ProspEx Reports 2007 Results and Provides Operational Update



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

    CALGARY, March 17 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") is pleased to announce its financial and operating results for the
three month period and year ended December 31, 2007 and to provide an update
on current operations.
    "2007 was a successful year at ProspEx, in a very challenging business
environment. With 22% annual average production growth the Company was
successful in meeting its production growth goals," said John Rossall,
President and Chief Executive Officer. "Finding and development costs were
reduced by almost 50% in 2007 compared to 2006. We also enjoyed a successful
winter drilling program and have a substantial amount of new production that
should be tied in over the next month".

    
    HIGHLIGHTS

    -   Production in the fourth quarter of 2007 averaged 3,922 boe per
        day, a 24% increase over the prior year.
    -   Annual average production for 2007 was 3,899 barrels of oil
        equivalent ("boe") per day. Production per fully diluted share in
        2007 increased by 15.2% relative to 2006.
    -   The Company replaced 216% of 2007 production and increased its year
        end reserves by 20% on a Proved plus Probable basis. Reserves per
        fully diluted share increased by 18.1% on a Proved plus Probable
        basis.
    -   Finding and development costs for 2007 were $16.84 per boe on a
        Proved plus Probable basis, including future development capital, but
        not including revisions. Reported 2007 costs were increased by a
        negative revision to reserves booked in prior years. With these
        revisions taken into account, along with future development capital,
        finding and development costs were $21.09 per boe on a Proved plus
        Probable basis, representing a substantial improvement compared to
        2006.
    -   With debt to trailing cash flow of only one year, the Company
        believes its financial position is strong.
    -   Exploration and development spending for the full year 2007 was
        $48.6 million, slightly less than the Company's $52 million capital
        budget, reflecting a measured approach to spending in the face of
        lower natural gas prices and uncertainty over the new royalty
        framework in Alberta.
    -   In January 2008, ProspEx completed an acquisition of partner assets
        in the Ricinus area with production of 360 boe per day, for
        consideration of $11.6 million after closing adjustments.
    -   ProspEx's first quarter 2008 drilling program is now complete with a
        100% success rate. Three (1.8 net) wells were successfully drilled at
        Kakwa in the Deep Basin and one (1.0 net) well was drilled and
        completed at Ricinus in West Central Alberta. In the Company's "high
        impact" program, wells at Salter and Edson were completed in the
        first quarter.
    -   ProspEx expects to bring approximately 800 to 1,000 boe per day of
        new production on stream in the next month from facilities
        construction projects currently underway at Harmattan, Ricinus, Kakwa
        and Salter.


    OPERATIONAL REVIEW

    Capital Program
                                                                   Full Year
    Capital Expenditures ($000s)                         Q4 2007        2007
    -------------------------------------------------------------------------
    Drilling & Completions                                 6,264      26,718
    Facilities                                             1,266      12,381
    Land and lease                                           526       4,383
    Seismic                                                  320       2,416
    Capitalized G&A                                          714       2,652
    -------------------------------------------------------------------------
    Total Exploration & Development                        9,090      48,550
    -------------------------------------------------------------------------
    


    Exploration and development capital expenditures of $48.6 million in 2007
were substantially reduced from $73.5 million (prior to dispositions) for the
full year 2006. In the fourth quarter of 2007, exploration and development
capital spending was $9.1 million compared to $25.6 million in the fourth
quarter of 2006. ProspEx reduced the pace of its capital spending in late
2007, due to low natural gas prices, uncertainty around the new royalty
framework in Alberta, and generally poor conditions in the capital markets.
Capital spending was less than the Company's $52 million capital budget.
    During 2007, the Company incurred $26.7 million in drilling and
completion expenditures to drill 48.3 gross (26.3 net) wells with a 93.4% net
success rate. In the fourth quarter of 2007, ProspEx participated in 16
(7.25 net) wells.
    Over the course of 2007, the Company incurred substantial facilities
construction expenditures of $12.4 million, equivalent to 25% of the total
capital budget. Approximately $4.5 million was spent in Harmattan to construct
gathering system, compression and oil processing facilities.
    Total capital spending for the first quarter of 2008 is estimated to be
approximately $28.0 million, including the Ricinus asset acquisition
($11.6 million). Although the natural gas pricing outlook improved thus far
over the quarter, the Company continued to maintain a conservative pace of
spending, including the deferral of some exploration and development capital
to partially offset the cost of the Ricinus acquisition.

    West Central Alberta

    At Harmattan, ProspEx continues to develop its Cardium discovery. ProspEx
drilled one (1.0 net) successful well in the fourth quarter of 2007 and now
has an inventory of three (3.0 net) completed wells at Harmattan which are
estimated to have initial net production capability of 500 boe per day.
Construction of facilities to bring these wells onstream is nearing
completion, with these facilities expected to be in service in April.
Wellsites have been constructed for two (1.5 net) additional wells which will
be drilled as soon as surface conditions permit in the second quarter of 2008.
    In the first quarter of 2008, the Company drilled one well in Ricinus
pursuant to a farm-in arrangement (100% capital interest, 75% interest in
production). This well has been completed and flow tested at a rate of
approximately 200 boe per day. This well is expected to come on stream in late
March.

    Deep Basin

    ProspEx's first quarter 2008 drilling program in the Deep Basin included
three (1.8 net) wells, all of which were successful. The first of these wells,
together with two wells drilled in 2007 are expected to be on stream by the
end of March at an aggregate initial rate of 300 boe per day net to ProspEx.
Two (1.2 net) additional wells have been cased, with completions planned after
spring breakup.
    As a result of pooling and farm-in deals associated with the Kakwa
program, in addition to purchases at Crown land sales, the Company has
expanded its Kakwa area land position by 19 gross (9 net) sections, providing
additional prospect inventory offsetting wells drilled this winter.

    Southern Alberta

    In the fourth quarter of 2007, ProspEx participated in 11 (4.0 net)
partner operated wells at its Medallion property in Southern Alberta. Ten of
these wells have been completed, and pipeline tie-ins are in progress.
    In Granum, a 100% working interest well was drilled in the fourth quarter
and has been tied in at an initial rate of 65 boe per day.

    High Impact Exploration

    At Salter, a horizontal well was drilled and completed in the first
quarter in the Mississippian Rundle Group in a Foothills structure. This well
is expected to be on stream in April 2008 at a facilities restricted rate of
2 million cubic feet ("mmcf") per day (approximately 100 boe per day net to
ProspEx). ProspEx has a 40% interest in the production from this well.
    In the Edson area, a well (35% ProspEx interest) was deepened into the
Devonian Wabamun in the first quarter and completed for gas production.
Testing operations are now underway at this well.

    MANAGEMENT APPOINTMENT

    Mr. Peter Parkinson succeeded Mr. Scott Godsman in the role of Vice
President, Land, effective February 15, 2008. Prior to joining ProspEx in
April of 2007 as Senior Landman, Mr. Parkinson was most recently the Vice
President, Land at Berland Exploration Ltd., a private oil and gas company.
ProspEx would like to extend its thanks to Mr. Godsman for his contributions
to the Company's success since its inception in October, 2004.

    
    PRODUCTION AND GUIDANCE

                             Q4 2007        2007
    Production (boe/d)       Average   Annual Average
                        -------------- --------------
    West Central               1,305       1,334
    Deep Basin                 1,472       1,402
    Southern Alberta           1,134       1,152
    Other                         11          11
                        -------------- --------------
    Total                      3,922       3,899
    

    Production for the fourth quarter of 2007 was 3,922 boe per day, a 24%
increase over the fourth quarter of 2006, and a decrease of 8% compared to the
third quarter of 2007. The decrease in production compared to the third
quarter reflects natural declines in the Company's production base, as well as
facility restrictions and downtime at Wapiti and Harmattan that resulted in
lost production of 175 boe per day.
    Annual average production for 2007 was 3,899 boe per day, an increase of
22% from the 2006 annual average. Production per fully diluted share increased
by 15.1%, based on a weighted average total of 56.3 million shares outstanding
in 2007 and 53.0 million shares in 2006.

    
    2008 Guidance Summary

    Production
    ----------
    Annual Average             4,200 to 4,500 boe per day

    Capital expenditures       $55 million
    Operating costs            $8.00 per boe
    G&A                        $2.15 per boe
    Royalties                  20%
    

    Guidance for 2008 is summarized in the table above. Guidance regarding
capital expenditures, operating costs, G&A 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.
    ProspEx's 2008 capital budget is currently $55 million (including the
Ricinus acquisition). The Company will reassess its plans for the year during
the second quarter, when it is anticipated that there will be better
information regarding natural gas prices, details of new Alberta royalties and
the results of the winter drilling program will be known.
    First quarter 2008 production is expected to be slightly less than
production in the fourth quarter of 2007. At Medallion, approximately 80 boe
per day of production was lost during the first quarter due to operational
problems and cold weather. Approximately 50 boe per day of net production is
shut in at Ricinus pending receipt of a regulatory "good production practice"
approval that is expected to be received in the near future. Most importantly,
the Company elected to reduce its level of capital spending in the fourth
quarter of 2007, and as a result only 2.25 net wells were drilled in the key
growth areas of West Central Alberta and the Deep Basin. Consequently, new
production additions over the past quarter have not offset production declines
and thus overall production has been flat to modestly decreasing.
    Not withstanding these challenges, the Company has a substantial volume
of new production scheduled to come onstream in the near future. As discussed
above, facilities projects are underway at Harmattan, Ricinus, Kakwa and
Salter that are expected to bring approximately 800 to 1,000 boe per day of
new production on stream in the next month.

    OIL AND GAS RESERVES DATA

    An independent evaluation of ProspEx's reserves at December 31, 2007 was
conducted by GLJ Petroleum Consultants Ltd. ("GLJ") and prepared in accordance
with the reporting guidelines of National Instrument 51-101 of the Canadian
Securities Administrators ("NI 51-101"). Under NI 51-101, the "best estimate"
for reserves is the Proved plus Probable ("P+P") category. In this category
the Company's reserves increased by 9.9 billion cubic feet ("bcf") of natural
gas and 14 thousand barrels ("mbbls") of oil and natural gas liquids ("NGL")
for a total increase of 1,656 thousand barrels of oil equivalent ("mboe") in
the period January 1, 2007 to December 31, 2007. ProspEx had no acquisition or
disposition activity that effected reserves in 2007, as the Company's
acquisition of assets in the Ricinus area closed in January of 2008. The
complete reserves disclosure as required under NI 51-101, will be contained in
ProspEx's 2007 Annual Information Form, to be filed on SEDAR on or before
March 31, 2008.
    The Company replaced 161% of 2007 production through exploration and
development activities on a Proved basis, and 216% of 2007 production on a P+P
basis. Reserves growth over the year was 15% on a Proved basis and 20% on a
P+P basis. Reserves per fully diluted share increased by 13.2% on a Proved
basis and 18.1% on a P+P basis, using a weighted average number of fully
diluted shares of 56.2 million outstanding in the fourth quarter of 2007 and
55.3 million in the fourth quarter of 2006.
    The Proved reserve life index at December 31, 2007, calculated using
fourth quarter 2007 production on an annualized basis, was 4.6 years. The P+P
reserve life index was 6.9 years.
    In 2007, ProspEx added 3,857 mboe of P+P reserves. In West Central
Alberta, 1,500 mboe were added, with 1,083 mboe attributable to five (four
net) wells in Harmattan. In the Deep Basin, 628 mboe of reserve additions were
recorded for three (1.55 net) wells. In Southern Alberta, 488 mboe (2.0 net
wells) were added at Granum and 1,242 mboe were added at Medallion.
    Reported reserves included a negative revision to reserves on a Proved
basis of 278 mboe, and a negative revision of 778 mboe on a P+P basis. The
largest revisions were at Ricinus and Harmattan in West Central Alberta. At
Ricinus, production performance from two wells at the extreme northern and
southern ends of the Company's lands was less than anticipated, resulting in a
negative revision of 293 mboe on a P+P basis. A positive revision of 52 mboe
(P+P) was recorded in the central portion of ProspEx's Ricinus lands, where
the Company acquired additional assets in early 2008. At Harmattan, natural
gas production performance exceeded expectations, resulting in a positive
revision of 830 mmcf, although oil and NGL production was less than
anticipated, resulting in a net negative revision of 202 mboe on a P+P basis.
    ProspEx has made substantial improvement in finding and development cost
performance over the past year. Finding and development costs were $26.01 per
boe on a Proved basis and $21.09 per boe on a P+P basis, including revisions
and future development costs (there were no acquisitions or dispositions). In
2006, finding and development costs were $31.14 per boe on a Proved basis and
$37.87 per boe on a P+P basis, including revisions and future development
costs (but not including acquisitions and dispositions).
    Without the revisions discussed above, but including future development
costs, finding and development costs were $23.19 per boe on a Proved basis and
$16.84 on a P+P basis, indicative of strong economic performance of the
Company's 2007 capital program.
    Finding and development costs in 2007 were lower due to improved industry
conditions and a focus on cost reduction. ProspEx has experienced reductions
of 25 to 30 percent on recent drilling and completion costs in West Central
Alberta and the Deep Basin, compared to "peak" costs experienced in late 2005
and early 2006. In 2008, the Company will continue to work towards reducing
finding and development costs.
    Drilling and completions capital is usually regarded as the portion of
exploration and development capital spending that generates reserves
additions. In 2007, only 55% of exploration and development capital was spent
on drilling and completions, compared to 64% in 2006, resulting in upward
pressure on finding and development costs.
    Recycle ratio is the ratio of operating netback to finding and
development costs, and is a measure of the economic efficiency of the capital
program. A recycle ratio of 1.1 was achieved on a Proved basis, and 1.4 on a
Proved plus Probable basis.
    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 or announced. Further, the Government of Alberta has publicly
indicated that it intends for the revised royalty structure to be reviewed and
revised from time to time following the implementation of the framework
contemplated by the October 25, 2007 announcements. There can be no assurance
that the Government of Alberta or the Government of Canada will not adopt new
royalty regimes which may render the Company's projects uneconomic.
    This reserves evaluation was conducted by GLJ in accordance with existing
royalty regulations in the Province of Alberta, as the proposed new royalty
framework has not yet been enacted as legislation. However, GLJ performed a
sensitivity analysis to determine the potential impact of the new royalty
framework. As the precise details of the new framework are not known at this
time, GLJ evaluated a "high" and a "low" case with different royalty
assumptions. The high case assumes that all wells will receive the proposed
deep gas royalty adjustment regardless of when they were drilled, while the
low case assumes that the reduction in royalties for deep gas wells will only
apply to wells drilled after January 1, 2009. In the high case, the value of
the Company's P+P reserves, evaluated before tax at a 10% discount rate,
decreased by 1% relative to the current royalty regime. In the low case, the
value of the Company's P+P reserves, evaluated before tax at a 10% discount
rate, decreased by 2.6%.

    
    Reserve Balance

    Company Interest (working interest plus royalties receivable)
    December 31, 2007
    (forecasted prices)
    -------------------------------------------------------------------------
                                                         Natural       Oil
                                    Oil         NGLs       Gas     Equivalent
                                  (mbbls)     (mbbls)     (mmcf)      (mboe)
    -------------------------------------------------------------------------
    Proved Producing                  35         448      22,924       4,303
    Proved Developed
     Non-Producing                    16         439       5,060       1,298
    Proved Undeveloped                 9          39       5,571         977
                                ---------------------------------------------
    Total Proved                      60         926      33,554       6,578
    Proved Plus Probable(1)           73       1,295      51,267       9,913

    (1) Columns may not add due to rounding


    Company Interest
    Reserves Reconciliation

    -------------------------------------------------------------------------
                              Proved                 Proved Plus Probable
                  -----------------------------------------------------------
                     Oil &   Natural      Oil      Oil &   Natural     Oil
                     NGLs      Gas    Equivalent   NGLs      Gas   Equivalent
                    (mbbls)   (mmcf)    (mboe)    (mbbls)   (mmcf)   (mboe)
    -------------------------------------------------------------------------
    Opening Balance
     - Jan. 1, 2007    999    28,303     5,716     1,355    41,413     8,257
    Drilling additions
     and improved
     recovery          611    11,711     2,563       821    18,210     3,857
    Technical
     revisions &
     economic
     factors          (408)      782      (278)     (592)   (1,115)     (778)
    Acquisitions/
     Divestitures        -         -         -         -         -         -
                  -----------------------------------------------------------
    Net additions      203    12,493     2,285       230    17,095     3,079
    Production         217     7,241     1,423       217     7,241     1,423
                  -----------------------------------------------------------
    Closing balance -
     Dec. 31, 2007(1)  986    33,554     6,578     1,368    51,267     9,913

                  -----------------------------------------------------------
                  -----------------------------------------------------------
    (1) Columns may not add due to rounding


    Performance Metrics

    -------------------------------------------------------------------------
                                                                 Proved Plus
                                                    Total Proved    Probable
    -------------------------------------------------------------------------
    Capital ($000's)
    Future development capital
      January 1, 2007                                     12,155      20,210
      December 31, 2007                                   23,032      36,599
    -------------------------------------------------------------------------
    Change in future development capital                  10,877      16,389
    Exploration & development capital                     48,550      48,550
    Total 2007 capital expenditures                       59,427      64,939
    -------------------------------------------------------------------------
    Acquisition & disposition capital                          -           -
    Total 2007 capital expenditures including
     acquisitions                                         59,427      64,939
    Reserves
    -------------------------------------------------------------------------
    Net reserves additions for the period (mboe)
     (excluding acquisitions & dispositions)               2,285       3,079
    Net reserves additions for the period (mboe)
     (including acquisitions & dispositions)               2,285       3,079
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    2007 Finding & Development Costs ($/boe)               26.01       21.09
    2007 Finding, Development & Acquisition Costs
     ($/boe)                                               26.01       21.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    2006 Finding & Development Costs ($/boe)               31.14       37.87
    2006 Finding, Development & Acquisition Costs
     ($/boe)                                               31.02       40.37
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Three Year Average Finding & Development Costs
     ($/boe)                                               29.44       22.80
    Three Year Average Finding,
     Development & Acquisition Costs ($/boe)               26.09       21.66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Operating Netback ($/boe)                            29.16       29.16
    -------------------------------------------------------------------------
      Finding & Development Costs ($/boe)                  26.01       21.09
    -------------------------------------------------------------------------
    2007 Recycle Ratio                                      1.12        1.38
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Reserves additions including revisions (mboe)        2,285       3,079
      Production (mboe)                                    1,423       1,423
    -------------------------------------------------------------------------
    2007 Reserves Replacement without disposition (%)       161%        216%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Reserves at Dec 31, 2007                             6,578       9,913
      Fourth Quarter Production (boe/d)                    3,922       3,922
    -------------------------------------------------------------------------
    2007 Reserves Life based on fourth quarter
     production annualized (years)                           4.6         6.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    Present Value of Cash Flows

    ProspEx's reserves were evaluated using GLJ's December 31, 2007 price
forecast. Cash flows are prior to income taxes and general and administrative
expenses. Undeveloped land values are not included. Well abandonment costs
have been included for wells that have reserves assigned.

    
    -------------------------------------------------------------------------
                                                Discount Rate
    $thousands                      0%          8%         10%         12%
    -------------------------------------------------------------------------
    Proved Producing             107,792      83,888      79,684      75,949
    Proved Developed
     Non-Producing                32,093      23,114      21,634      20,344
    Proved Undeveloped            12,343       6,385       5,371       4,488
                               ----------------------------------------------
    Total Proved(1)              152,228     113,387     106,689     100,782
    Total Proved plus Probable   230,151     157,362     145,853     135,942
                               ----------------------------------------------

    (1) Columns may not add due to rounding


    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:

    (a)    the anticipated effects of the Government of Alberta's new royalty
           framework announced on October 25, 2007; and the effects of any
           other royalties (such as freehold or overriding royalties) payable
           in the future;
    (b)    anticipated capital expenditures, production forecasts, production
           and reserves additions from the Company's historical and future
           capital programs or acquisitions, 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 the reserves and resources described exist in the
quantities predicted or estimated and can profitably be produced in the
future.
    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 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; 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.
    "Operating netbacks" are calculated by subtracting transportation costs,
royalties payable, and operating costs from the average price received during
the period.
    "Reserves replacement ratio" is calculated by dividing the sum of the
reserves added, plus or minus any revisions, and dividing by the production
volume over the period.
    "Reserve life index" is calculated by dividing the reserves balance at
year end by the annualized production rate during the prior quarter.
    "Production per fully diluted share" is calculated by dividing average
production over the period by the weighted average number of fully diluted
shares outstanding over the period.
    "Reserves per share" at year end is calculated by dividing the reserves
balance at year end by the weighted average number of fully diluted shares
outstanding in the fourth quarter of that year.
    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 periods ended
    (unaudited)                    Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    FINANCIAL ($000's)
    Oil and gas revenue           15,906      13,536      63,534      51,501
    Net earnings (loss)             (180)      2,143      (1,091)      5,080
    Cash flow(1)                   9,363       7,641      35,997      27,962
    Total assets                 175,765     161,736     175,765     161,736
    Total net debt                37,505      29,709      37,505      29,709

    Net earnings (loss) per
     share ($ per share)
      basic                         0.00        0.04       (0.02)       0.10
      diluted                       0.00        0.04       (0.02)       0.10
    Cash flow per share
     ($ per share)(1)
      basic                         0.17        0.15        0.67        0.56
      diluted                       0.17        0.14        0.64        0.53
    Weighted average common
     shares (000's)
      basic                       54,687      52,628      54,095      50,378
      diluted                     56,160      55,264      56,318      53,004

    PRODUCTION VOLUMES
      Natural gas (mcf/d)         19,690      16,221      19,838      16,610
      Natural gas liquids
       (bbls/d)                      515         276         468         324
      Oil (bbls/d)                   125         184         125          94
      Total (boe/d)                3,922       3,164       3,899       3,186

    SALES PRICES
      Natural gas ($/mcf)           6.89        7.40        7.12        6.92
      Natural gas liquids
       ($/bbl)                     51.46       49.46       50.12       59.92
      Oil ($/bbl)                  85.43       72.93       75.09       71.37
      Total ($/boe)                44.09       46.50       44.65       44.29

    NETBACKS ($/boe)
      Price                        44.09       46.50       44.65       44.29
      Unrealized financial
       instrument                  (2.75)       4.17       (2.01)       2.69
      Royalties                    (5.41)      (7.16)      (6.57)      (7.76)
      Operating costs              (8.06)      (7.39)      (7.97)      (6.97)
      Transportation               (0.86)      (0.96)      (0.95)      (0.97)
      General and administrative   (2.32)      (2.17)      (2.16)      (2.07)
                                  -------     -------     -------     -------
      Total ($/boe)                24.69       32.99       24.99       29.21

    CAPITAL ($000's)
      Drilling and completions     6,264      15,987      26,718      46,893
      Facilities                   1,266       7,562      12,381      17,785
      Land and lease                 526         612       4,383       5,230
      Seismic                        320         922       2,416       1,603
      Capitalized general and
       administrative                714         482       2,652       1,953
      Property disposition             -           -           -     (10,842)
      Other capital assets             3          18         160         269
                                  -------     -------     -------     -------
      Total                        9,093      25,583      48,710      62,891

    (1) Cash flow is defined as cash flow from operations before changes in
        non-cash working capital to analyze operating results. Cash flow does
        not have a standardized measure prescribed by Canadian generally
        accepted accounting principles and therefore may not be comparable
        with calculations with similar measures for other companies.
    


    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 twelve months ended December 31, 2007 and was
prepared as at March 14, 2008. The MD&A should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2007
and the audited consolidated financial statements and MD&A for the year ended
December 31, 2006. The reader should be aware that historical results are not
necessarily indicative of future performance.

    RESULTS OF OPERATIONS

    Net Income and Cash Flow

    Cash flow for the fourth quarter of 2007 increased 23% to $9.4 million
from $7.6 million in the same period of 2006. The increase in cash flow is the
result of higher production offset by lower realized natural gas prices.
During the final quarter of 2007, the Company recorded a net loss of
$0.2 million compared to net income of $2.1 million for the comparable period
of 2006. The decrease in net income was due to a combination of lower realized
natural gas prices, higher depletion costs and the recognition of an
unrealized financial instrument loss, partially offset by higher volumes.
    Full year cash flow was up 29% from $28.0 million in 2006 to
$36.0 million in 2007. As operating netback per boe remained consistent year
over year the increase in cash flow is the result of higher volumes. The
Company incurred a net loss of $1.1 million for the year in 2007 compared to
annual net earnings of $5.1 million in 2006. Similar to the quarterly results,
the majority of the decrease in net income was the result of higher depletion
costs and the recognition of an unrealized financial instrument loss,
partially offset by higher volumes.

    
    Revenue

    ($000's)                       Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
    Natural gas                 $ 11,661    $  9,873    $ 48,466    $ 39,762
    Realized gain on
     financial instruments           825       1,170       3,089       2,211
                              -----------------------------------------------
    Total natural gas             12,486      11,043      51,555      41,973
    Oil                              984       1,236       3,428       2,451
    Natural gas liquids            2,436       1,257       8,551       7,077
                              -----------------------------------------------
    Oil and gas revenue           15,906      13,536      63,534      51,501
    Unrealized financial
     instrument gain (loss)         (991)      1,213      (2,867)      3,132
                              -----------------------------------------------
    Total revenue               $ 14,915    $ 14,749    $ 60,667    $ 54,633
                              -----------------------------------------------


    Oil and gas revenue for the three months ended December 31, 2007 was $15.9
million, representing an 18% increase over revenue of $13.5 million for the
same period of 2006. Revenue was up in the quarter due to increased production
of 24% offset by a 5% decrease in average sales price.
    As a result of a 22% growth in production, annual operating revenue for
2007 increased 23% to $63.5 million from $51.5 million in 2006.

    Production
                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
    Area (boe/d)
    Deep Basin                     1,472         913       1,402         828
    West Central                   1,305       1,108       1,334       1,175
    Southern Alberta               1,134       1,131       1,152       1,169
    Other Areas                       11          12          11          14
                                 --------    --------    --------    --------
                                   3,922       3,164       3,899       3,186

    Natural gas (mcf/d)           19,690      16,221      19,838      16,610
    Natural gas liquids (bbls/d)     515         276         468         324
    Oil (bbls/d)                     125         184         125          94
                                 --------    --------    --------    --------
    Total (boe/d)                  3,922       3,164       3,899       3,186
    


    Production for the fourth quarter of the year averaged 3,922 boe per day,
up 24% compared to 3,164 boe per day in the fourth quarter of 2006 and down 8%
compared to the third quarter of 2007. Natural gas represented 84% of
production in the fourth quarter with the remaining 16% being light oil and
natural gas liquids. Fourth quarter production is up over the prior year due
to drilling success in the Company's West Central and Deep Basin areas. The
decline in production from the third quarter reflects natural declines in the
Company's production base, as well as facilities outages in the Deep Basin
resulting in lost production of 75 boe per day. In Harmattan, declines and
third party facility restrictions resulted in a reduction in production of
approximately 100 boe per day compared to the third quarter of 2007.
    Annual production for 2007 averaged 3,899 boe per day, an increase of 22%
compared to an annual average of 3,186 boe per day in 2006. Production growth
in 2007 is attributable to the addition of new production in the West Central
area where new facilities were commissioned during the second quarter at
Harmattan and exploration success in the Deep Basin area. Annual production
was slightly below the Company's original guidance of 4,000 to 4,200 boe per
day as a result of third party gas processing constraints at Harmattan,
delayed capital spending in the Deep Basin due to wet weather and uncertainty
surrounding the proposed changes to Alberta Crown Royalties.

    
    Commodity Pricing

    ProspEx Average Prices         Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
    Natural gas ($/mcf)
      Sales price               $   6.44    $   6.62    $   6.69    $   6.55
      Realized gain on
       financial instrument         0.45        0.78        0.43        0.37
                              -----------------------------------------------
      Average realized
       natural gas price            6.89        7.40        7.12        6.92
    Oil ($/bbl)                    85.43       72.93       75.09       71.37
    NGL ($/bbl)                    51.46       49.46       50.12       59.92
                              -----------------------------------------------
    Average realized price
     ($/boe)                       44.09       46.50       44.65       44.29
    Unrealized financial
     instrument gain ($/boe)       (2.75)       4.17       (2.01)       2.69
                              -----------------------------------------------
    Total average price
     ($/boe)                    $  41.34    $  50.67    $  42.64    $  46.98


    Benchmark pricing              Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
    AECO C Spot ($/mcf)         $   6.12    $   6.87    $   6.42    $   6.48
    Edmonton Par - light oil
     ($/bbl)                    $  86.36    $  64.48    $  76.33    $  72.77
    


    On an annual basis, in 2007 the Company realized a natural gas price of
$7.12 per mcf, 3% higher than the annual realized price for 2006 of $6.92 per
mcf. While the AECO C Spot benchmark price declined slightly from 2006 to
2007, ProspEx realized a slight price increase as approximately half of the
Company's production was subject to the AECO monthly index, which performed
better than the AECO C spot prices in 2007. Realized natural gas prices also
outperformed AECO spot prices due to the higher heating content of the
Company's natural gas production in the Deep Basin and West Central Alberta
areas. Realized gains from our financial instrument program added $0.43 per
mcf to the annual price compared to $0.37 per mcf added in 2006.
    During the fourth quarter of 2007, AECO C spot prices for natural gas
decreased by 11% compared to the fourth quarter of 2006. In comparison, the
Company's sales price decreased by only 3% as approximately 50% of gas was
sold at the AECO monthly index which was higher than the AECO C daily spot
price in 2007 and lower than the AECO C daily spot in 2006. The Company's
fourth quarter realized price includes an additional $0.45 per mcf realized
from hedging gains.
    ProspEx's 2007 annual realized oil price increased 5% over 2006,
consistent with the increase in Edmonton Par prices. Realized oil prices for
the fourth quarter of 2007 averaged $85.43 per barrel, an increase of 17% from
the $72.93 per barrel realized during the same period in 2006. Oil prices did
not increase proportionately with the benchmark price which showed an increase
of 34%, comparing the fourth quarter of 2007 to 2006, due to a prior year
amendment at the lower 2006 prices.
    The annual average price realized for natural gas liquids decreased 16%
from $59.92 per barrel in 2006 to $50.12 per barrel in 2007. The price
realized for natural gas liquids during the fourth quarter increased 4% from
2006 to 2007. Natural gas liquids prices did not reflect the increase in oil
benchmark pricing due to an increase in the proportion of ethane in the
Company's overall NGL mix, and the lower price received for ethane, which
tends to track natural gas pricing.

    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. These financial instruments, which are predominantly
costless collars, allow the Company to better forecast operating cashflow,
in-turn providing the Company with greater confidence in funding for its
operations. In 2007, the Company's risk management program resulted in a net
realized gain of $3.1 million for the year compared to $2.2 million in 2006
and $0.8 million during the fourth quarter of 2007 compared to $1.2 million
during the fourth quarter of 2006.
    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 and cash flows. 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 unsettled as of December 31, 2007 are described in the financial
instruments and risk management note to the consolidated financial statements.
The fair value of unsettled financial instruments at December 31, 2007 was an
asset of $0.2 million compared to an asset of $3.1 million at December 31,
2006 and $1.2 million at September 30, 2007 resulting in an unrealized
financial instrument loss of $1.0 million for the fourth quarter of 2007 and
$2.9 million for the year. The loss in value from December 31, 2006 and the
end of the third quarter was due mainly to the expiration and realization of
contracts in place, partially offset by the fair value of new contracts.
    Subsequent to year end, ProspEx entered into collars for
10,000 gigajoules ("GJ's") per day for the summer of 2008 and 4,000 GJ's per
day for the winter of 2008/09. These contracts are described in the financial
instruments and risk management note to the consolidated financial statements.

    
    Royalty Expense

                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
    ($000's, except percentage   Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
     and per boe amounts)           2007        2006        2007        2006
                              -----------------------------------------------
    Crown                       $  1,302    $  1,863    $  6,219    $  6,518
    Freehold and GORR                650         220       3,124       2,506
                                 --------    --------    --------    --------
    Total Royalties             $  1,952    $  2,083    $  9,343    $  9,024

    $ Per boe                   $   5.41    $   7.16    $   6.57    $   7.76
    As a percentage of oil
     and gas revenue (%)              12          15          15          18
    

    Royalty expense in the fourth quarter of 2007 was $2.0 million or 12% of
oil and gas revenue, compared to $2.1 million or 15% of revenue in the same
period of 2006. The decrease in royalties as a percentage of revenue was the
result of the recognition and approval of royalty holidays on new wells.
    2007 full year royalty expense was $9.3 million or 15% of oil and gas
revenue, compared to $9.0 million or 18% of oil and gas revenue for 2006.
Annual royalty expense as a percentage of revenue is lower in the current year
due to an additional $1.2 million of capital cost recovery credits received
during the second quarter as a result of capital expenditures incurred to
build production facilities. Royalties for the year were below guidance as the
Company's risk management program resulted in realized natural gas prices
which were above the 2007 market prices used for royalty calculations, and due
to the capital cost recovery credit received during the year.
    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 or announced. Further, the Government of Alberta has publicly
indicated that it intends for the revised royalty structure to be reviewed and
revised from time to time following the implementation of the framework
contemplated by the October 25, 2007 announcements. There can be no assurance
that the Government of Alberta or the Government of Canada will not adopt new
royalty regimes which may render the Company's projects uneconomic.

    
    Operating Costs

                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
    Operating costs ($000's)       2,907       2,152      11,341       8,104
    Operating costs ($/boe)     $   8.06    $   7.39    $   7.97    $   6.97
                              -----------------------------------------------
    

    The Company's unit operating costs increased during the year and the
fourth quarter of 2007 compared to the same periods of 2006 due to increased
processing fees and cost associated with new production in West Central
Alberta. Unit operating costs in the Deep Basin were essentially unchanged
from 2006 to 2007, while Southern Alberta operating costs declined modestly.
    2007 annual operating costs per boe were consistent with the Company's
guidance of $8.00 per boe.

    
    Transportation Expenses

                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                               ----------------------------------------------
    Transportation expenses
     ($000's)                        311         281       1,343       1,129
    Transportation expenses
     ($/boe)                    $   0.86    $   0.96    $   0.95    $   0.97
                               ----------------------------------------------

    Transportation expense per boe is down in the fourth quarter of 2007
compared to the same period of 2006 reflecting better utilization of firm
transportation contracts during the second half of 2007.

    Annual transportation expense per boe decreased 2% from 2006 to 2007
reflecting better utilization of firm transportation contracts during the
second half of 2007.

    General and Administrative Expenses


    -------------------------------------------------------------------------
                                 Three months ended          Year ended
                                    December 31,            December 31,
    ($000's)                        2007        2006        2007        2006
    -------------------------------------------------------------------------
    Gross general and
     administrative             $  1,787    $  1,535    $  6,683    $  5,621
    Recoveries                      (237)       (421)       (951)     (1,262)
    Capitalized expenses            (714)       (482)     (2,652)     (1,953)
                               ----------------------------------------------
    Net general and
     administrative expenses    $    836    $    632    $  3,080    $  2,406
                               ----------------------------------------------
    Net general and
     administrative expenses
     ($/boe)                    $   2.32    $   2.17    $   2.16    $   2.07
    -------------------------------------------------------------------------
    

    Gross general and administration costs ("G&A") increased for the fourth
quarter and the year in 2007 compared to the corresponding periods in 2006 due
to increased staff levels and inflationary pressure on salaries. Unit G&A
costs exceeded guidance in 2007 as production was slightly lower than
anticipated and salary costs were higher than forecasted.

    Depletion, Depreciation and Accretion

    
                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
                                    2007        2006        2007        2006
                               ----------------------------------------------
    Depletion, depreciation
     and accretion ($000's)        8,744       6,638      33,889      23,758
    Depletion, depreciation
     and accretion ($/boe)      $  24.23    $  22.81    $  23.81    $  20.43
                               ----------------------------------------------
    

    Depletion, depreciation and accretion expense ("DD&A") per boe increased
over the prior year as the cost of adding proved reserves over the past twelve
months increased relative to historical levels.

    Interest and Bank Charges

    Interest and bank charges totaled $2.0 million for the year and
$0.5 million for the fourth quarter of 2007 compared with $1.1 million for the
year and $0.2 million for the fourth quarter of 2006. The increase in 2007
interest expense over the prior year resulted from increased average debt
levels.
    The Company has maintained a conservative level of leverage at year end
with a net debt to annualized fourth quarter cash flow ratio of 1.0.

    Stock-Based Compensation

    Stock-based compensation expense remained consistent from 2006 to 2007 at
$1.2 million for the year and $0.3 million for the fourth quarter.

    Income Taxes

    In the fourth quarter of 2007, the Company had an income tax recovery of
$0.5 million compared to income tax provision of $0.3 million for the same
period of 2006. On an annual basis the Company had an income tax recovery of
$0.4 million in 2007 as compared to an income tax provision of $2.8 million in
2006. Lower natural gas prices and the recognition of an unrealized financial
instrument loss together with higher DD&A expenses resulted in a net loss for
both the year and the fourth quarter of 2007.
    ProspEx has approximately $147 million of income tax pools at
December 31, 2007 and does not anticipate being cash taxable in 2008. As a
result of the December 2007 flow-through share financing, ProspEx has
committed to incur $8.0 million in qualifying Canadian exploration
expenditures by the end of 2008.

    Capital Expenditures

    
                                   Three       Three
                                  months      months        Year        Year
                                   ended       ended       ended       ended
                                 Dec. 31,    Dec. 31,    Dec. 31,    Dec. 31,
    ($000's)                        2007        2006        2007        2006
                               ----------------------------------------------
    Drilling and completions    $  6,264    $ 15,987    $ 26,718    $ 46,893
    Facilities                     1,266       7,562      12,381      17,785
    Land and lease                   526         612       4,383       5,230
    Seismic                          320         922       2,416       1,603
    Capitalized G&A                  714         482       2,652       1,953
    Property disposition               -           -           -     (10,842)
    Other capital assets               3          18         160         269
                               ----------------------------------------------
    Total capital expenditures  $  9,093    $ 25,583    $ 48,710    $ 62,891
                               ----------------------------------------------
    

    The Company invested $9.1 million in capital expenditures during the
fourth quarter of 2007 and $48.7 million during the year, compared to
$25.6 million in the fourth quarter of 2006 and $62.9 million for the full
year 2006. Of the $48.7 million in 2007 capital expenditures, $12.1 million
was spent in the Deep Basin, $20.5 million in West Central Alberta and
$12.4 million in Southern Alberta. Spending was down in 2007 over the prior
year as the Company executed a conservative capital spending program in
response to weakening natural gas prices and uncertainty in the capital
market.
    The decrease in annual capital spending for 2007 compared with 2006 is
primarily due to a reduction in capital spent on drilling and completions in
2007. In 2007 the Company incurred $26.7 million in drilling and completion
expenditures to drill 48 gross (26.3 net) wells, compared to $46.9 million to
drill 41 (23.2 net) wells in 2006. Although more net wells were drilled in
2007, a larger proportion of drilling was incurred in Southern Alberta, where
the cost per well is lower.
    During the final quarter of 2007 the Company's capital spending was
focused on drilling and completions as $6.3 million was spent to drill
16 gross (7.25 net) wells.
    The Board of Directors has approved a capital budget of $55 million in
2008, including the acquisition of Ricinus area assets that closed on
January 22, 2008.

    OIL & GAS RESERVES DATA

    An independent evaluation of ProspEx's reserves at December 31, 2007 was
conducted by GLJ Petroleum Consultants Ltd. ("GLJ") and prepared in accordance
with the reporting guidelines of National Instrument 51-101 of the Canadian
Securities Administrators ("NI 51-101"). Under NI 51-101, the "best estimate"
for reserves is the Proved plus Probable ("P+P") category. In this category
the Company's reserves increased by 9.9 billion cubic feet ("bcf") of natural
gas and 14 thousand barrels ("mbbls") of oil and natural gas liquids ("NGL")
for a total increase of 1,656 thousand of barrels of oil equivalent ("mboe")
in the period January 1, 2007 to December 31, 2007. ProspEx had no acquisition
or disposition activity that effected reserves in 2007, as the Company's
acquisition of assets in the Ricinus area closed in January of 2008. The
complete reserves disclosure as required under NI 51-101, will be contained in
ProspEx's 2007 Annual Information Form, to be filed on SEDAR on or before
March 31, 2008.
    The Company replaced 161% of 2007 production through exploration and
development activities on a Proved basis, and 216% of 2007 production on a P+P
basis. Reserves growth over the year was 15% on a Proved basis and 20% on a
P+P basis.
    The Proved reserve life index at December 31, 2007, calculated using
fourth quarter 2007 production on an annualized basis, was 4.6 years. The P+ P
reserve life index was 6.9 years.
    Reported reserves included a negative revision to reserves on a Proved
basis of 278 mboe, and a negative revision of 778 mboe on a P+P basis. The
largest revisions were at Ricinus and Harmattan in West Central Alberta. At
Harmattan the negative revision was due to a reclassification of an oil pool
to natural gas and at Ricinus the revision was due to lower than anticipated
production performance from two wells.
    Finding and development costs were $26.01 per boe on a Proved basis and
$21.09 per boe on a P+P basis, including revisions and future development
costs (there were no acquisitions or dispositions). ProspEx has made
substantial improvement in finding and development cost performance over the
past year. In 2006, finding and development costs were $31.14 per boe on a
Proved basis and $37.87 per boe on a P+P basis, including revisions and future
development costs (but not including acquisitions and dispositions).
    Without revisions, but including future development costs, finding and
development costs were $23.19 per boe on a Proved basis and $16.84 on a P+P
basis, indicative of strong economic performance of the Company's capital
program.
    Finding and development costs in 2007 were substantially lower than in
2006 due to improved industry conditions and a focus on cost reduction. In
2008, the Company will continue to work towards reducing finding and
development costs.
    Recycle ratio is the ratio of operating netback to finding and
development costs, and is a measure of the economic efficiency of the capital
program. On a Proved basis a recycle ratio of 1.1 was achieved, with a recycle
ratio of 1.4 on a Proved plus Probable basis.

    Liquidity & Capital Resources

    At December 31, 2007, ProspEx had the following resources available to
fund its capital expenditure program.

    
                                                                     ($000's)
    -------------------------------------------------------------------------
    Working capital deficiency                                      $ (8,659)
    Long-term debt                                                   (28,846)
    Bank facilities available                                         60,000
    -------------------------------------------------------------------------
    Total capital resources                                         $ 22,495
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The Company anticipates that it will continue to have adequate liquidity
to fund future working capital and its 2008 capital program of $55 million,
from operating cash flow and the capital resources listed in the table above.

    Bank Debt

    At December 31, 2007, the Company had a total credit facility of
$60.0 million. The facility is available by way of Canadian and US dollar
prime rate based loans, LIBOR advances, bankers' acceptances and letters of
credit. The credit facility is fully revolving until June 30, 2008 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, 2009. This facility is secured by a $200 million demand debenture and
a first floating charge on all petroleum and natural gas assets of ProspEx.
    In January 2008, the Company expanded its credit facility by $5.0 million
to bring the total credit facility to $65.0 million.

    Share Capital

    As at December 31, 2007, ProspEx had 56,453,422 common shares, 2,716,145
warrants, 4,655,917 options and no special performance units issued and
outstanding. Each warrant and option, upon exercise, entitles the holder to
one common share.
    As at March 14, 2008, ProspEx had 56,561,813 common shares, 2,607,754
warrants, 5,267,417 options and no special performance units issued and
outstanding.
    On December 13, 2007, the Company issued 2.2 million common shares on a
flow-through basis at a price of $3.70 per share for total gross proceeds of
$8.0 million. With this share offering ProspEx has committed to incur
$8.0 million in qualifying expenditures related to the flow-through share
financing by December 31, 2008. Directors and Officers of the Company
purchased a total of 15,600 of the flow-through shares for total proceeds of
$0.1 million.

    Subsequent Events

    On January 22, 2008, the Company acquired certain assets in the Ricinus
area of Alberta. These assets consist of 16 (11.9 net) wells with current
production of approximately 360 boe per day, along with associated gas
gathering and field compression facilities. The consideration paid by the
Company was $11.6 million after closing adjustments. The purchase of these
assets was financed from the Company's credit facility.
    As noted under bank debt, in January 2008, the Company expanded its
credit facility by $5.0 million to bring the total credit facility to
$65.0 million.

    Contractual Obligations

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

    
    Payments due
     ($000's)           2008        2009        2010        2011  Thereafter
    -------------------------------------------------------------------------
    Long-term debt  $      -      28,846           -           -           -
    Drilling rig
     contract          2,468         106           -           -           -
    Building lease       384          32           -           -           -
    Process fees         505         400         300          47           -
    Transportation       934         181           -           -           -
    Other                 12           8           2           -           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total           $  4,303      29,573         302          47           -
    -------------------------------------------------------------------------
    

    OFF-BALANCE SHEET ARRANGEMENTS

    The Company has not entered into any off-balance sheet transactions.

    
    Summary of Quarterly Results

                                                     2007
                                    Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)
    Oil and gas revenue           15,906      16,004      17,553      14,071
    Net earnings (loss)             (180)     (1,352)      2,235      (1,794)
      Per share - basic             0.00       (0.03)       0.04       (0.03)
                - diluted           0.00       (0.03)       0.04       (0.03)

    Average Daily Production
    Oil (bbls/d)                     125          82         210          83
    NGL (bbls/d)                     515         548         513         290
    Natural Gas (mcf/d)           19,690      21,743      21,108      16,757
                                 --------    --------    --------    --------
    Total (boe/d)                  3,922       4,254       4,241       3,166

    Operating Netbacks ($/boe)
    Price(1)                       44.09       40.89       45.48       49.38
    Royalties                      (5.41)      (7.79)      (3.97)      (9.85)
    Operating Cost                 (8.06)      (8.42)      (7.86)      (7.38)
    Transportation Cost            (0.86)      (0.89)      (1.01)      (1.03)
                                 --------    --------    --------    --------
    Operating Netback              29.76       23.79       32.64       31.12
                                 --------    --------    --------    --------


                                                     2006
                                    Q4          Q3          Q2          Q1
    -------------------------------------------------------------------------
    Financial ($000's, except
     per share amounts)
    Oil and gas revenue           13,536      14,071      12,704      11,190
    Net earnings (loss)            2,143         440         868       1,629
      Per share - basic             0.04        0.01        0.02        0.03
                - diluted           0.04        0.01        0.02        0.03

    Average Daily Production
    Oil (bbls/d)                     184          67          96          28
    NGL (bbls/d)                     276         515         287         212
    Natural Gas (mcf/d)           16,221      18,335      17,948      13,890
                                 --------    --------    --------    --------
    Total (boe/d)                  3,164       3,639       3,375       2,555

    Operating Netbacks ($/boe)
    Price(1)                       46.50       42.03       41.37       48.66
    Royalties                      (7.16)      (8.46)      (7.12)      (8.36)
    Operating Cost                 (7.39)      (8.21)      (5.68)      (6.34)
    Transportation Cost            (0.96)      (0.98)      (1.07)      (0.83)
                                 --------    --------    --------    --------
    Operating Netback              30.99       24.38       27.50       33.13
                                 --------    --------    --------    --------
    (1) Price does not include unrealized financial instrument loss.
    

    Oil and gas revenue trends are mainly impacted by realized commodity
prices and production volumes. Oil and gas revenue grew in conjunction with
production volumes during the first three quarters of 2006 and then held
relatively flat until the second of 2007 as lower production was offset by
strengthening prices. Revenue increased in the second quarter of 2007 due to
increased production, but then declined due to decreases in netbacks and
production.
    Production growth over the last eight quarters is attributable to an
active and successful exploration and development drilling program.
    Net earnings or losses are affected by production volumes, operating
netback, taxation rates, the risk management program and the Company's
depletion charge which is a result of the Company's success in adding new
proven oil and natural gas reserves.

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Adopted

    On January 1, 2007 the Company adopted the new accounting standards for
financial instrument recognition and measurement, financial instruments
presentation and disclosure, hedging and comprehensive income. These standards
require that financial assets and liabilities be carried at fair value on the
balance sheet, except for loans and receivables, securities designated as
held-to-maturity and non-trading financial liabilities, which are carried at
amortized cost (unless they are designated as held-for-trading, in which case
fair value is appropriate).
    The Company uses derivative financial instruments to manage its exposure
to volatility in commodity prices. Prior to January 1, 2007 and to date, the
derivative financial instruments used have not been designated as hedges; they
were and are recorded at fair value at inception with unrealized gains or
losses reflected in earnings.
    Prior to the adoption of the new standards, physical receipt and delivery
contacts were not within the scope of the definition of a financial
instrument. On adoption of the new standards, the Company elected to account
for its commodity sales contracts and other non-financial contracts as
non-financial derivatives, which results in fair value measurement.
    The new standards require a statement of comprehensive income comprised
of net earnings plus other comprehensive income. The Company does not have any
other comprehensive income to report on the adoption of the new standards.
    The adoption of these new standards on January 1, 2007 did not have a
material impact on the reported results of operations or net financial
position of the Company.

    Recent Accounting Pronouncements

    On February 13, 2008 Canada's Accounting Standards Board announced their
intention to converge Canadian GAAP with International Financial Reporting
Standards, effective January 1, 2011. The Company continues to monitor and
research the impact of this transition on financial position and earnings.

    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 Chief Executive Officer
and Chief Financial Officer have concluded, based on their evaluation as of
December 31, 2007, that the Company's disclosure controls and procedures as at
such date 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 Chief Executive Officer and Chief Financial Officer
believe that the Company's disclosure controls and procedures provide a
reasonable level of assurance that they are effective, they do not expect that
the disclosure controls and procedures will prevent all errors and fraud. A
control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.

    INTERNAL CONTROLS OVER FINANCIAL REPORTING

    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 fourth quarter of 2007, 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 measure. For the purposes hereof, "cash flow" is defined as cash
flow from operations before the change in 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, 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 information and 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 Unaudited Balance Sheets

    As At December 31,
    (Stated in thousands of dollars)
    (unaudited)                                             2007        2006
                                                        ---------   ---------
    Assets

    Current assets
      Accounts receivable                               $ 12,900    $ 13,220
      Prepaid expenses                                       988         746
      Unrealized financial instrument gain                   214       3,081
                                                        ---------------------
    Total assets                                          14,102      17,047

    Property, plant and equipment, net                   161,663     142,649
    Asset held for resale(note 2)                              -         937
    Future income tax asset(note 3)                            -       1,103
                                                        ---------------------
                                                        $175,765    $161,736
                                                        ---------------------
                                                        ---------------------

    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities          $ 22,761    $ 29,990

    Long term debt(note 4)                                28,846      16,766
    Asset retirement obligation                            5,201       4,157
    Future income tax liability(note 3)                    3,214           -
                                                        ---------------------
    Total liabilities                                     60,022      50,913
                                                        ---------------------

    Shareholders' Equity

    Share capital(note 5)                                 92,204      87,459
    Contributed surplus(note 5)                            5,614       4,348
    Retained earnings                                     17,925      19,016
                                                        ---------------------
    Total shareholders' equity                           115,743     110,823
                                                        ---------------------
                                                        $175,765    $161,736
                                                        ---------------------
                                                        ---------------------

    Subsequent events(note 8)
    See accompanying notes to consolidated unaudited financial statements for
the fourth quarter of 2007.



    ProspEx Resources Ltd.
    Consolidated Statements of Earnings (Loss), Comprehensive Earnings (Loss)
    and Retained Earnings

                                For the     For the
                                 Three       Three       For the     For the
                                 Months      Months       Year        Year
                                 Ended       Ended        Ended       Ended
    ($000's except per          December    December    December    December
     share amounts)             31, 2007    31, 2006    31, 2007    31, 2006
    -------------------------------------------------------------------------
                              (unaudited) (unaudited)   (audited)   (audited)
    Revenue
      Oil and gas               $ 15,906    $ 13,536    $ 63,534    $ 51,501
      Unrealized financial
       instrument gain (loss)       (991)      1,213      (2,867)      3,132
      Royalties                   (1,952)     (2,083)     (9,343)     (9,024)
                                ---------   ---------   ---------   ---------
                                  12,963      12,666      51,324      45,609
                                ---------   ---------   ---------   ---------
    Expenses
      Depletion, depreciation
       and accretion               8,744       6,638      33,889      23,758
      Operating                    2,907       2,152      11,341       8,104
      Transportation                 311         281       1,343       1,129
      General and administrative     836         632       3,080       2,406
      Interest and bank charges      505         176       2,047       1,133
      Stock-based compensation       328         321       1,156       1,181
                                ---------   ---------   ---------   ---------
                                  13,631      10,200      52,856      37,711
                                ---------   ---------   ---------   ---------
    Earnings (loss) before
     income taxes                   (668)      2,466      (1,532)      7,898
                                ---------   ---------   ---------   ---------
    Income Tax(note 3)
      Current expense                  -           -           -          20
      Future expense
       (reduction)                  (488)        323        (441)      2,798
                                ---------   ---------   ---------   ---------
                                    (488)        323        (441)      2,818
                                ---------   ---------   ---------   ---------
    Net earnings (loss) and
     comprehensive earnings
     (loss) for the period          (180)      2,143      (1,091)      5,080

    Retained earnings,
     beginning of period          18,105      16,873      19,016      13,936
                                ---------   ---------   ---------   ---------
    Retained earnings,
     end of year                $ 17,925    $ 19,016    $ 17,925    $ 19,016
                                ---------   ---------   ---------   ---------
                                ---------   ---------   ---------   ---------
    Net earnings (loss)
     per share
      Basic                     $   0.00    $   0.04    $  (0.02)   $   0.10
                                ---------   ---------   ---------   ---------
                                ---------   ---------   ---------   ---------
      Diluted                   $   0.00    $   0.04    $  (0.02)   $   0.10
                                ---------   ---------   ---------   ---------
                                ---------   ---------   ---------   ---------

    See accompanying notes to consolidated unaudited financial statements for
the fourth quarter of 2007.



    ProspEx Resources Ltd.
    Consolidated Statements of Cash Flows

                                For the     For the
                                 Three       Three       For the     For the
                                 Months      Months       Year        Year
                                 Ended       Ended        Ended       Ended
                                December    December    December    December
    ($000's)                    31, 2007    31, 2006    31, 2007    31, 2006
    -------------------------------------------------------------------------
                              (unaudited) (unaudited)   (audited)   (audited)
    Operations
    Net earnings (loss)
     for the period             $   (180)   $  2,143    $ (1,091)   $  5,080
    Items not involving cash
      Depletion, depreciation
       and accretion               8,744       6,638      33,889      23,758
      Stock-based compensation       328         321       1,156       1,181
      Unrealized financial
       instrument (gain) loss        991      (1,243)      2,867      (3,131)
      Future income taxes
       (reduction)                  (488)        323        (441)      2,798
    Asset retirement
     expenditures                    (32)       (541)       (383)     (1,724)
                                ---------   ---------   ---------   ---------
                                   9,363       7,641      35,997      27,962
    Changes in non-cash
     working capital                (726)        161        (901)     (3,874)
                                ---------   ---------   ---------   ---------
                                   8,637       7,802      35,096      24,088
                                ---------   ---------   ---------   ---------

    Financing
      Issuance of common shares    7,682      14,456       8,020      21,045
      (Decrease) increase in
       long-term debt             (3,620)      2,987      12,080      15,713
                                ---------   ---------   ---------   ---------
                                   4,062      17,443      20,100      36,758
                                ---------   ---------   ---------   ---------

    Investing
      Exploration and
       development expenditures   (9,090)    (25,565)    (48,550)    (73,464)
      Deposit on property
       acquisition(note 8)        (1,175)          -      (1,175)          -
      Expenditures on asset
       held for resale                 -        (937)        937        (937)
      Proceeds of property
       disposition                     -           -           -      10,842
      Other capital
       expenditures                   (3)        (18)       (160)       (269)
                                ---------   ---------   ---------   ---------
                                 (10,268)    (26,520)    (48,948)    (63,828)
    Changes in non-cash
     working capital              (2,431)      1,275      (6,248)      2,982
                                ---------   ---------   ---------   ---------
                                 (12,699)    (25,245)    (55,196)    (60,846)
                                ---------   ---------   ---------   ---------

    Change in cash                     -           -           -           -

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

    Cash, end of year           $      -    $      -    $      -    $      -
                                ---------   ---------   ---------   ---------
                                ---------   ---------   ---------   ---------

    See accompanying notes to consolidated unaudited financial statements for
the fourth quarter of 2007.



    Notes to Unaudited Consolidated Financial Statements
    For the three months and year ended December 31, 2007
    (unaudited)

    The interim unaudited consolidated financial statements of ProspEx
    Resources Ltd. ("the Company" 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
    year ended December 31, 2006. 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. 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, 2006.

    ProspEx was incorporated on August 13, 2004 and commenced operations on
    October 1, 2004 when certain assets of Esprit Exploration Ltd. ("Esprit")
    were transferred to ProspEx under a Plan of Arrangement (the "Plan of
    Arrangement"). The Plan of Arrangement resulted in, amongst other
    matters, Esprit shareholders becoming shareholders of ProspEx. ProspEx is
    engaged in the acquisition, exploration, development and production of
    oil and natural gas in Canada.

    1.  CHANGE IN ACCOUNTING POLICY

    On January 1, 2007, the Company adopted the new accounting standards for
    financial instrument recognition and measurement, financial instruments
    presentation and disclosures, hedging and comprehensive income.

    The standards require that financial assets and liabilities be carried at
    fair value on the balance sheet, except for loans and receivables,
    securities designated as held-to-maturity and non-trading financial
    liabilities, which are carried at amortized cost (unless they are
    designated as held-for-trading, in which case fair value is appropriate).

    The Company uses derivative financial instruments to manage its exposure
    to volatility in commodity prices. Prior to January 1, 2007 and to date,
    the derivative financial instruments used have not been designated as
    hedges; they were and are recorded at fair value at inception with
    unrealized gains or losses reflected in earnings.

    Prior to the adoption of the new standards, physical receipt and delivery
    contracts were not within the scope of the definition of a financial
    instrument. On adoption of the new standards, the Company elected to
    account for its commodity sales contracts and other non-financial
    contracts as non-financial derivatives, which results in fair value
    measurement.

    The new standards require a statement of comprehensive income comprised
    of net earnings plus other comprehensive income. The Company does not
    have any other comprehensive income to report on the adoption of the new
    standards.

    The adoption of these new standards on January 1, 2007 did not have a
    material impact on the reported results of operations or net financial
    position of the Company.

    2.  ASSET HELD FOR RESALE

    At December 31, 2006, the Company had $0.9 million of equipment assembled
    that it intended to sell. The Company no longer intends to sell this
    equipment, as it is expected that this equipment will be utilized in the
    Company's field operations.

    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 (loss) before income taxes. The reasons for these differences
    are as follows:

                                 Three       Three
                                 months      months       Year        Year
                                 ended       ended        ended       ended
                                December    December    December    December
    ($000's)                    31, 2007    31, 2006    31, 2007    31, 2006
    -------------------------------------------------------------------------
    Earnings (loss) before
     taxes                      $   (180)   $  2,466    $ (1,532)   $  7,898
    Rate (%)                       32.12       34.50       32.12       34.50
    -------------------------------------------------------------------------
    Computed expected
     provision (reduction)
     for future income taxes         (58)        851        (492)      2,725
    Increase (decrease) in
     taxes resulting from:
      Non-deductible crown
       payments                        -         217           -         835
      Resource allowance               -        (239)          -        (914)
      Stock-based compensation       105         111         371         407
      Effect of change in
       tax rate                     (535)       (216)       (458)         91
      Alberta royalty deduction
       pool additions                  -        (251)          -        (251)
      Other                            -        (150)        138         (95)
    -------------------------------------------------------------------------
                                    (488)        323        (441)      2,798
    Capital taxes                      -           -           -          20
    -------------------------------------------------------------------------
    Income tax expense
     (reduction)                $   (488)   $    323    $   (441)   $  2,818
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The components of the future income tax asset at December 31, are as
    follows:

    ($000's)                                                2007        2006
    -------------------------------------------------------------------------
    Tax assets:
      Property, plant and equipment                     $ (3,744)   $  1,482
      Asset retirement obligation                            509         533
      Share issue costs                                      590         578
      Unrealized financial instrument gain                   (69)       (990)
    -------------------------------------------------------------------------
                                                          (2,714)      1,603
    Valuation allowance                                     (500)       (500)
    -------------------------------------------------------------------------
    Future income tax asset (liability)                 $ (3,214)   $  1,103
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At December 31, 2007, the Company had estimated tax pools available to
    reduce future taxable income of $147.0 million (2006 - $149.7 million).
    ProspEx has committed to incur $8.0 million in qualifying expenditures
    related to the December 2007 flow-through share issuance by
    December 31, 2008.

    4.  LONG-TERM DEBT

    At December 31, 2007, the Company had a $60.0 million credit facility
    with a Canadian chartered bank. The facility is available by way of
    Canadian and US dollar prime rate based loans, LIBOR advances, bankers'
    acceptances and letters of credit. The credit facility is fully revolving
    until June 30, 2008 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 full payment is required on July 1, 2009. This facility
    is secured by a $200 million demand debenture and a first floating charge
    on all petroleum and natural gas assets of ProspEx.

    5.  SHARE CAPITAL

    (a) Common Shares & Common Share Performance Warrants Issued

                                        2007                    2006
    -------------------------------------------------------------------------
                               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      53,790    $ 85,681      48,932    $ 65,214
      Issued on exercise of
       options                        72         243          22          71
      Flow-through shares
       issued - May 5, 2006            -           -       1,220       7,015
      Flow-through shares
       issued - November 1, 2006       -           -       1,400       7,560
      Flow-through shares
       issued - December 13,
       2007                        2,170       8,029           -           -
      Shares issued -
       November 1, 2006                -           -       1,800       7,560
      Flow-through shares
       tax adjustment                  -      (4,461)          -      (2,047)
      Shares issued under
       special performance
       unit plan                     252           3         294           3
      Shares issued on exercise
       of warrants                   169         353         122         245
      Issue costs, net of future
       tax reduction                   -        (351)          -        (905)
      Stock options exercised          -       1,046           -         965
    -------------------------------------------------------------------------
      Balance at the end
       of the year                56,453    $ 90,543      53,790    $ 85,681
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Common share performance
     warrants
    -------------------------------------------------------------------------
      Balance at the beginning
       of the year                 2,908    $  1,778       3,032    $  1,853
      Exercised                     (169)       (104)       (122)        (75)
      Cancelled                      (23)        (13)         (2)          -
    -------------------------------------------------------------------------
      Balance at the end
       of the year                 2,716       1,661       2,908       1,778
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Share Capital at end
     of year                                $ 92,204                $ 87,459
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On December 13, 2007, ProspEx issued 2,170,000 common shares on a
    flow-through basis at a price of $3.70 per share for total gross proceeds
    of $8.0 million. ProspEx has committed to incur $8.0 million in
    qualifying expenditures by December 31, 2008. Three officers of the
    Company, of which one is also a director, purchased a total of 15,600 of
    the flow-through shares for total proceeds of $57,720.

    (b) Contributed Surplus

    ($000's)                                                2007        2006
    -------------------------------------------------------------------------
    Balance at the beginning of the year                $  4,348    $  2,951
    Stock-based compensation                               2,312       2,362
    Exercise of stock options & special
     performance units                                    (1,046)       (965)
    -------------------------------------------------------------------------
    Balance at the end of the year                      $  5,614    $  4,348
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (c) Stock Options and Special Performance Units

    Changes in outstanding stock options during the years ended
    December 31, 2007 and 2006 are summarized below:

                                        2007                    2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                                 Options    Exercise     Options    Exercise
                                   (000s)      Price       (000s)      Price
    -------------------------------------------------------------------------
    Outstanding at beginning
     of year                       3,354    $   3.49       2,314    $   3.27
    Granted                        1,725        3.96       1,096        3.93
    Exercised                        (72)       3.38         (22)       3.22
    Cancelled                       (351)       4.06         (34)       3.37
    -------------------------------------------------------------------------
    Outstanding at end of year     4,656    $   3.62       3,354    $   3.49
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Changes in special performance units during the years ended December 31,
    2007 and 2006 are as follows:

                                                            2007        2006
    -------------------------------------------------------------------------
    (000s)
    -------------------------------------------------------------------------
    Outstanding at beginning of year                         436         872
    Exercised                                               (406)       (436)
    Cancelled                                                (30)          -
    -------------------------------------------------------------------------
    Outstanding at end of year                                 -         436
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The fair value of each stock option and special performance unit granted
    is estimated on the date of the grant using the Black-Scholes option
    pricing model with the following weighted average assumptions for grants
    as follows:

                                                            2007        2006
    -------------------------------------------------------------------------
    Risk free interest rate                                   4%          4%
    Expected life                                        5 years     5 years
    Expected volatility                                      44%         46%
    Expected dividend yield                                  Nil         Nil
    -------------------------------------------------------------------------

    The estimated fair values of the options and the special performance
    units are being amortized to expense over the vesting period.
    $1.2 million (2006 - $1.2 million) of stock and unit-based compensation
    was recorded against income and $1.2 million was capitalized in both 2007
    and 2006.

    (d) Per Share Amounts

    In computing diluted net earnings per share for the year ended
    December 31, 2007, 2,223,429 (2006 - 2,625,929) common shares were added
    to the weighted average number of common shares outstanding of 54,094,873
    (2006 - 50,378,377). A total of 4,655,917 (2006 - 1,096,500) options were
    excluded from the diluted calculations as they were not dilutive. For the
    quarter ended December 31, 2007, 1,473,335 common shares
    (2006 - 2,636,406) were added to the weighted average number of common
    shares outstanding of 54,686,979 (2006 - 52,627,783) and 2,871,729
    (2006 - 1,096,500) options were excluded from the diluted calculations,
    as they were not dilutive.

    6.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

    The Company uses derivative financial instruments to manage its exposure
    to volatility in commodity prices. These financial instruments are not
    used for trading or other speculative purposes. In 2007, realized gains
    on physical and financial swap contracts of $0.8 million
    (2006 - $1.2 million) for the quarter ended and $3.1 million
    (2006 - $2.2 million) for the year ended December 31, 2007 were recorded.
    Financial instruments and physical contracts in place at December 31,
    2007 are summarized below.

    Type    Amount         Term                Price               Type
    ----    ------         ----                -----               ----
    Collar  2,500 GJ/d     November 1, 2007 -  $7.00 - $8.40       Physical
                            March 31, 2008      at AECO ($Cdn/GJ)
    Collar  2,500 mmbtu/d  November 1, 2007 -  $6.76 - $8.40       Financial
                            March 31, 2008      at AECO
                                                ($USD/mmbtu)

    Accounts receivable are with customers and joint-venture partners in the
    oil and gas industry and are subject to normal industry credit risks. Due
    to the deterioration of North American gas price fundamentals, industry
    access to capital markets may become increasingly difficult, raising the
    credit risk on accounts receivable. The Company has not recorded an
    allowance for doubtful accounts at December 31, 2007.

    The Company is exposed to a floating rate of interest on its long-term
    debt. The Company is also exposed to foreign currency fluctuations as oil
    prices received are referenced to US dollar denominated prices and
    natural gas and natural gas liquids prices are influenced by US dollar
    denominated markets. The Company has no financial contracts in place at
    December 31, 2007 to manage the foreign currency and interest rate
    exposure.

    The fair values of the financial instruments, including accounts
    receivable, accounts payable, accrued liabilities and long-term debt
    approximate their carrying values.

    Subsequent to the quarter the Company entered into the following
    contracts:

    Type    Amount (GJ/d)  Term                Price ($/GJ)        Type
    ----    -------------  ----                ------------        ----
    Collar  2,000          April 1, 2008 -     $6.50 - $6.75       Physical
                            October 31, 2008    at AECO
    Collar  1,000          April 1, 2008 -     $6.50 - $6.90       Physical
                            October 31, 2008    at AECO
    Collar  1,000          April 1, 2008 -     $6.50 - $7.13       Financial
                            October 31, 2008    at AECO
    Collar  2,000          April 1, 2008 -     $6.50 - $7.45       Financial
                            October 31, 2008    at AECO
    Collar  2,000          April 1, 2008 -     $6.50 - $7.75       Financial
                            October 31, 2008    at AECO
    Collar  2,000          April 1, 2008 -     $6.75 - $7.62       Financial
                            October 31, 2008    at AECO
    Collar  2,000          November 1, 2008 -  $7.00 - $8.80       Financial
                            March 31, 2009      at AECO
    Collar  2,000          November 1, 2008 -  $7.00 - $9.15       Financial
                            March 31, 2009      at AECO

    7.  ADDITIONAL DISCLOSURES

    Net cash interest paid during the year was $2.7 million (2006 -
    $1.4 million) and interest paid during the quarter was $0.9 million (2006
    - $0.3 million). Cash taxes paid during the year was $nil (2006 - $nil)
    and during the quarter was $nil.

    8.  SUBSEQUENT EVENTS

    On January 22, 2008, the Company acquired certain assets in the Ricinus
    area of Alberta. These assets consist of 16 (11.9 net) wells with current
    production of approximately 360 boe per day, along with associated gas
    gathering and field compression facilities. The consideration paid by the
    Company was $11.6 million after closing adjustments. The purchase of
    these assets was financed from the Company's credit facility. At
    December 31, 2007 a deposit of $1.2 million was outstanding that related
    to this purchase.

    In January 2008, the Company expanded its credit facility by $5.0 million
    to bring the total credit facility to $65.0 million.

    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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PROSPEX RESOURCES LTD.

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