   7.29      $   9.11      $   7.48
      Realized (loss)
       gain on financial
       instrument            (0.78)         0.02         (0.37)         0.22
                         ----------------------------------------------------
      Average realized
       natural gas price      9.47          7.31          8.74          7.70
    Oil ($/bbl)             126.37         65.22        114.49         63.66
    NGL ($/bbl)              79.09         48.47         71.88         48.48
                         ----------------------------------------------------
    Average realized
     price ($/boe)           63.00         45.48         57.14         47.14
    Unrealized financial
     instrument (loss)
     gain ($/boe)            (7.13)         3.96         (9.94)        (2.53)
                         ----------------------------------------------------
    Total average price
     ($/boe)              $  55.87      $  49.44      $  47.20      $  44.61
                         ----------------------------------------------------


    Benchmark pricing   Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    AECO C Spot ($/mcf)   $  10.22      $   7.07      $   9.06      $   7.24
    Edmonton Par -
     light oil  ($/bbl)   $ 126.07      $  71.93      $ 111.79      $  69.51
                         ----------------------------------------------------
    

    Average natural gas sales prices increased 41% to $10.25 per mcf in the
second quarter of 2008, compared to $7.29 per mcf in the second quarter of
2007. During the second quarter of 2008, AECO C daily spot prices for natural
gas increased by 45% compared to the second quarter of 2007 and the AECO
monthly index for the same period increased 27%.
    Realized natural gas prices for the second quarter of 2008 averaged $9.47
per mcf, an increase of 30% from $7.31 per mcf realized in the second quarter
of 2007. For the six months ending June 30, 2008 the realized natural gas
price increased 14% to $8.74 per mcf compared to $7.70 per mcf for the same
period of 2007. Overall 2008 realized natural gas prices have increased
reflecting the improvements in the commodity markets for 2008.
    Oil prices received for the second quarter of 2008 were $126.37 per
barrel ("bbl"). This is a 94% increase from the $65.22 per bbl received in the
second quarter of 2007. For the six months ending June 30, 2008, the oil price
received was $114.49 per bbl, an increase of 80% from the same period of 2007.
    The price realized for NGLs in the second quarter of 2008 was $79.09 per
bbl, an increase of 63% from $48.47 per bbl in the second quarter of 2007. On
a year to date basis, the NGL price as of June 30, 2008 was $71.88 per bbl
which is an increase of 48% over June 30, 2007. NGL prices did not reflect the
same percentage increases as seen with the oil benchmark pricing due to an
increase in the proportion of ethane in the Company's overall NGL mix. Ethane
prices tend to track natural gas pricing as opposed to oil prices.

    Financial Instruments

    In an effort to mitigate the effects of volatile commodity prices and
ensure cash flow to fund its exploration and development programs, ProspEx
enters into financial instruments such as forwards, futures, swaps and
costless collars. For the quarter ended June 30, 2008, the Company's risk
management program resulted in a net realized loss of $1.4 million and a loss
of $1.3 million for the first half of 2008, compared to a $0.1 million gain
and a $0.8 million gain for the same periods in 2007.
    The fair values of unsettled financial instruments are recorded as a
current asset or liability with the change in the fair value recorded as an
unrealized gain or loss in the statements of earnings. As a result, changes in
the fair value of financial instruments due to fluctuating forward natural gas
prices and the purchase or expiration of financial contracts can lead to
volatility in net earnings for the period. The financial instruments open as
of June 30, 2008 are described in detail in the financial instruments, risk
management and capital management strategy note to the consolidated financial
statements (note 5). The fair value of open financial instruments at June 30,
2008 was a liability of $7.1 million compared to an asset of $1.4 million at
June 30, 2007. The impact of the changes in the fair values of open financial
instruments was a loss of $2.8 million for the quarter ended June 30, 2008 and
a loss of $7.3 million for the first six months of the year. This compares to
a gain of $1.5 million for the second quarter of 2007 and a loss of $1.7
million for the first six months of 2007.

    
    Royalty Expenses

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
    ($000's)                 2008          2007          2008          2007
                         ----------------------------------------------------
      Crown               $  2,862      $    768      $  5,528      $  3,114
      Freehold and
       gross overriding      1,806           765         2,090         1,226
                          --------      --------      --------      --------
      Total Royalties     $  4,668      $  1,533      $  7,618      $  4,340
                         ----------------------------------------------------

      $ per boe           $  11.97      $   3.97      $  10.38      $   6.47
      As a percentage
       of oil and gas
       revenue                 19%            9%           18%           14%
                         ----------------------------------------------------
    

    In the second quarter of 2008, royalties totaled $4.7 million or 19% of
revenue compared to last year's $1.5 million or 9% of revenue. During the
first six months of 2008 royalties totaled $7.6 million or 18% of revenue
compared to $4.3 million or 14% of revenue for the same period of 2007. The
rate in 2007 was low due to a $1.2 million capital cost deduction adjustment
that was not duplicated in 2008. The Company's 2008 royalty rate is expected
to be higher than 2007 as a result of the shift in the production profile from
the lower royalty rate wells in Medallion to higher royalty rate wells in West
Central Alberta and the Deep Basin.
    ProspEx is required to pay the Province of Alberta and other royalty
owners for the right to produce minerals owned by them. Such royalty payments
are subject to change and any changes may have an adverse impact on the
profitability of a project.
    On October 25, 2007, the Government of Alberta unveiled a new framework
to calculate the royalties payable to it for conventional oil, natural gas and
bitumen that are based on, among other things, price, production and depth of
wells. This framework has a proposed effective date of January 1, 2009,
however many material details of the revised royalty structure have yet to be
finalized.
    On April 10, 2008, the Government of Alberta introduced two new five year
deep resource programs to address concerns over the development of deep oil &
gas reserves commencing January 1, 2009. These programs consist of a sliding
scale of royalty credits according to depth.

    
    Operating Costs

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    Operating costs
     ($000's)             $  3,274      $  3,034      $  6,774      $  5,137
    Operating costs
     ($/boe)              $   8.39      $   7.86      $   9.23      $   7.66
                         ----------------------------------------------------
    

    Operating costs for the second quarter were $3.3 million or $8.39 per
boe. In comparison to the prior year operating costs have risen from $3.0
million or $7.86 per boe, but in comparison to the first quarter of 2008 are
lower than the $3.5 million or $10.17 per boe. Overall operating costs are
trending upwards as the Company's growing production profile is shifting
towards producing areas that attract higher operating costs which include
processing fees. Operating costs for the second quarter were lower than the
first quarter of 2008 as a result of higher than usual operating costs
incurred in the first quarter of the year as the Company incurred additional
spending required to integrate newly acquired properties that it purchased in
the quarter, the cost to address operational issues at Medallion, increased
costs at Salter and costs incurred to accommodate production growth.
    Operating costs for the first half of the year were $6.8 million or $9.23
per boe compared to $5.1 million or $7.66 per boe for the first half of 2007,
reflecting the comments above.

    
    Transportation Expenses

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    Transportation
     expenses ($000's)    $    389      $    389      $    721      $    684
    Transportation
     expenses ($/boe)     $   1.00      $   1.01      $   0.98      $   1.02
                         ----------------------------------------------------
    

    Transportation expense per boe for the three and six months ended
June 30, 2008 is consistent with the comparable periods of 2007.

    
    General and Administrative Expenses

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
    ($000's)                 2008          2007          2008          2007
                         ----------------------------------------------------
    Gross general and
     administrative       $  1,685      $  1,732      $  3,620      $  3,242
    Recoveries                (202)         (192)         (470)         (547)
    Capitalized expenses      (697)         (718)       (1,495)       (1,234)
                          ---------     ---------     ---------     ---------
    Net general and
     administrative
     expenses             $    786      $    822      $  1,655      $  1,461
                          ---------     ---------     ---------     ---------
    Net general and
     administrative
     expenses ($/boe)     $   2.02      $   2.13      $   2.25      $   2.18
                         ----------------------------------------------------
    

    Gross general and administrative costs remained relatively flat during
the second quarter of 2007 and 2008. For the first six months of 2008 gross
general and administrative costs increased by $0.4 million in the six months
ended June 30, 2008 compared to the same period in 2007, due to higher salary
expenses in the current year.

    Interest and Bank Charges

    Interest and bank charges of $0.5 million in the second quarter and $1.0
million year to date in 2008 were essentially unchanged from the prior year
amounts of $0.6 million and $1.0 million, as average debt levels have remained
consistent over the past year.

    
    Depletion, Depreciation and Accretion

                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
                             2008          2007          2008          2007
                         ----------------------------------------------------
    Depletion,
     depreciation and
     accretion ($000's)   $  8,685      $  9,078      $ 16,060      $ 15,875
    Depletion,
     depreciation and
     accretion ($/boe)    $  22.27      $  23.52      $  21.88      $  23.66
                         ----------------------------------------------------
    

    Depletion, depreciation and accretion expense per boe in the second
quarter and first half of 2008 was $22.27 per boe and $21.88 per boe
respectively, which is a decrease from the comparable period in 2007 of $23.52
per boe and $23.66 per boe respectively. The reductions over the comparable
periods in 2007 are as a result of the Company adding proven reserves at a
lower cost than the Company's historical average.

    Stock-Based Compensation

    Stock-based compensation expenses are down slightly for the three and six
months ended June 30, 2008 from $0.3 million and $0.5 million respectively in
2007, to $0.2 million and $0.4 million respectively in 2008. Costs are down as
the initial grant of stock options and special performance units in 2004 has
been fully recognized.

    Income Taxes

    In the second quarter of 2008, the Company's future income tax expense
was in line with the same period in 2007 at $1.0 million. For the six months
ending June 30, 2008 future income tax expense totaled $0.2 million, down from
$0.5 million in June of 2007.
    During the first quarter of 2008, the renouncement of flow-through shares
resulted in an increase of future tax liability of $2.2 million (2007 - $4.5
million).

    
    Estimated tax pools as at June 30 are:

    ($000's)                                2008                        2007
    -------------------------------------------------------------------------
    Canadian development expense        $ 33,042                    $ 30,578
    Canadian exploration expense          27,581                      29,354
    Canadian oil & gas property expense   34,606                      30,156
    Undepreciated capital cost            46,296                      46,718
    Other                                  5,169                       4,799
    -------------------------------------------------------------------------
                                        $146,694                    $141,605
    -------------------------------------------------------------------------
    

    ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by the end of 2008. The Company estimates that $7.8 million of this
commitment has been expended to June 30, 2008.

    Capital Expenditures

    Capital expenditures excluding the property disposition of $5.4 million,
were $8.6 million during the second quarter of 2008, compared to expenditures
of $7.8 million in the second quarter of 2007. Details of these expenditures
for the period ended June 30, were as follows:

    
                        Three months  Three months   Six months    Six months
                            ended         ended         ended         ended
                           June 30,      June 30,      June 30,      June 30,
    ($000's)                 2008          2007          2008          2007
    -------------------------------------------------------------------------
    Drilling and
     completions          $  2,094      $  1,552      $ 12,145      $ 10,869
    Facilities               1,908         3,801         6,620         9,732
    Land and lease           1,354         1,369         2,913         3,557
    Seismic                  2,562           311         2,826         1,015
    Capitalized G&A            697           718         1,494         1,234
                             ------        ------        ------        ------
    Exploration &
     development capital
     expenditures            8,615         7,751        25,998        26,407
    Net property
     acquisitions
     (dispositions)         (5,448)            -         6,050             -
    Other capital assets        99            34           159           108
    -------------------------------------------------------------------------
    Total capital
     expenditures         $  3,266      $  7,785      $ 32,207      $ 26,515
    -------------------------------------------------------------------------
    

    Of the $8.6 million invested in exploration and development capital
expenditures, $2.0 million was spent in the Deep Basin, $1.8 million in West
Central Alberta, $0.8 million in Southern Alberta, $2.3 million in other areas
and $1.7 million on corporate items.
    In the first half of 2008, $12.1 million was spent to drill and complete
seven (3.8 net) wells with an 89% net success rate. No wells were rig released
in the second quarter of 2008 as the usual spring break-up conditions
prevented access to drilling locations for the quarter.
    The Company has participated in $6.1 million of acquisition and
disposition activity during the first half of the year. During the first
quarter of 2008 the Company acquired certain properties in the Ricinus area of
Alberta for $11.5 million after closing adjustments. These properties consist
of 16 (11.9 net) wells with production at acquisition of approximately 360 boe
per day. In the second quarter of 2008 the Company sold certain non-operated
properties in the Granum area for net proceeds of $5.4 million after closing
adjustments. These properties consisted of 5 (1.0 net) producing wells with
net production at disposition of approximately 110 boe per day.

    Liquidity & Capital Resources

    At June 30, 2008, ProspEx had the following resources available to fund
its capital expenditure program.

    
    ($000's)
    -------------------------------------------------------------------------
    Working capital deficiency, excluding financial instrument
     gains/losses and related tax                                $    (6,709)
    Long-term debt                                                   (36,515)
    Bank facilities available                                         65,000
    -------------------------------------------------------------------------
    Total capital resources available                            $    21,776
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    ProspEx expects that it will be able to fund its remaining 2008 capital
program from operating cash flow and capital resources noted above.
    On July 22, 2008 one of ProspEx's natural gas liquids purchasers
announced that it had filed for creditor protection. ProspEx has exposure of
approximately $25,000 with this counterparty.

    Bank Debt

    At June 30, 2008 the Company had a $65.0 million credit facility with a
Canadian chartered bank. The facility is available by way of Canadian prime
and US base rate loans, LIBOR advances, bankers' acceptances and letters of
credit. Canadian prime rate loans, US base rate loans, and LIBOR advances bear
interest at Canadian prime, US base rate or LIBOR, as applicable, plus a
margin dependant upon the Company's debt/cash flow ratio as calculated in the
previous quarter. Stamping fees for bankers' acceptances are based on a rate
adjusted over the term to maturity plus a margin as described above. The
credit facility is fully revolving until June 30, 2009 and may be extended at
the mutual agreement of ProspEx and its lender for an additional year. If the
credit facility is not extended, a balloon payment is required on July 1,
2010. This facility is secured by a $200 million demand debenture and a first
floating charge on all petroleum and natural gas assets of ProspEx.

    Share Capital

    As at June 30, 2008, ProspEx had 57,199,448 common shares (2007 -
53,955,551), 2,201,983 warrants (2007 - 2,792,218), and 5,035,553 options
(2007 - 4,520,917) issued and outstanding. Each warrant and option, upon
exercise, entitles the holder to one common share.
    As at July 31, 2008, ProspEx had 57,199,448 common shares,
2,201,983 warrants, and 5,035,553 options issued and outstanding.

    Subsequent event

    On July 23, 2008, the Company acquired certain properties in the Ricinus
area of Alberta. These properties consist of 13 (1.2 net) producing wells,
with current net production of approximately 60 boe per day and 400 net acres
of undeveloped land. The consideration paid by the Company was $3.35 million
subject to normal closing adjustments.

    Contractual Obligations

    The Company has committed to certain payments over the next five years as
follows:

    
    Payments due                                                       There-
     ($000's)               2008     2009     2010     2011     2012    after
    -------------------------------------------------------------------------
    Long-term debt       $     -        -   36,515        -        -  $     -
    Building lease           192    1,122    1,189    1,229    1,243    1,346
    Drilling rig contract  2,929      161        -        -        -        -
    Process fees             252      400      300       47        -        -
    Transportation           491      579       78        -        -        -
    Other                      5        8        2        -        -        -
    -------------------------------------------------------------------------
    Total                $ 3,869    2,270   38,084    1,276    1,243  $ 1,346
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by December 31, 2008. The Company estimates that $7.8 million of
this commitment has been expended to June 30, 2008.

    Off-Balance Sheet Arrangements

    The Company has not entered into any off-Balance Sheet transactions.

    Summary of Quarterly Results

    The following table summarizes the quarterly operating statistics of the
Company.

    
                                   2008                         2007
    -------------------------------------------------------------------------
                              Q2            Q1            Q4            Q3
    -------------------------------------------------------------------------
    Financial ($000's,
     except per share
     amounts)
    Oil and gas revenue     24,567        17,378        15,906        16,004
    Net earnings (loss)      2,261        (2,110)         (180)       (1,352)
      Per share - basic       0.04         (0.04)         0.00         (0.03)
                - diluted     0.04         (0.04)         0.00         (0.03)

    Average Daily
     Production
    Oil (bbls/d)               108            68           125            82
    NGL (bbls/d)               851           536           515           548
    Natural Gas (mcf/d)     19,957        19,064        19,690        21,743
                           --------      --------      --------      --------
    Total (boe/d)            4,285         3,781         3,922         4,254

    Operating Netbacks
     ($/boe)
    Price(1)                 63.00         50.50         44.09         40.89
    Royalties               (11.97)        (8.57)        (5.41)        (7.79)
    Transportation           (1.00)        (0.96)        (0.86)        (0.89)
    Operating Cost           (8.39)       (10.17)        (8.06)        (8.42)
                           --------      --------      --------      --------
    Operating Netback        41.64         30.80         29.76         23.79
                          ---------------------------------------------------



                                    2007                        2006
    -------------------------------------------------------------------------
                              Q2            Q1            Q4            Q3
    -------------------------------------------------------------------------
    Financial ($000's,
     except per share
     amounts)
    Oil and gas revenue     17,554        14,071        13,536        14,071
    Net earnings (loss)      2,235        (1,794)        2,143           440
      Per share - basic       0.04         (0.03)         0.04          0.01
                - diluted     0.04         (0.03)         0.04          0.01

    Average Daily
     Production
    Oil (bbls/d)               210            83           184            67
    NGL (bbls/d)               513           290           276           515
    Natural Gas (mcf/d)     21,108        16,757        16,221        18,335
                           --------      --------      --------      --------
    Total (boe/d)            4,241         3,166         3,164         3,639

    Operating Netbacks
     ($/boe)
    Price(1)                 45.48         49.38         46.50         42.03
    Royalties                (3.97)        (9.85)        (7.16)        (8.46)
    Transportation           (1.01)        (1.03)        (0.96)        (0.98)
    Operating Cost           (7.86)        (7.38)        (7.39)        (8.21)
                           --------      --------      --------      --------
    Operating Netback        32.64         31.12         30.99         24.38
                          ---------------------------------------------------

    (1) Price does not include unrealized financial instrument gain or loss.
    

    Revenue and net earnings are affected by production volumes, operating
netback, taxation rates, the Company's risk management program and depletion
charges which are the result of the Company's success in adding new proven oil
and natural gas reserves.
    Overall production volume trends are the result of exploration and
drilling success, however quarterly volatility is impacted by the seasonality
of the industry as well as facility or pipeline restrictions and/or
maintenance.
    With respect to operating netbacks, the average price received has
increased as worldwide commodity prices have risen over the past two years.
Operating costs have increased due to the growth in the proportion of
production from higher cost areas such as the Deep Basin and West Central
Alberta.

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Adopted and Recent Pronouncements

    Financial Instruments - Effective January 1, 2008 the Company adopted the
new accounting standards for disclosure required under CICA Handbook Section
3862 "Financial Instruments - Disclosures", which applies to both recognized
and unrecognized financial instruments. These disclosures, which include the
nature and extent of risks arising from financial instruments, are included in
note 5 of the unaudited financial statements of the Company for the second
quarter of 2008 (the "Second Quarter Financial Statements").

    Capital Disclosures - Effective January 1, 2008, ProspEx adopted the new
requirements of the CICA for disclosure of the Company's objectives, policies
and processes for managing capital (Section 1535) as discussed in note 5 of
the Second Quarter Financial Statements.

    Internal Control Reporting - On July 11, 2008, Canadian Securities
Administrators issued a staff notice relative to the replacement of the
current multilateral instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings. The notice accepts the replacement
proposal, whereby CEO and CFO annual certification will be required to include
an evaluation of the effectiveness of internal controls over financial
reporting ("ICFR") as of the end of the financial year and disclosure
conclusions about the effectiveness of ICFR in the annual MD&A. This will
apply for the year ended December 31, 2008. The Company is continuing with its
evaluation of ICFR to ensure it meets the criteria for December 31, 2008
certification.

    Convergence with International Reporting Standards - On February 13,
2008, the Canadian Accounting Standards Board confirmed that the effective
date for the convergence of Canadian Generally Accepted Accounting Standards
for publicly accountable entities to International Financial Reporting
Standards will be January 1, 2011. On April 8, 2008, an exposure draft was
released soliciting comment from the Canadian financial community on the
applicability and appropriateness in a Canadian context, of the proposed
standards, with a comment deadline of July 31, 2008. The Company has not yet
developed an IFRS changeover plan, therefore the impact on its financial
position or results of operations has not yet been determined.

    DISCLOSURE CONTROLS AND POLICIES

    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 CEO and CFO have
concluded, based on their evaluation as of June 30, 2008, 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 subsidiary, is made known to them by
others within those entities. It should be noted that while the Company's CEO
and CFO 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

    The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls that require
commenting on in the MD&A.
    For the second quarter of 2008 there were no changes to the design of
internal controls over financial reporting.

    ADVISORIES

    Within the MD&A references are made to terms commonly used in the oil and
gas industry. "Cash flow" is not defined by GAAP in Canada and is referred to
as a non-GAAP measures. For the purposes thereof, "cash flow" is defined as
cash flow from operations before the change in operating non-cash working
capital. The MD&A contains the term "cash flow" which should not be considered
an alternative to, or more meaningful than "cash flow from operations" as
determined in accordance with GAAP. The Company considers cash flow to be a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund capital projects and to repay debt. Cash flow presented does
not have any standardized meaning prescribed by Canadian GAAP and therefore it
may not be comparable with the calculation of similar measures for other
entities. Cash flow per share is calculated using the same weighted average
number of common shares for the period as used in calculating the net earnings
per share calculation.
    Boe amounts have been calculated using a conversion rate of six mcf of
gas to one barrel of oil. The term boe may be misleading if used in isolation.
A boe conversion ratio of one barrel of oil to six mcf of gas is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the well head.
    "Operating netbacks" are calculated by subtracting transportation costs,
royalties payable, and operating costs from the average price received during
the period.
    The aggregate of the exploration and development costs incurred in the
most recent financial year and the change during the year in estimated future
development costs generally will not reflect total finding and development
costs related to reserve additions for that year.

    Forward-looking Information

    Certain information regarding ProspEx including, without limitation,
management's assessment of future plans and operations, constitutes
forward-looking information or statements under applicable securities law and
necessarily involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without limitation, assumptions
and risks associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, royalty rates, imprecision of reserve
estimates, environmental risks, competition, incorrect assessment of the value
of acquisitions or dispositions, failure to realize the anticipated benefits
of acquisitions and ability to access sufficient capital from internal and
external sources.
    The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonable by ProspEx at the time of preparation, may
prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of assumptions, factors and risks is not exhaustive. Additional information on
the foregoing assumptions, risks and other factors that could affect ProspEx's
operations or financial results are included in ProspEx's public disclosure
documents on file with Canadian securities regulatory authorities. In
particular see the Risk Factors and Industry Conditions sections of ProspEx's
most recent Annual Information Form. ProspEx's reports may be accessed through
the SEDAR website (www.sedar.com), at ProspEx's website (www.psx.ca) or by
contacting the Company directly. Consequently, there is no representation by
ProspEx that actual results achieved will be the same in whole or in part as
those set out in the forward-looking information.
    Furthermore, the forward-looking information and statements contained in
this MD&A are made as of the date of this MD&A, and ProspEx does not undertake
any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. The forward-looking
information and statements contained herein are expressly qualified by this
cautionary statement.



    
    ProspEx Resources Ltd.
    Consolidated Balance Sheets
    (unaudited)


                                                           June 30, December
    (Stated in thousands of dollars)                          2008  31, 2007
    -------------------------------------------------------------------------

    Assets

    Current assets
      Accounts receivable                                 $ 11,653    12,900
      Prepaid expenses                                         889       988
      Future income tax asset (note 3)                       2,090         -
      Unrealized financial instrument gain                       -       214
                                                          -------------------
                                                            14,632    14,102

    Property, plant and equipment, net                     178,049   161,663
                                                          -------------------
                                                          $192,681   175,765
                                                          -------------------
                                                          -------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities            $ 19,251    22,761
      Unrealized financial instrument loss                   7,086         -
      Future income tax liability (note 3)                       -        69
                                                          -------------------
                                                            26,337    22,830

    Long term debt (note 2)                                 36,515    28,846

    Asset retirement obligation                              5,975     5,201

    Future income tax liability (note 3)                     7,884     3,145
                                                          -------------------

    Total liabilities                                       76,711    60,022
                                                          -------------------

    Shareholders' Equity

    Share capital (note 4)                                  91,775    92,204
    Contributed surplus (note 4)                             6,119     5,614
    Retained earnings                                       18,076    17,925
                                                          -------------------
    Total shareholders' equity                             115,970   115,743
                                                          -------------------

                                                          $192,681   175,765
                                                          -------------------
                                                          -------------------

    Subsequent event (note 8)
    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Earnings, Comprehensive Earnings and Retained
    Earnings
    For the periods ended
    (unaudited)

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
    (Stated in thousands of dollars,   June 30,  June 30,  June 30,  June 30,
     except per share amounts)            2008      2007      2008      2007
    -------------------------------------------------------------------------

    Revenue
      Oil and gas                     $ 24,567    17,554    41,945    31,625
      Unrealized financial instrument
       gain (loss)                      (2,781)    1,529    (7,300)   (1,701)
      Royalties                         (4,668)   (1,533)   (7,618)   (4,340)
                                      ---------------------------------------

                                        17,118    17,550    27,027    25,584
                                      ---------------------------------------

    Expenses
      Depletion, depreciation and
       accretion                         8,685     9,078    16,060    15,875
      Operating                          3,274     3,034     6,774     5,137
      Transportation                       389       389       721       684
      General and administrative           786       822     1,655     1,461
      Interest and bank charges            515       559     1,024       956
      Stock-based compensation             236       286       431       521
                                      ---------------------------------------

                                        13,885    14,168    26,665    24,634
                                      ---------------------------------------

    Earnings before taxes                3,233     3,382       362       950
                                      ---------------------------------------

    Income Taxes (note 3)
      Future                               972     1,147       211       509
                                      ---------------------------------------

                                           972     1,147       211       509
                                      ---------------------------------------

    Net earnings and comprehensive
     earnings for the period             2,261     2,235       151       441

    Retained earnings, beginning of
     period                             15,815    17,222    17,925    19,016
                                      ---------------------------------------

    Retained earnings, end of period  $ 18,076    19,457    18,076    19,457
                                      ---------------------------------------
                                      ---------------------------------------

    Net earnings per share
      Basic                           $   0.04      0.04      0.00      0.01
                                      ---------------------------------------
                                      ---------------------------------------
      Diluted                         $   0.04      0.04      0.00      0.01
                                      ---------------------------------------
                                      ---------------------------------------

    See accompanying notes to consolidated financial statements



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flows
    For the periods ended
    (unaudited)

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    (Stated in thousands of dollars)      2008      2007      2008      2007
    -------------------------------------------------------------------------

    Operations
    Net earnings for the period       $  2,261     2,235       151       441
    Items not involving cash
      Depletion, depreciation and
       accretion                         8,685     9,078    16,060    15,875
      Stock-based compensation             236       286       431       521
      Future income taxes                  972     1,147       211       509
      Unrealized financial instrument
       (gain) loss                       2,781    (1,529)    7,300     1,701
    Asset retirement expenditures           (9)      (28)      (45)     (325)
                                      --------- -----------------------------
                                        14,926    11,189    24,108    18,722
    Changes in non-cash working
     capital                            (2,227)   (3,744)     (302)   (9,913)
                                      --------- -----------------------------
                                        12,699     7,445    23,806     8,809
                                      --------- -----------------------------

    Financing
      Issuance of common shares            912       271     1,418       310
      (Decrease) Increase in long-term
       debt                             (2,910)    2,972     7,669    25,757
                                      --------- -----------------------------
                                        (1,998)    3,243     9,087    26,067
                                      --------- -----------------------------

    Investments
      Exploration and development
       expenditures                     (8,615)   (7,751)  (25,998)  (26,407)
      Property (acquisition)
       disposition                       5,448         -    (6,050)        -
      Expenditures on asset held
       for resale                            -       937         -       937
      Deposit on property acquisition        -         -     1,175         -
      Other capital expenditures           (99)      (34)     (159)     (108)
                                      --------- -----------------------------
                                        (3,266)   (6,848)  (31,032)  (25,578)
    Changes in non-cash working
     capital                            (7,435)   (3,840)   (1,861)   (9,298)
                                      --------- -----------------------------
                                       (10,701)  (10,688)  (32,893)  (34,876)
                                      --------- -----------------------------

    Change in cash                           -         -         -         -

    Cash, beginning of period                -         -         -         -
                                      --------- -----------------------------

    Cash, end of period               $      -         -         -         -
                                      --------- -----------------------------
                                      --------- -----------------------------

    See accompanying notes to consolidated financial statements




    Notes to Consolidated Financial Statements

    For the three months and six months ended June 30, 2008
    (unaudited)

    The interim unaudited consolidated financial statements of ProspEx
    Resources Ltd. (the "Company" and/or "ProspEx") have been prepared in
    accordance with Canadian generally accepted accounting principles
    ("GAAP"). The Company is engaged in the acquisition, exploration,
    development and production of oil and natural gas in Canada.

    The interim unaudited consolidated financial statements have been
    prepared by management following the same accounting policies and methods
    of computation as the audited consolidated financial statements for the
    period ended December 31, 2007 except as described below. Preparation of
    financial statements in conformity with Canadian GAAP requires management
    to make estimates and assumptions that affect the reported amounts of
    assets, liabilities, revenue and expenses and disclosure of contingent
    assets and liabilities at the date of the financial statements. Actual
    results may differ from these estimates. The disclosures included below
    are incremental to those included with the annual consolidated financial
    statements except as disclosed below. The interim consolidated financial
    statements should be read in conjunction with the consolidated financial
    statements and the notes thereto in the Company's annual report for the
    year ended December 31, 2007.

    1.  CHANGES IN ACCOUNTING POLICIES

    (a) Financial Instruments

    On January 1, 2008 the Company adopted the new accounting standard for
    financial instruments - disclosures, which applies to both recognized and
    unrecognized financial instruments. The standards require that disclosure
    be made of the nature and extent of risks arising from financial
    instruments. This adoption did not have any impact on the results of
    operations or net financial position, as it is a disclosure related
    standard.

    A financial instrument is any contract that gives rise to a financial
    asset of one entity and a financial liability or equity instrument to
    another entity. Upon initial recognition all financial instruments,
    including derivatives, are recognized on the balance sheet at fair value.
    Subsequent measurement is then based on the financial instruments being
    classified into one of five categories: held for trading, held to
    maturity, loans and receivables, available for sale and other
    liabilities. The Company has designated its financial instruments into
    the following categories applying the indicated measurement methods:


                                                               Measurement
    Financial Instrument                      Category         Method
    -------------------------------------------------------------------------
    Accounts receivable                       Loans and        Amortized cost
                                               receivables

    Accounts payable and accrued liabilities  Other            Amortized cost
                                               liabilities

    Long-term debt                            Other            Amortized cost
                                               liabilities
    -------------------------------------------------------------------------

    The Company enters into derivative financial instruments to manage its
    exposure to volatility in commodity prices. These instruments are not
    used for trading or other speculative purposes.

    Commodity price financial instruments that do not qualify as hedges, or
    have not been designated as such, are recorded at fair value on
    inception. Realized gains or losses on these financial instruments are
    reflected as adjustments to the related revenue when the gain or loss is
    realized; unrealized gains and losses on these instruments are recognized
    as adjustments to the related revenue at the end of each reporting
    period. The estimated fair value of these instruments is based on quoted
    market prices, or if quotes are not available, third-party market
    indications and forecasts are used.

    Derivative instruments that qualify as hedges, and have been designated
    as hedges, are not recognized in the financial statements on inception.
    Gains or losses on commodity price financial instruments designated as
    hedges are reflected as adjustments to the related revenue when the gain
    or loss is realized.

    (b) Capital Disclosures

    On January 1, 2008, the Company adopted the new accounting standard for
    disclosure of the Company's objectives, policies and processes for
    managing capital. This new adoption did not have any impact on the
    results of operations or net financial position, as it is a disclosure
    related standard.

    2.  LONG TERM DEBT

    At June 30, 2008 the Company had a $65.0 million credit facility with a
    Canadian chartered bank. The facility is available by way of Canadian
    prime and US base rate loans, LIBOR advances, bankers' acceptances and
    letters of credit. Canadian prime rate loans, US base rate loans, and
    LIBOR advances bear interest at Canadian prime, US base rate or LIBOR, as
    applicable, plus a margin dependant upon the Company's debt/cash flow
    ratio as calculated in the previous quarter. Stamping fees for bankers'
    acceptances are based on a rate adjusted over the term to maturity plus a
    margin as described above. The credit facility is fully revolving until
    June 30, 2009 and may be extended at the mutual agreement of ProspEx and
    its lender for an additional year. If the credit facility is not
    extended, a balloon payment is required on July 1, 2010. This facility is
    secured by a $200 million demand debenture and a first floating charge on
    all petroleum and natural gas assets of ProspEx.

    3.  FUTURE INCOME TAXES

    The provision for future income taxes differs from the amount computed by
    applying the combined expected Canadian Federal and Provincial tax rates
    to earnings before income taxes. The reasons for these differences are as
    follows:

                                         Three     Three       Six       Six
                                        months    months    months    months
                                         ended     ended     ended     ended
                                       June 30,  June 30,  June 30,  June 30,
    ($000's)                              2008      2007      2008      2007
    -------------------------------------------------------------------------
    Earnings before taxes             $  3,233  $  3,382  $    362  $    950
    Rate (%)                            29.50%    32.12%    29.50%    32.12%
    -------------------------------------------------------------------------
    Computed expected provision for
     future income taxes                   954     1,086       107       305
    Increase (decrease) in taxes
     resulting from:
      Stock-based compensation expensed     70        92       127       167
      Effect of change in tax rate        (195)      (20)     (168)     (105)
      Other                                143       (11)      145       142
    -------------------------------------------------------------------------
    Income tax expense                $    972   $ 1,147  $    211  $    509
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the current future income tax asset and liability are
    as follows:

                                                           June 30, December
    ($000's)                                                  2008  31, 2007
    -------------------------------------------------------------------------
      Financial instrument loss                           $  2,090  $      -
      Financial instrument gain                                  -       (69)
    -------------------------------------------------------------------------
    Future income tax asset (liability)                   $  2,090  $    (69)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the long term future income tax liability are as
    follows:

                                                           June 30, December
    ($000's)                                                  2008  31, 2007
    -------------------------------------------------------------------------
      Property, plant and equipment                       $ (8,329) $ (3,744)
      Asset retirement obligation                              519       509
      Share issue costs                                        426       590
    -------------------------------------------------------------------------
                                                            (7,384)   (2,645)
    Valuation allowance                                       (500)     (500)
    -------------------------------------------------------------------------
    Future income tax liability                           $ (7,884) $ (3,145)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At June 30, 2008, the Company had estimated tax pools available to reduce
    future taxable income of $146.7 million (June 30, 2007 - $141.6 million).
    ProspEx has committed to incur $8.0 million in qualifying Canadian
    exploration expenditures related to the December 2007 flow-through share
    financing by December 31, 2008. The Company estimates that $7.8 million
    of this commitment has been expended to June 30, 2008.

    Capitalized stock based compensation resulted in an increase to future
    tax liabilities of $0.2 million during both the six months ended
    June 30, 2008 and 2007 (three months ended June 30, 2008 and 2007 -
    $0.1 million).

    During the first quarter of 2008, the renouncement of flow-through shares
    resulted in an increase of future tax liability of $2.2 million.

    4.  SHARE CAPITAL

    (a) Common Shares & Common Share Performance Warrants Issued

                                           June 30, 2008        June 30,2007
    -------------------------------------------------------------------------
                                     Number of           Number of
                                        Shares/             Shares/
                                      Warrants    Amount  Warrants    Amount
                                        (000's)  ($000's)   (000's)  ($000's)
    -------------------------------------------------------------------------
    Common shares
    -------------------------------------------------------------------------
      Balance at the beginning of
       the year                         56,453  $ 90,543    53,790  $ 85,681
      Flow-through shares tax
       adjustment                            -    (2,218)        -    (4,461)
      Issued on exercise of stock
       options                             232       746        72       243
      Exercise of stock options              -       357         -       114
      Shares issued on exercise of
       warrants                            514     1,034        94       188
      Issue costs, net of future tax
       reduction of $14 (2007 - $20)         -       (34)        -       (44)
      Warrants cancelled                     -         -         -        13
    -------------------------------------------------------------------------
      Balance at the end of the period  57,199  $ 90,428    53,956  $ 81,734
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Common share performance warrants
    -------------------------------------------------------------------------
      Balance at the beginning of the
       period                            2,716  $  1,661     2,908  $  1,778
      Exercised                           (514)     (314)      (94)      (58)
      Cancelled                              -         -       (22)      (13)
    -------------------------------------------------------------------------
      Balance at the end of the period   2,202  $  1,347     2,792  $  1,707
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Share Capital at the end of the
     period                                     $ 91,775            $ 83,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    All outstanding performance warrants entitle the holder to acquire a
    common share at a price of $1.40 and expire on October 1, 2009.

    (b) Contributed Surplus

                                      Three months ended    Six months ended
                                           June 30,            June 30,
    (000's)                             2008      2007      2008      2007
    -------------------------------------------------------------------------
    Balance at the beginning of the
     period                           $  6,004  $  4,818  $  5,614  $  4,348
    Stock-based compensation               472       572       862     1,042
    Exercise of stock options             (357)     (114)     (357)     (114)
    -------------------------------------------------------------------------
    Balance at the end of the period  $  6,119  $  5,276  $  6,119  $  5,276
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (c) Stock Options

    Changes in outstanding stock options are summarized below:


                                       June 30, 2008       June 30, 2007
    -------------------------------------------------------------------------
                                                Weighted            Weighted
                                                 Average             Average
                                       Options  Exercise   Options  Exercise
                                         (000s)    Price     (000s)    Price
    -------------------------------------------------------------------------
    Outstanding at  beginning of year    4,656  $   3.62     3,354  $   3.49
    Granted                                612      3.32     1,300      4.16
    Exercised                             (232)     3.22       (72)     3.38
    Cancelled                                -         -       (61)     3.60
    -------------------------------------------------------------------------
    Outstanding at the end of the
     period                              5,036  $   3.60     4,521  $   3.68
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes stock options outstanding and exercisable
    at June 30, 2008:


                     Options outstanding                Options exercisable
    ------------------------------------------------ ------------------------
                                Weighted
                                 average                  Number
                   Number of   remaining    Weighted exercisable    Weighted
    Range of     outstanding contractual     average          at     average
    exercise   at period end        life    exercise  period end    exercise
    price              (000s)     (years)      price       (000s)      price
    ------------------------------------------------ ------------------------
    $ 2.95 - $ 3.45      2,410      2.21    $   3.22       1,751    $   3.23
    $ 3.48 - $ 3.95      1,721      3.22    $   3.79         740    $   3.84
    $ 4.00 - $ 4.46        905      3.73    $   4.27         302    $   4.27
    -------------------------------------------------------------------------
                         5,036      2.83    $   3.60       2,793    $   3.50
    -------------------------------------------------------------------------

    No options were granted during the second quarter of 2008. The fair value
    of options granted during the second quarter of 2007 was $0.9 million,
    during the first six months of 2008 was $0.8 million (2007 -
    $2.2 million). The fair value is determined using the Black-Scholes
    option pricing model with the following weighted average assumptions for
    grants as follows:


                                       Three months ended   Six months ended
                                            June 30,            June 30,
                                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Risk free interest rate                n/a      4.0%      3.2%      4.0%
    Expected life                          n/a   5 years   5 years   5 years
    Expected volatility                    n/a       48%       47%       48%
    Expected dividend yield                n/a       Nil       Nil       Nil
    -------------------------------------------------------------------------

    The estimated fair values of the options and the special performance
    units are being amortized to expense over the vesting period. During the
    three months ended June 30, 2008, a total of $0.2 million (2007 -
    $0.3 million) of stock based compensation was recorded against income and
    $0.2 million (2007 - $0.3 million) was capitalized. During the six
    months ended June 30, 2008 a total of $0.4 million (2007 - $0.5 million)
    of stock based compensation was recorded against income and $0.4 million
    (2007 - $0.5 million) was capitalized.

    (d) Per Share Amounts

                                    Three months ended     Six months ended
                                        June 30,                June 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Weighted average common shares
     basic                    57,081,774  53,911,553  56,813,545  53,859,424
    Dilutive securities:
      Stock options              247,737     492,317     200,826     433,367
      Performance warrants     1,379,670   1,888,528   1,385,890   1,880,767
      Special performance units        -     267,945           -     255,333
    -------------------------------------------------------------------------
    Diluted                   58,709,181  56,560,343  58,400,261  56,428,891
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended June 30, 2008, a total of 3,133,000 (June 30,
    2007 - 2,136,500) options were excluded from the diluted calculations as
    they were anti-dilutive. The six month year to date equivalent number of
    options excluded due to their anti-dilutive impact was 3,208,750 (2007 -
    2,109,000)

    5.  FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CAPITAL MANAGEMENT
        STRATEGY

    Overview

    The Company has exposure to a number of risks from its use of financial
    instruments including:

    -   Credit risk
    -   Liquidity risk
    -   Market risk

    This note presents information about the Company's exposure to each of
    the above risks and the Company's objectives, policies and processes for
    measuring and managing risk, and the Company's management of capital.
    Further quantitative disclosures are included throughout these financial
    statements.

    The Board of Directors has overall responsibility for the establishment
    and oversight of the Company's risk management framework. The Board has
    implemented and monitors compliance with risk management policies.

    The Company's risk management policies are established to identify and
    analyze the risks faced by the Company, to set appropriate risk limits
    and controls, and to monitor risks and adherence to market conditions and
    the Company's activities.

    Credit Risk

    Credit risk relates to the Company's receivables from joint venture
    partners and petroleum and natural gas marketers and the risk of
    financial loss if a customer, partner or counterparty to a financial
    instrument fails to meet its contractual obligations. A substantial
    portion of the Company's accounts receivable are with customers in the
    energy industry and are subject to normal industry credit risk. The
    Company generally grants unsecured credit but routinely assesses the
    financial strength of its partners and marketers.

    Receivables from petroleum and natural gas marketers are normally
    collected on the 25th day of the month following production. The Company
    sells the majority of its production to two petroleum and natural gas
    marketers therefore is subject to concentration risk. To date the Company
    has not experienced any collection issues with its petroleum and natural
    gas marketers. Joint venture receivables are typically collected within
    one to three months of the joint venture bill being issued to the
    partner. The Company attempts to mitigate the risk from joint venture
    receivables by obtaining joint venturer approval of significant capital
    expenditures prior to expenditure. The Company does not typically obtain
    collateral from petroleum and natural gas marketers or joint venturers;
    however in certain circumstances, it may elect to cash call a joint
    venturer in advance of the work.

    As at June 30, 2008 the Company's receivables consisted of $2.1 million
    (December 31, 2007 - $5.3 million) from joint venturers, $7.8 million
    (December 31, 2007 - $5.1 million) of receivables from petroleum and
    natural gas marketers and $1.8 million (December 31, 2007 - $2.5 million)
    of other receivables.

    The carrying amount of accounts receivable and cash and cash equivalents
    represents the maximum credit exposure. The Company does not have an
    allowance for doubtful accounts as at June 30, 2008 and did not provide
    for any doubtful accounts nor was it required to write-off any
    receivables during the period ended June 30, 2008.

    Liquidity risk

    Liquidity risk is the risk that the Company will not be able to meet its
    financial obligations as they are due. The Company's approach to managing
    liquidity is to ensure, as far as possible, that it will have sufficient
    liquidity to meet its liabilities when due, under both normal and
    stressed conditions without incurring unacceptable losses or risking harm
    to the Company's reputation.

    The Company prepares annual capital expenditure budgets, which are
    regularly monitored and updated as considered necessary. Further, the
    Company utilizes authorizations for expenditures on both operated and
    non-operated projects to further manage capital expenditures. To
    facilitate the capital expenditure program, the Company has a revolving
    reserve based credit facility, as outlined in note 2. The Company also
    attempts to match its payment cycle with collection of petroleum and
    natural gas revenues on the 25th of each month.

    The following are the contractual maturities of financial liabilities and
    associated interest payments as at June 30, 2008:

    -------------------------------------------------------------------------
                                    (less than)    1 - 2     2 - 5    There-
    Financial Liability ($000's)        1 year     years     years     after
    -------------------------------------------------------------------------
    Accounts payable and accrued
     liabilities                      $ 19,251         -         -         -
    Derivative contracts                 7,086         -         -         -
    Long term debt                           -    36,515         -         -
    -------------------------------------------------------------------------
    Total                             $ 26,337    36,515         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Market risk

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

    The Company utilizes both financial derivatives and physical delivery
    sales contracts to manage market risks. All such transactions are
    conducted in accordance with the risk management policy that has been
    approved by the Board of Directors.

    Foreign Currency Exchange Risk

    Foreign currency exchange rate risk is the risk that the fair value of
    financial instruments or future cash flows will fluctuate as a result of
    changes in foreign exchange rates. Although substantially all of the
    Company's petroleum and natural gas sales are denominated in Canadian
    dollars, the underlying market prices in Canada for petroleum and natural
    gas are impacted by changes in the exchange rate between the Canadian and
    United States dollars. Given that changes in exchange rate have an
    indirect influence, the impact of changing exchange rates can not be
    accurately quantified. The Company had no forward exchange rate contracts
    in place as at or during the three months ended June 30, 2008.

    Commodity Price Risk

    Commodity price risk is the risk that the fair value of financial
    instruments or future cash flows will fluctuate as a result of changes in
    commodity prices. Commodity prices for petroleum and natural gas are
    impacted by world economic events that dictate the levels of supply and
    demand. The Company has attempted to mitigate commodity price risk
    through the use of financial derivative sales contracts. The Company's
    contracts in place as of June 30, 2008 are as follows:

    Type   Amount Term                               Price ($/GJ)  Type
    ----   ------ ----                               ------------  ----
           (GJ/d)                                    at AECO
           ------                                    -------

    Collar  2,000 April 1, 2008 - October 31, 2008   $6.50 - $6.75 Physical
    Collar  1,000 April 1, 2008 - October 31, 2008   $6.50 - $6.90 Physical
    Collar  1,000 April 1, 2008 - October 31, 2008   $6.50 - $7.13 Financial
    Collar  2,000 April 1, 2008 - October 31, 2008   $6.50 - $7.45 Financial
    Collar  2,000 April 1, 2008 - October 31, 2008   $6.50 - $7.75 Financial
    Collar  2,000 April 1, 2008 - October 31, 2008   $6.75 - $7.62 Financial
    Collar  2,000 November 1, 2008 - March 31, 2009  $7.00 - $8.80 Financial
    Collar  2,000 November 1, 2008 - March 31, 2009  $7.00 - $9.15 Financial
    Put     2,000 November 1, 2008 - March 31, 2009         $10.00 Financial

    The contracts in place during the three months ended June 30, 2008
    resulted in an unrealized loss of $2.8 million (2007 - $1.5 million gain)
    and a realized loss of $1.4 million (2007 - $0.1 million gain). During
    the first half of the year ended June 30, 2008 the contracts in place
    resulted in an unrealized loss of $7.3 million (2007 - $1.7 million) and
    a realized loss of $1.3 million (2007 - $0.8 million gain).

    With respect to commodity prices, during the three and six month period
    ended June 30, 2008, a one dollar increase in the price per GJ of natural
    gas relevant only to the Company's production dedicated to derivative
    financial instruments would have resulted in a net earnings decrease of
    $0.1 million and an increase of $0.1 million respectively. A $1.00
    decrease in the price per GJ of natural gas on the same production would
    have increased net earnings for the three and six months ended June 30,
    2008 by $0.1 million. This excludes any impact relating to unrealized
    financial instrument gains/losses.

    Interest Rate Risk

    Interest rate risk is the risk that future cash flows will fluctuate as a
    result of changes in market interest rates. The Company is exposed to
    interest rate fluctuations on its credit facility which bears a floating
    rate of interest. The Company had no interest rate swaps or financial
    contracts in place as at or during the three months ended June 30, 2008.
    For the three and six months ended June 30, 2008, a difference in the
    interest rate of 1% would change net earnings in both periods by an
    estimated $0.1 million, assuming all other variables are constant.

    Capital Management Strategy

    The Company's policy on capital management is to maintain a prudent
    capital structure to allow the Company to fund future development. The
    Company considers its capital structure to include shareholders' equity,
    bank debt, and working capital.

                                                           June 30, December
    ($000's)                                                  2008  31, 2007
    -------------------------------------------------------------------------
    Shareholders' equity                                  $115,970  $115,743
    Bank debt                                               36,515    28,846
    Working capital deficiency excluding unrealized
     financial instrument gain or losses and associated
     future tax assets or liabilities                        6,709     8,873
    -------------------------------------------------------------------------

    The Company manages its capital programs in order to maintain a prudent
    capital structure as changes in economic conditions occur. The Company
    may and has from time to time issued shares and adjusted spending to
    manage current or projected operating cash flows and debt levels.

    The Company monitors its capital base using the ratio of net debt to
    annualized operating cash flow. This ratio is calculated as net debt, as
    defined as long term debt less working capital (or plus working capital
    deficiency) excluding unrealized financial instrument gain (loss) and
    associated future tax assets (liabilities); divided by annualized cash
    flow from operations before changes in non-cash working capital (based on
    the most recent operating quarter). The Company's guideline is to
    maintain a ratio of approximately 1.0 to 1.0, not exceeding 2.0 to 1.0.
    This ratio will fluctuate depending on fluctuations of the commodity and
    business cycles. The Company prepares annual capital expenditure budgets
    which are updated periodically to monitor this ratio. The annual budget
    is approved by the Board of Directors with updates reviewed by the Board
    throughout the year.

    As at June 30, 2008 the Company's ratio of net debt to annualized
    operating cash flow was 0.7 to 1.0 (June 30, 2007 - 0.9 to 1.0), and
    compares to the ratio of 1.0 to 1.0 for the year ended December 31, 2007.
    The decrease during the second quarter is consistent with the reduction
    of debt and improved cash flow in the second quarter.

    The Company's share capital is not subject to any external restrictions.
    The bank debt facility has no restrictions other than the limitation of
    borrowing under the facility on an annual basis. As at June 30, 2008, the
    Company is in compliance with all flow-through share expenditure
    requirements as well as all bank facility requirements.

    There have been no changes to the Company's capital management strategy
    during the quarter ended June 30, 2008.

    6.  ADDITIONAL DISCLOSURES

    (a) Interest and Taxes Paid

    Net cash interest paid during the quarter was $0.7 million (2007 -
    $0.9 million). Cash taxes paid during the period was $nil (2007 - $nil).
    On a year to date basis, net cash interest paid to June 30, 2008 was
    $1.1 million (2007 - $1.4 million). Year to date cash taxes paid to June
    30, 2008 was $nil (2007 - $nil).

    (b) Asset Retirement Obligation

    For the six month period ended June 30, 2008, Asset Retirement Obligation
    increased by $0.6 million for liabilities incurred (quarter ended June
    30, 2008 - $0.5 million), with a corresponding increase to Property,
    Plant and Equipment.

    7.  COMMITMENTS

    The Company has committed to certain future payments as follows:

    Payments due                                                      There-
    ($000's)          2008      2009      2010      2011      2012     after
    -------------------------------------------------------------------------
    Long-term
     debt         $      -         -    36,515         -         -  $      -
    Building lease     192     1,122     1,189     1,229     1,243     1,346
    Drilling rig
     contract        2,929       161         -         -         -         -
    Process fees       252       400       300        47         -         -
    Transportation     491       579        78         -         -         -
    Other                5         8         2         -         -         -
    -------------------------------------------------------------------------
    Total         $  3,869     2,270    38,084     1,276     1,243  $  1,346
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    ProspEx has committed to incur $8.0 million in qualifying Canadian
    exploration expenditures related to the December 2007 flow-through share
    financing by December 31, 2008. The Company estimates that $7.8 million
    of this commitment has been expended to June 30, 2008.

    8.  SUBSEQUENT EVENT

    On July 23, 2008, the Company acquired certain properties in the Ricinus
    area of Alberta. These properties consist of 13 (1.2 net) producing
    wells, with current net production of approximately 60 boe per day and
    400 net acres of undeveloped land. The consideration paid by the Company
    was $3.35 million subject to normal closing adjustments.

    9.  RECLASSIFICATION

    Certain amounts disclosed for prior years have been reclassified to
    conform to current period presentation.
    


    %SEDAR: 00021285E




For further information:

For further information: John Rossall, President & CEO, jrossall@psx.ca,
 (403) 268-3941; or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3942

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