Silverwing Announces 2008 Second Quarter Results



    CALGARY, Aug. 15 /CNW/ - Silverwing Energy Inc. ("Silverwing" or the
"Company") (TSX : SVW) is pleased to announce its financial and operating
results for the three and six months ended June 30, 2008.

    
    HIGHLIGHTS
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007    Change    2008     2007    Change
    -------------------------------------------------------------------------
    (000s, except per
     share amounts)         ($)      ($)      (%)      ($)      ($)      (%)

    Financial
    Oil and gas revenue   3,897    3,558       10    7,198    7,429       (3)
    Funds from
     operations(1)        1,527   (1,040)    (247)   2,814      227    1,140
      Per share - basic
       and diluted         0.01    (0.03)    (133)    0.01     0.01        -
    Net loss             (1,655)  (2,675)     (38)  (3,180)  (5,529)     (42)
      Per share -
       basic and
       diluted            (0.01)   (0.08)     (88)   (0.02)   (0.16)     (88)
    Capital
     expenditures (net)    (585)   1,371     (143)    (854)   8,466     (110)
    Bank debt and
     working capital
     deficiency         (13,085) (26,909)     (51) (13,085) (26,909)     (51)
    Shareholders'
     equity (deficit)    42,729   37,629       14   42,729   37,629       14
    -------------------------------------------------------------------------
    (000s)                (No.)    (No.)      (%)    (No.)    (No.)      (%)

    Share Data
    Total shares
     outstanding
      Basic and
       diluted          188,068   37,509      401  188,068   37,509      401
    Weighted average
     shares
     outstanding
      Basic and
       diluted          188,068   34,770      441  188,068   34,300      448
    -------------------------------------------------------------------------
                                              (%)                        (%)

    Operating
    Average daily
     production
      Natural gas
       (mcf/d)            3,704    4,707     (21)    3,796    4,916      (23)
      Crude oil and
       NGLs (bbls/d)         41       54     (24)       40       58      (31)
    -------------------------------------------------------------------------
      Total (boe/d)         658      839     (22)      673      877      (23)
    -------------------------------------------------------------------------
    Average selling
     prices
      Natural gas
       ($/mcf)            10.64     7.62      40      9.54     7.63       25
      Crude oil
       and NGLs ($/bbl)   83.06    60.02      38     84.12    61.05       38
    -------------------------------------------------------------------------
      Total ($/boe)       65.08    46.62      40     58.81    46.79       26
    -------------------------------------------------------------------------
    Wells drilled -
     gross (net) (No.)
      Gas                - (-)      - (-)   - (-)   4 (1.2)  4 (0.2)  - (600)
      Oil                - (-)      - (-)   - (-)     - (-)    - (-)    - (-)
      Standing/untested  - (-)      - (-)   - (-)   2 (0.1)  2 (1.1)  - (-91)
      Dry and abandoned  - (-)      - (-)   - (-)     - (-)    - (-)    - (-)
    -------------------------------------------------------------------------
      Total              - (-)      - (-)   - (-)   6 (1.5)  6 (1.3)   - (15)
    -------------------------------------------------------------------------
    (1) Funds from operations is defined as cash provided by operations
        before changes in non-cash operating working capital.
    

    LETTER TO SHAREHOLDERS

    I am pleased to present the financial and operating highlights of
Silverwing Energy Inc. for the three and six months ended June 30, 2008 and
provide an outlook for the remainder of the year.

    
    2008 Second Quarter Highlights

    -  Commodity prices continued to show improvement.
    -  Capital program was curtailed pending conclusion of the value
       maximization process.
    -  Production averaged 658 boe/d, a 22% decrease from the second quarter
       of 2007.
    -  Funds from operations totaled $1.5 million or $0.01 per share.
    

    Corporate Activities and Financial Highlights

    On May 12, 2008, Silverwing announced the formal commencement of a
process to explore strategic alternatives for the maximization of shareholder
value. The Company also formed a Special Committee of the Board of Directors
and engaged Jacob & Company Securities Inc. as its financial advisors to
assist in the value maximization process. The process was to solicit
transaction proposals that may include the merger, sale or recapitalization of
the Company or a sale of certain or all of Silverwing's assets.
    In light of this process, we adjusted our capital program during the
second quarter of 2008, focusing only on essential expenditures associated
with production operations and with commitments to our Tomahawk farm-in. This
is in addition to a number of other financial protective measures that were
taken to help manage our balance sheet during the first quarter, which
included placing a 1-year financial hedge on approximately 50% of our gas
production and selling our Torquay undeveloped property. During the second
quarter, the Company undertook a second non-core asset disposition with the
sale of part of the Countess, Alberta producing property for $0.6 million.
Proceeds from the Countess divestiture were applied towards reducing our
working capital deficit. In addition, one of the farmors elected to
participate in the drilling of the Tomahawk 9-35 Nisku well, which resulted in
a reimbursement of $0.4 million in costs incurred to date to license the well.
Consequently, for the three months ended June 30, 2008, Silverwing had a net
inflow from the capital program of $0.6 million.

    Operations Review

    During the second quarter of 2008, no drilling operations were undertaken
at Silverwing's Prespatou project in northeastern British Columbia. In June, a
major scheduled gas plant shut down at McMahon for maintenance and overhaul
significantly reduced corporate gas production in the area. Consequently, our
corporate production for the second quarter averaged 658 boe/d.
    Tomahawk, located in west central Alberta, is a well known area of
multi-zone oil and gas potential. Due to our Company's decision to freeze our
capital program during the second quarter, we focused only on essential
operations in the area. These included a continuation of the process to
license the proposed Nisku wells at Tomahawk and Easyford as well as the
completion of the only Belly River test drilled during the 22-well
Mississippian and Belly River program in 2007 at Tomahawk. The Belly River
zones tested positive for gas but at rates that were deemed non-commercial,
and as a result, this well has now been suspended and scheduled for
abandonment. A program for the evaluation of a number of other completion
candidates, high-graded from the remaining 20 wells, will be considered in
light of the conclusion of the value maximization process.

    Outlook

    The first half of 2008 has continued to be challenging financially for
Silverwing, and as a result, we have maintained stringent financial and
operating control measures in order to manage our balance sheet. Furthermore,
on May 12, 2008, the Company undertook a process of value maximization. As a
result of this process, the Company announced on August 14, 2008 that it had
entered into an agreement with Bonterra Energy Income Trust to acquire all of
the issued and outstanding shares of Silverwing, subject to approval by the
Company's shareholders as well as final court and regulatory approval.
    I am pleased to announce that the proposed business combination will
facilitate exploitation of Silverwing's inventory of low risk, high reward
opportunities at Prespatou and a re-commencement of the completions and tie-in
work associated with the Tomahawk wells drilled to date.

    On behalf of the Board of Directors,

    (signed)

    Oleh Wowkodaw
    President & Chief Executive Officer
    August 14, 2008

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    This Management's Discussion and Analysis ("MD&A") has been prepared by
management as of August 14, 2008 and reviewed and approved by the Board of
Directors of Silverwing Energy Inc. ("Silverwing" or the "Company"). This MD&A
is a review of the operational results of the Company with disclosure of oil
and gas activities in accordance with Canadian Securities Regulators National
Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI
51-101") and a review of financial results of the Company based on accounting
principles generally accepted in Canada. Its focus is primarily a comparison
of the operational and financial performance for the three and six months
ended June 30, 2008 and 2007 and should be read in conjunction with the
audited financial statements and accompanying notes for the year ended
December 31, 2007.
    For the purpose of calculating unit costs, natural gas volumes have been
converted to a barrel equivalent ("boe") using six thousand cubic feet equal
to one barrel unless otherwise stated. A boe conversion ratio of 6:1 is based
on an energy equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead. This
conversion conforms with NI 51-101. Boes may be misleading, particularly if
used in isolation.
    Funds from operations, funds from operations per share, operating netback
and corporate netback are terms that do not have a standardized measuring
prescribed by Canadian generally accepted accounting principles ("GAAP").
Management believes that funds from operations, funds from operations per
share, operating netback and corporate netback are useful supplemental
measures as they demonstrate the Company's ability to generate the cash
necessary to repay debt or fund future growth through capital investment.
Investors are cautioned, however, that these measures should not be construed
as an alternative to cash flow determined in accordance with GAAP as an
indication of the Company's performance. Silverwing's method of calculating
these measures may differ from other companies, and accordingly, may not be
comparable to measures used by other companies. For these purposes, the
Company defines funds from operations as cash provided by operations before
changes in non-cash operating working capital, defines operating netback as
revenue less royalties and operating expenses on a per boe basis and defines
corporate netback as operating netback less general and administrative costs
and interest and other on a per boe basis. The Company also presents funds
from operations per share whereby amounts per share are calculated using
weighted average shares outstanding consistent with the calculation of
earnings per share.

    Forward-Looking Statements

    Certain statements contained in this report, including statements that
may contain words such as "anticipates," "can," "may," "expect," "believe or
believes" and "will" and similar expressions are forward-looking statements.
These statements may include, but are not limited to, future capital
expenditures, future financial resources, future oil and gas well activity,
outcome of specific events, and trends in the oil and gas industry. These
statements are derived from certain assumptions and analyses made by the
Company based on its experience and interpretation of historical trends,
current conditions and expected future developments, and other factors that it
believes are appropriate in the circumstances. These statements or predictions
are subject to a number of known and unknown risks and uncertainties, which
are discussed previously in this report, that could cause actual results to
differ materially from the Company's expectations. Consequently, all of the
forward-looking statements made in this report are qualified by these
cautionary statements and there can be no assurance that actual results or
developments anticipated by the Company will be realized, or that they will
have the expected consequences or effects on the Company or its business or
operations.
    All financial measures presented in this MD&A are expressed in Canadian
dollars unless otherwise indicated.

    General Description of Business

    Silverwing Energy Inc. is a Calgary based crude oil and natural gas
exploration and production company with operations located throughout the
Western Canadian Sedimentary Basin. Common shares of Silverwing are listed for
trading on the Toronto Stock Exchange ("TSX") under the symbol SVW.

    Offer To Purchase 100% of Silverwing Common Shares

    The Company entered into a value maximization process during the second
quarter of 2008. As a result of this process, the Company announced on August
14, 2008 that it had entered into an agreement whereby Bonterra Energy Income
Trust ("Bonterra") will acquire all of the issued and outstanding shares of
Silverwing at a gross purchase price of $30.45 million to be reduced based on
outstanding debt, negative working capital and the settlements to be incurred
in connection with the drilling contract buy-out and the amended Tomahawk
farm-in agreement, which is estimated to be $16.5 million at the closing of
the acquisition for a net purchase price of approximately $13.95 million.
Under the agreement, shareholders of Silverwing will be entitled to receive at
their election either 0.002226 of a trust unit of Bonterra at a deemed price
equal to $33.70 per Bonterra trust unit for each Silverwing share, or cash in
an amount equal to such securityholder's pro rata share of the net purchase
price estimated to be approximately $0.075 per Silverwing share.
    The acquisition is subject to approval by the Company's shareholders as
well as final court and regulatory approval.
    In certain circumstances where either Bonterra or the Company are
determined to be in a material breach of certain covenants under the
agreement, a non-compliance fee of $1 million may be payable to the other
party.
    The proposed business combination will facilitate exploitation of
Silverwing's inventory of low risk, high reward opportunities at Prespatou and
the re-commencement of the completion and tie-in work associated with the
Tomahawk wells drilled to date.

    Operations Overview - Second Quarter 2008

    During the second quarter of 2008, Silverwing conserved its capital,
expending only essential funds needed to preserve lease commitments in the
Prespatou area of northeastern British Columbia ("NEBC") and to satisfy the
farm-in requirements at Tomahawk located in west central Alberta.
    Production decreased to 658 boe/d in the second quarter of 2008 compared
to 687 boe/d in the first quarter of the year, reflecting natural declines and
a processing plant shut down in the Prespatou core area. Commodity prices
continued to improve favourably, resulting in a modest increase in revenues to
$3.9 million during the second quarter of 2008 from $3.3 million recorded in
the year's first quarter.

    
    Financial Results

    Production
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                                              (%)                        (%)

    Daily Production
    Natural gas (mcf/d)   3,704    4,707      (21)   3,796    4,916      (23)
    Crude oil and
     NGLs (bbls/d)           41       54      (24)      40       58      (31)
    -------------------------------------------------------------------------
    Boe/d                   658      839      (22)     673      877      (23)
    -------------------------------------------------------------------------
                            (%)      (%)       (%)     (%)      (%)       (%)
    Production Mix
    Natural gas              94       94        -       94       93        1
    Crude oil and NGLs        6        6        -        6        7      (14)
    -------------------------------------------------------------------------
                            100      100        -      100      100        -
    -------------------------------------------------------------------------
    

    Production volumes for the second quarter averaged 658 boe/d, a decrease
of 22% from the 839 boe/d recorded in the same period of 2007. Natural gas
production declined 21% to 3,704 mcf/d from 4,707 mcf/d a year ago, while
crude oil and NGLs production decreased 24% to 41 bbls/d from 54 bbls/d in the
same period of 2007.
    Production for the first six months of 2008 decreased 23% to average 673
boe/d compared to 877 boe/d in the corresponding period of 2007. These
production reductions in both the three and six-month periods were the result
of natural declines in the NEBC project area and a shut down for scheduled
maintenance of the McMahon natural gas processing plant at Prespatou.

    
    -------------------------------------------------------------------------
                      Three Months Ended June 30,   Six Months Ended June 30,
                          2008    2007    Change    2008     2007    Change
    -------------------------------------------------------------------------
                        (boe/d)  (boe/d)    (%)    (boe/d)  (boe/d)    (%)

    Daily Production
     by Area
    Birley                  124      200      (38)     140      214      (35)
    Sirius                  180      288      (38)     209      310      (33)
    North Buick Creek        41      115      (64)      51      131      (61)
    South Beavertail        104      157      (34)     107      148      (28)
    Umbach                  195        -        -      136        -        -
    Other                    14       79      (82)      30       74      (59)
    -------------------------------------------------------------------------
    Total                   658      839      (22)     673      877      (23)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Pricing
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                                              (%)                        (%)

    Selling Prices
    Natural gas ($/mcf)   10.64     7.62       40     9.54     7.63       25
    Crude oil and NGLs
     ($/bbl)              83.06    60.02       38    84.12    61.05       38
    -------------------------------------------------------------------------
    Total combined
     ($/boe)              65.08    46.62       40    58.81    46.79       26
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Average natural gas prices for the second quarter of 2008 increased 40%
to $10.64/mcf from $7.62/mcf a year ago, while crude oil and NGLs prices rose
38% to $83.06/bbl from $60.02/bbl in 2007. Sales prices for the six months
ended June 30, 2008 averaged $9.54/mcf for natural gas and $84.12/bbl for
crude oil and NGLs compared to $7.63/mcf and $61.05/bbl, respectively, in the
first half of 2007. One hedge was in effect during the second quarter of 2008,
resulting in cash contract settlements of $0.3 million for the period. This
hedge involved a 1-year contract for 2,000 GJ/d of natural gas production at a
fixed price of $8.13/GJ effective April 1, 2008.

    
    Oil and Gas Revenue
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s)                  ($)      ($)      (%)      ($)      ($)      (%)

    Natural gas revenue   3,587    3,263       10    6,589    6,791       (3)
    Crude oil and
     NGLs revenue           310      295        5      609      638       (5)
    -------------------------------------------------------------------------
    Total oil and
     gas revenue          3,897    3,558       10    7,198    7,429       (3)
    -------------------------------------------------------------------------
    

    The Company's gross revenue increased 10% during the three months ended
June 30, 2008 to $3.9 million compared to $3.6 million a year ago. The
increase was primarily due to an overall Company commodity price improvement
of 40%, offset by a 22% decrease in production volumes in the period.
    Total oil and natural gas revenue for the first half of 2008 was $7.2
million versus $7.4 million in 2007. The 3% revenue decrease was attributed to
natural declines in many of the producing wells offset by the new wells that
came on-stream in the Umbach sub-project area of Prespatou and increases in
commodity prices.

    
    Royalty Expense
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                                              (%)                        (%)
    Total royalties
     ($000s)                411      635      (35)     659    1,584      (58)
    As a % of oil
     and gas sales          11%      18%      (39)      9%      21%      (57)
    $/boe                  6.86     8.32      (18)    5.38    9.98       (46)
    -------------------------------------------------------------------------
    

    For the three months ended June 30, 2008, royalty expense declined 35% to
$0.4 million from $0.6 million a year ago due to a reduced royalty rate
realized in the period. Year-over-year royalties as a percentage of production
revenue fell 39% as a result of lower productivity rates now recognized by the
Crown in the period. For the first half of 2008, royalty expense dropped 58%
to $0.7 million from $1.6 million a year ago due to a reduction in
year-over-year revenue and royalty rates recorded in the period.

    
    Operating Expenses
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                                              (%)                        (%)
    Operating expenses
     ($000s)                771    1,379      (44)   1,499    2,333      (36)
    Operating expenses
     ($/boe)              12.88    18.07      (29)   12.25    14.69      (17)
    -------------------------------------------------------------------------
    

    Operating expenses decreased 44% to $0.8 million in the 2008 second
quarter from $1.4 million in the prior year. For the first half of 2008,
operating costs dropped 36% to $1.5 million from $2.3 million in the 2007
six-month period, reflecting the year-over-year decrease in production and
operating rates primarily attributed to a maintenance shut down of a key
non-operated processing facility at Prespatou that resulted in only 40% of
normal volumes being processed in June. On a per boe basis, operating expenses
dropped to $12.88/boe and $12.25/boe during the three and six-month periods of
2008, respectively, compared to $18.07/boe and $14.69/boe during the
corresponding periods of 2007, respectively. The significant decrease in per
boe operating expenses was due to 2007 period expenses being inflated by prior
period adjustments coupled with operating expense recoveries recorded in the
second quarter of 2008.

    
    General and Administrative ("G&A") Expenses
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s)                  ($)      ($)      (%)      ($)      ($)      (%)

    Gross expenses          875      845        4    1,875    1,594       18
    Capitalized G&A        (107)    (106)       1     (215)    (212)       1
    Overhead recoveries       5      (40)    (113)      (9)    (260)     (97)
    -------------------------------------------------------------------------
    G&A expenses before
     stock-based
     compensation           773      699       11    1,651    1,122       47
    Stock-based
     compensation expense   106       42      152      213      108       97
    -------------------------------------------------------------------------
    Total G&A expense       879      741       19    1,864    1,230       52
    -------------------------------------------------------------------------
    $/boe                 14.68     9.71       51    15.23     7.75       97
    % capitalized           12%      13%       (8)     11%      13%      (15)
    -------------------------------------------------------------------------
    

    During the second quarter of 2008, net G&A expenses, before stock-based
compensation, rose 11% to $0.8 million from $0.7 million in 2007. For the six
months ended June 30, 2008, net G&A expenses, before stock-based compensation,
rose 47% to $1.7 million from $1.1 million in 2007. Year-over-year G&A
expenses rose for both the three and six-month periods as a result of
increased costs associated in operating a public oil and gas company, advisory
fees related to ongoing financing activities plus the reduction in partner
overhead recoveries due to reduced operations.
    Stock-based compensation expense increased 152% and 97% for each of the
three and six-month periods to $0.1 million and $0.2 million, respectively,
from that of the comparable periods in 2007. These increases were due to the
number of stock options that were granted late in the fourth quarter of 2007
and the recognition of that expense as at June 30, 2008.

    Interest Income and Expense

    Interest income for the three and six months ended June 30, 2008 was
$24,000 and $47,000, respectively, compared to $3,000 and $8,000,
respectively, recorded in the prior year. The increases were directly related
to the balance of cash on hand within the escrow account managed by the
farmors of the Tomahawk project for the first half of 2008.
    Interest expense and financing fees for the quarter and six-month periods
ended June 30, 2008 totaled $0.2 million and $0.3 million, respectively,
versus $1.9 million and $2.2 million, respectively, in the same periods of
2007. The year-over-year changes were due to lower average debt levels
experienced in the respective periods.

    
    Netbacks
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                        ($/boe)  ($/boe)      (%)  ($/boe)  ($/boe)      (%)

    Sales price           65.08    46.62       40    58.81    46.79       26
      Realized loss
       from risk
       management         (4.69)       -        -    (2.30)       -        -
      Royalties           (6.86)   (8.32)     (18)   (5.38)   (9.98)     (46)
      Operating          (12.88)  (18.07)     (29)  (12.25)  (14.69)     (17)
    -------------------------------------------------------------------------
    Operating netback     40.65    20.23      101    38.88    22.12       76
      G&A (net of
       non-cash items)   (12.91)  (10.55)      22   (13.49)   (8.40)      61
      Interest and
       other (net of
       non-cash items)    (2.24)  (10.26)     (78)   (2.40)   (6.71)     (64)
    -------------------------------------------------------------------------
    Corporate netback
     (loss)               25.50    (0.58)  (4,497)   22.99     7.01      228
    -------------------------------------------------------------------------
    

    On a cash netback per boe basis, second quarter 2008 funds from
operations increased to $25.50/boe from ($0.58)/boe a year ago. For the first
six months of 2008, funds from operations increased to $22.99/boe from
$7.01/boe in 2007. The increases were primarily the result of increased
selling prices of commodities, decreases in interest and financing fees along
with decreases in royalty expenses and lower operating costs offset by
increases in G&A, net of non-cash items, on a per boe basis.

    
    Depletion, Depreciation and Accretion ("DD&A")
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
                                              (%)                        (%)

    DD&A provision
     ($000s)              1,855    2,479      (25)   3,755    5,219      (28)
    DD&A provision
     ($/boe)              30.98    32.49       (5)   30.68    32.87       (7)
    Impairment provision
     for oil and
     gas assets ($000s)       -        -        -        -    2,258     (100)
    -------------------------------------------------------------------------
    

    For the second quarter of 2008, the DD&A provision decreased 25% to $1.9
million from $2.5 million in 2007 due to a reduction in production and the
applied unit rate. On a per boe basis, the DD&A provision decreased 5% to
$30.98 from $32.49 a year ago. For the six months ended June 30, 2008, DD&A
was down 28% to $3.8 million from $5.2 million for the same period in 2007 due
also to decreased production and a lower applied unit rate. For the first half
of 2008, the DD&A provision per boe decreased 7% to $30.68 from $32.87 a year
ago. In both the three and six-month comparative periods, the rate per boe was
down in 2008 relative to the same period in 2007 as a result of the ceiling
test impairment charge recognized in 2007, which had the effect of reducing
the carrying amount of the oil and natural gas assets for DD&A purposes.
    As at June 30, 2008, costs incurred to acquire and evaluate unproved
properties totaling $23.6 million had been excluded from and future
development costs of $3.4 million had been included in the depletion
calculation. At June 30, 2008, the impairment recognition portion of the
ceiling test indicated the estimated discounted future cash flows from proved
and probable reserves exceeded the carrying values of producing petroleum and
natural gas properties, and therefore, an impairment provision was not
required.

    Income Taxes

    There was no future income tax recovery or expense for the three and
six-month periods ended June 30, 2008 versus a recovery of $0.9 million and
$1.8 million, respectively, recorded in 2007. The changes in this non-cash
item are the anticipated future tax effect of the periods' activities, after
reconciling recorded net assets with the Company's tax pool assets at the end
of each period. The primary reason for the change in each period was a
year-over-year increase in earnings before income taxes that was recognized in
the 2008 periods as a result of a ceiling test write-down that occurred in the
first quarter of 2007 and not in the same period of 2008.
    As at June 30, 2008, the Company had approximately $73.5 million in tax
pools available to shelter taxable income in future years. The Company does
not anticipate being cash taxable in 2008. A valuation allowance of $5.2
million was recorded to reflect the risk of the eventual realization of the
Company's tax pools in future periods.

    
    Funds from Operations

    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s)                  ($)      ($)      (%)      ($)      ($)      (%)

    Cash flow (used in)
     from operating
     activities
     (per GAAP)           3,706     (464)    (899)   2,921    4,413      (34)
    Change in
     non-cash working
     capital             (2,179)    (576)     278     (107)  (4,186)     (97)
    -------------------------------------------------------------------------
    Funds from
     (used in)
     operations           1,527   (1,040)    (247)   2,814      227    1,140
    -------------------------------------------------------------------------

    The Company determines funds from operations as cash provided from
operations before changes in non-cash operating working capital.

    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s, except per
     share amounts)         ($)      ($)      (%)      ($)      ($)      (%)

    Funds from (used
     in) operations       1,527   (1,040)    (247)   2,814      227    1,140
      Per share - basic
       and diluted         0.01    (0.03)    (133)    0.01     0.01        -
    -------------------------------------------------------------------------
    

    Funds from operations increased to $1.5 million ($0.01 per basic and
diluted share) for the three months ended June 30, 2008 versus funds used of
$1.0 million ($0.03 per basic and diluted share) in the comparable period of
2007. For the first half of 2008, funds from operations increased 1,140% to
$2.8 million ($0.01 per basic and diluted share) from $0.2 million ($0.01 per
basic and diluted share) in the prior year. The increases in the three and
six-month periods were primarily attributed to higher commodity prices and
lower interest and finance charges offset by lower production and higher G&A
costs recorded in the periods relative to the prior year.

    
    Net Loss

    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s, except per
     share amounts)         ($)      ($)      (%)      ($)      ($)      (%)

    Net loss             (1,655)  (2,675)     (38)  (3,180)  (5,529)     (42)
      Per share - basic
       and diluted        (0.01)   (0.08)     (88)   (0.02)   (0.16)     (88)
    -------------------------------------------------------------------------
    

    During the second quarter of 2008, the Company recorded a net loss of
$1.7 million ($0.01 per basic and diluted share) versus a net loss of $2.7
million ($0.08 per basic and diluted share) a year ago. For the 2008 six-month
period, a net loss of $3.2 million ($0.02 per basic and diluted share) was
realized compared to a net loss of $5.5 million ($0.16 per basic and diluted
share) recorded in the corresponding period of 2007. The reduction in the loss
in each 2008 period was primarily due to an impairment to oil and gas
properties recognized pursuant to the application of the ceiling test and a
large interest and finance charge incurred during the three and six months
ended June 30, 2007 that was offset by commodity risk management expenses.

    
    Liquidity and Capital Resources

    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s)                  ($)      ($)      (%)      ($)      ($)      (%)

    Working capital
     (deficiency),
     beginning of
     period             (13,967) (25,626)     (45) (14,706) (19,817)     (26)
    Funds from (used
     in) operations       1,527   (1,040)    (247)   2,814      227     1140
    Issue of capital
     stock (net)              -    1,128     (100)       -    1,147     (100)
    Capital
     expenditures (net)     585   (1,371)     143      854   (8,466)     110
    Restricted cash,
     non-current             (9)       -        -      (21)       -        -
    Unrealized loss
     on risk
     management          (1,221)       -        -   (2,026)       -        -
    -------------------------------------------------------------------------
    Working capital
     (deficiency),
     end of period      (13,085) (26,909)     (51) (13,085) (26,909)     (51)
    -------------------------------------------------------------------------
    

    Silverwing opened the second quarter of 2008 with a working capital
deficiency of $14.0 million. Changes in the quarter's working capital involved
funds from operations of $1.5 million, net capital disposition of $0.6 million
and an unrealized loss on a risk management contract entered into during the
period of $1.2 million, thereby leaving the Company with a working capital
deficit of $13.1 million as at June 30, 2008.
    The bank's non-revolving and revolving demand loan facilities were
scheduled for review in May 2008. As a result of the Company initiating the
value maximization process, the bank has elected to defer this review pending
the results of this process. The balance drawn at period-end was $9.5 million.
As at June 30, 2008, the Company was in breach of its bank loan covenant.
Consequently, the bank has the right to demand repayment of the entire balance
drawn on the facilities. Management has informed the bank of the covenant
breach.
    Subsequent to the second quarter ended June 30, 2008, the Company entered
into an agreement to sell all of its issued and outstanding common shares to
Bonterra to facilitate the recapitalization of Silverwing. This proposed
transaction is the culmination of the Company's value maximization process
that was initiated in the second quarter of 2008.

    Capital Expenditures

    Capital expenditures made during the three and six months ended June 30,
2008 and 2007 are summarized in the table below and do not include non-cash
transactions.

    
                             Three Months Ended          Six Months Ended
                                   June 30,                   June 30,
                           2008     2007   Change     2008     2007   Change
    -------------------------------------------------------------------------
    (000s)                   ($)      ($)      (%)      ($)      ($)      (%)

    Land                     27      857      (97)       1      898     (100)
    Seismic                   7        -        -       12      108      (89)
    Drilling and
     completions           (132)     585     (123)     730    5,329      (86)
    Facilities and
     equipment              129     (183)    (170)     192    1,910      (90)
    Property acquisitions     -        -        -       14        -        -
    Property dispositions  (725)       -        -   (2,024)       -        -
    Capitalized G&A and
     other                  109      112       (3)     221      221        -
    -------------------------------------------------------------------------
    Total                  (585)   1,371     (143)    (854)   8,466     (110)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the second quarter of 2008, the Company had significantly
decreased capital spending and disposed of certain non-core assets, resulting
in a net inflow of capital of $0.6 million compared to net expenditures of
$1.4 million in 2007. Drilling and completion expenditures consisted of a
recovery of $0.1 million due to partner equalizations incurred in the Tomahawk
project. In the second quarter of 2008, Silverwing disposed of its producing
well in the Countess area of southeastern Alberta and other assets for total
proceeds of $0.7 million, net of disposition expenses and adjustments. These
funds were used to pay down debt prior to the end of the quarter.
    During 2006, the Company entered into a three-year contract involving a
drilling rig guaranteeing 560 days at a day rate of $18,720. During the first
quarter of 2008, the Company received an extension to the contract to
December 31, 2009, thereby allowing sufficient time to fulfill the remaining
days. The total commitment as at August 14, 2008 was $5.7 million for the
contract as the 560-day guarantee had 302 days remaining. Subsequent to
June 30, 2008, the Company entered into an agreement with the drilling
contractor to terminate the aforementioned drilling contract and thereby
extinguish any further commitments or liabilities related to the contract in
exchange for a cash payment of $0.9 million. The termination payment will be
made upon closing of the acquisition of the Company by Bonterra on or before
November 15, 2008.
    Subsequent to June 30, 2008, the Company renegotiated the terms of the
29-well farm-in agreement. The renegotiated terms are conditional upon closing
of the acquisition of the Company by Bonterra. Under the amended terms of the
farm-in agreement, the Company will earn interests in the Tomahawk project
area and receive certain funds from escrow by completing or abandoning blocks
of seven wells. Upon completing the third and final block of seven wells, the
Company will also earn the rights to the 22nd well that had been previously
drilled and abandoned. The amended agreement also eliminates the obligation
for the Company to drill the remaining seven wells under the original 29-well
farm-in agreement in exchange for cash consideration of $2.625 million.

    Off-Balance Sheet Arrangements

    As at the date of this report, the Company had no off-balance sheet
financing arrangements.

    Transactions with Related Parties

    Included in G&A expenses are amounts for services provided to the Company
through entities affiliated with and/or controlled by the Corporate Secretary
of Silverwing. During the three and six months ended June 30, 2008, the
Company paid the affiliated entity $44,300 and $77,000 (2007 - $58,200 and
$102,400), respectively. There was an outstanding balance owing of $42,800
(2007 - $nil) with the related company at period-end. These amounts are
considered to be in the normal course of operations and approximate the fair
value based on the exchange amount for services received.
    The Company utilizes the services of a consulting company in which an
officer of the Company has an interest. This company provides construction,
drilling and completions services to Silverwing in the normal course of
business. During the three and six months ended June 30, 2008, the Company
paid the related party a total of $nil and $35,800 (2007 - $9,680 received and
$5,120 paid), respectively, representing the fair market value based on the
exchange amount for those services. There was no balance outstanding as at
June 30, 2008 (2007 - $92,176). This officer resigned from the Company on
May 31, 2008.
    During the three and six-month periods ended June 30, 2008, the Company
utilized the services of a drilling company of which a director of Silverwing
is an officer. The total purchased services for the respective periods
amounted to $nil and $32,600 (2007 - $nil and $18,500, respectively) and the
balance owing to the related company was $nil as at June 30, 2008 (2007 -
$1.4 million). The transactions are in the normal course of operations and are
measured at the exchange amount that reflects the fair market value of the
services.

    Outstanding Shares

    The Company is authorized to issue an unlimited number of common shares,
of which 188,068,316 common shares were issued and outstanding as fully paid
and non-assessable as at June 30, 2008 and the date of this report. The
Company is also authorized to issue an unlimited number of preferred shares,
of which none are issued and outstanding. During the first quarter of 2008,
warrants to purchase an aggregate of 10,637,500 common shares at $2.25 per
share expired. The balance of outstanding warrants, to purchase an aggregate
of 151,053,000 common shares at $0.20 and $0.25 per share, expire between
August 2, 2009 and August 2, 2010. In addition, options to purchase an
aggregate of 9,241,250 common shares have been granted to directors, officers,
employees and consultants of the Company at an exercise price of $0.20, $2.00
and $2.10 per common share. Since the second quarter of 2006, performance
warrants to purchase an aggregate of 3,800,000 common shares were outstanding
to certain directors, officers and employees of the Company at an exercise
price of $2.20 per common share. These warrants may be exercised only upon a
change in control of the Company.

    
    Summary of Quarterly Results
    -------------------------------------------------------------------------
    Three
     Months   Sep.30, Dec.31, Mar.31, Jun.30, Sep.30, Dec.31, Mar.31, Jun.30,
     Ended      2006    2006    2007    2007    2007    2007    2008    2008
    -------------------------------------------------------------------------
    (000s,
     except
     per share
     amounts)     ($)     ($)     ($)     ($)     ($)     ($)     ($)     ($)

    Oil and
     gas
     revenue   3,300   4,136   3,871   3,558   2,324   2,946   3,301   3,897
    Funds
     from
     (used in)
     opera-
     tions(1)    837   1,740   1,267  (1,040)   (344)  1,470   1,287   1,527
      Per share
       - basic
       and
       diluted  0.03    0.06    0.04   (0.03)      -    0.01    0.01    0.01
    Net
     earnings
     (loss)   (1,063)(10,649) (2,854) (2,675)(19,620)   (569) (1,525) (1,655)
      Per share
       - basic
       and
       diluted (0.04)  (0.37)  (0.08)  (0.08)  (0.15)      -   (0.01)  (0.01)
    Capital
     expendi-
     tures
     (net)    22,524  18,623   7,095   1,371   7,106   8,005    (269)   (585)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Funds from operations is defined as cash provided by operations
        before changes in non-cash operating working capital.
    

    The significant variances in the net loss recorded during the three-month
periods ended December 31, 2006 and September 30, 2007 were due to impairment
write-downs as a result of the ceiling test of $13.7 million and
$18.1 million, respectively.

    Internal Controls Over Financial Reporting

    There were no changes in internal control over financial reporting from
year-end that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.

    New Accounting Standards Adopted

    As disclosed in the MD&A for the year ended December 31, 2007, the
Company adopted the Canadian Institute of Chartered Accountants' ("CICA")
Handbook new accounting standards: "Capital Disclosures," "Financial
Instruments - Disclosures" and "Financial Instruments - Presentation" on
January 1, 2008. The adoption of the standards has had no material impact on
the Company's net earnings or funds from operations.

    Recent Accounting Pronouncements

    In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed
the changeover to International Financial Reports Standards ("IFRS") from
Canadian GAAP will be required for publicly accountable enterprises' interim
and annual financial statements effective for fiscal years beginning on or
after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS
with comments due by July 31, 2008, wherein early adoption by Canadian
entities is also permitted. The eventual changeover to IFRS represents a
change due to new accounting standards. The transition from current Canadian
GAAP to IFRS is a significant undertaking that may materially affect the
Company's reported financial position and results of operations.
    The International Accounting Standards Board has stated that it plans to
issue an exposure draft relating to certain amendments and exemptions to IFRS
1 - "First-Time Adoption of International Financial Reporting Standards" in
order to make it more useful to Canadian entities adopting IFRS for the first
time. One such exemption relating to full cost oil and gas accounting is
expected to reduce the administrative burden in the transition from the
current Canadian Accounting Guideline - 16 to IFRS. It is anticipated that
this exposure draft will not result in an amended IFRS 1 standard until late
2009. The amendment will potentially permit the Company to apply IFRS
prospectively to their full cost pool, rather than the retrospective
assessment of capitalized exploration and development expenses, with the
proviso that a ceiling test, under IFRS standards, be conducted at the
transition date.
    Although the Company has not completed development of its IFRS changeover
plan, when finalized, it will include project structure and governance,
resourcing and training, an analysis of key GAAP differences and a phased plan
to assess accounting policies under IFRS as well as potential IFRS 1
exemptions. The Company anticipates completing its project scoping, which will
include a timetable for assessing the impact on data systems, internal
controls over financial reporting, and business activities, such as financing
and compensation arrangements, by the fourth quarter of 2008.

    Financial and Other Instruments

    On February 29, 2008, Silverwing entered into a fixed price commodity
contract for 2,000 GJs/d at a fixed price of $8.13/GJ of natural gas
production effective April 1, 2008 for a 365-day period. Management will
continue to consider employing such strategies should it be prudent to warrant
such measures.

    SEDAR

    Additional information relating to Silverwing, including the Company's
Prospectus document supporting its Initial Public Offering, are available on
the Canadian Securities Administrators' System for Electronic Document
Analysis and Retrieval ("SEDAR") at www.sedar.com.

    
    BALANCE SHEETS

    -------------------------------------------------------------------------
    As at                                              June 30,  December 31,
                                                          2008          2007
    -------------------------------------------------------------------------
    (000s) (unaudited)                                      ($)           ($)

    Assets
    Current assets
      Restricted cash, current (note 3)                      -         5,150
      Accounts receivable and other assets               2,709         3,847
    -------------------------------------------------------------------------
                                                         2,709         8,997
    Restricted cash, non-current (note 3)                1,245         1,224
    Future income taxes                                      -           477
    Property, plant and equipment (note 4)              59,154        63,155
    -------------------------------------------------------------------------
                                                        63,108        73,853
    -------------------------------------------------------------------------
    Liabilities
    Current liabilities
      Accounts payable and accrued liabilities           4,229        12,496
      Risk management liability (note 11)                2,026             -
      Bank debt (note 5)                                 9,539        11,207
    -------------------------------------------------------------------------
                                                        15,794        23,703
    Asset retirement obligations (note 6)                4,585         4,044

    Shareholders' Equity
    Common shares (note 7)                              66,459        66,936
    Share purchase warrants (note 7)                    11,058        15,402
    Contributed surplus (note 7)                         7,531         2,907
    Deficit                                            (42,319)      (39,139)
    -------------------------------------------------------------------------
                                                        42,729        46,106
    Future operations (note 1)
    Commitments (note 10)
    Contingency (note 12)
    Subsequent event (note 13)
    -------------------------------------------------------------------------
                                                        63,108        73,853
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the interim financial statements.



    STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT

    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (000s, except per share amounts)
    (unaudited)                          ($)        ($)        ($)        ($)

    Revenues
      Petroleum and natural gas
       sales                          3,897      3,558      7,198      7,429
      Royalties                        (411)      (635)      (659)    (1,584)
      Realized loss on risk
       management                      (281)         -       (281)         -
      Unrealized loss on risk
       management                    (1,221)         -     (2,026)         -
      Interest and other income          24          3         47          8
    -------------------------------------------------------------------------
                                      2,008      2,926      4,279      5,853
    Expenses
      Production                        771      1,379      1,499      2,333
      General and administrative        879        741      1,864      1,230
      Interest                          158      1,888        341      2,171
      Depletion, depreciation and
       accretion                      1,855      2,479      3,755      7,477
    -------------------------------------------------------------------------
                                      3,663      6,487      7,459     13,211
    -------------------------------------------------------------------------
    Loss before income taxes         (1,655)    (3,561)    (3,180)    (7,358)
    Future income tax reduction           -        886          -      1,829
    -------------------------------------------------------------------------
    Net loss and comprehensive loss
     for the period                  (1,655)    (2,675)    (3,180)    (5,529)
    Deficit, beginning of period    (40,664)   (16,275)   (39,139)   (13,421)
    -------------------------------------------------------------------------
    Deficit, end of period          (42,319)   (18,950)   (42,319)   (18,950)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net loss per share (note 7)
      Basic and diluted               (0.01)     (0.08)     (0.02)     (0.16)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the interim financial statements.



    STATEMENTS OF CASH FLOWS

    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Cash provided by (used in):
    Operations
      Net loss for the period        (1,655)    (2,675)    (3,180)    (5,529)
      Add (subtract) non-cash items:
        Stock-based compensation        106         42        213        108
        Depletion, depreciation
         and accretion                1,855      2,479      3,755      7,477
        Future income tax reduction       -       (886)         -     (1,829)
        Unrealized loss on risk
         management                   1,221          -      2,026          -
    -------------------------------------------------------------------------
                                      1,527     (1,040)     2,814        227
      Net change in non-cash working
       capital                        2,179        576        107      4,186
    -------------------------------------------------------------------------
                                      3,706       (464)     2,921      4,413
    -------------------------------------------------------------------------
    Financing
      Bank debt                        (455)    (1,288)    (1,668)     5,913
      Bridge loan                         -     13,000          -     13,000
      Issue of common shares and
       warrants                           -      1,128          -      1,151
      Share issue costs                   -          -          -         (4)
      Net change in non-cash working
       capital                            -        (43)       147        (43)
    -------------------------------------------------------------------------
                                       (455)    12,797     (1,521)    20,017
    -------------------------------------------------------------------------
    Investing
      Property, plant and equipment
       expenditures                    (140)    (1,371)    (1,170)    (8,466)
      Proceeds on disposal of
       property, plant and equipment    725          -      2,024          -
      Restricted cash, non-current       (9)         -        (21)         -
      Net change in non-cash working
       capital                       (3,827)   (11,288)    (2,233)   (16,345)
    -------------------------------------------------------------------------
                                     (3,251)   (12,659)    (1,400)   (24,811)
    -------------------------------------------------------------------------
    Decrease in cash and cash
     equivalents                          -       (326)         -       (381)
    Cash and cash equivalents,
     beginning of period                  -        353          -        408
    -------------------------------------------------------------------------
    Cash and cash equivalents, end
     of period                            -         27          -         27
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest paid                       156        338        317        511
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the interim financial statements.



    NOTES TO INTERIM FINANCIAL STATEMENTS

    Three and Six Months Ended June 30, 2008 and 2007
    (unaudited)

    Basis of Presentation
    

    Silverwing Energy Inc. ("Silverwing" or the "Company") is engaged in the
exploration, development and production of petroleum and natural gas reserves
in Western Canada.
    The interim financial statements of Silverwing have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP")
using the same accounting policies as the financial statements for the year
ended December 31, 2007, except as disclosed below. The disclosures herein are
incremental to, and should be read in conjunction with those annual financial
statements and notes.

    
    1.  Future Operations

        The future operation of the Company is dependant on its ability to
        successfully explore, develop and produce economically viable
        reserves and market petroleum products from its properties, raise
        capital and receive the continued financial support from its lenders
        (see note 5). As at June 30, 2008, the Company had a working capital
        deficiency of $13.1 million, has incurred significant losses to date,
        is in breach of a covenant on its bank debt and requires significant
        additional capital to continue its activities and discharge its
        commitments (note 10).

        These financial statements have been prepared on the basis that the
        Company will be able to discharge its obligations and realize its
        assets in the normal course of business at the values at which they
        are carried in these financial statements, and that the Company will
        be able to continue its business activities.

        Management believes that the going concern assumption is appropriate
        for these financial statements. If this assumption were not
        appropriate, adjustments to the carrying amounts of the assets and
        liabilities, revenues and expenses and the balance sheet
        classifications used may be necessary.

        Subsequent to the second quarter ended June 30, 2008, the Company
        entered into an agreement to sell all of the issued and outstanding
        common shares to Bonterra Energy Income Trust ("Bonterra") as
        detailed in note 13.

    2.  Change in Accounting Policies

        As disclosed in the December 31, 2007 annual audited financial
        statements, the Canadian Institute of Chartered Accountants ("CICA")
        issued new accounting standards: "Capital Disclosures," "Financial
        Instruments - Disclosures" and "Financial Instruments -
        Presentation." These standards have been adopted for the Company's
        interim and annual reporting periods commencing January 1, 2008.

        The capital disclosures standard establishes guidelines for the
        disclosure of information concerning the Company's capital and how it
        is managed. The standard requires disclosure of an entity's
        objectives, policies and processes for managing capital, including a
        description of what the Company considers capital and to indicate if
        the Company has complied with all capital requirements and the
        ramifications of non-compliance, if applicable (see note 8).

        "Financial Instruments - Disclosures" and "Financial Instruments -
        Presentation" replace "Financial Instruments - Disclosure and
        Presentation," revising and enhancing its disclosure requirements to
        provide additional information regarding the risks associated with
        both recognized and unrecognized financial instruments the Company is
        exposed to and how those risks are managed (see note 11).

        The adoption of these standards has had no impact on the Company's
        net earnings or cash flows.

        Recent Accounting Pronouncements

        In January 2006, the CICA Accounting Standards Board ("AcSB") adopted
        a strategic plan for the direction of accounting standards in Canada.
        As part of that plan, the AcSB confirmed in February 2008 that
        International Financial Reporting Standards ("IFRS") will replace
        Canadian GAAP in 2011 for profit oriented Canadian publicly
        accountable enterprises. The Company will be required to report its
        results in accordance with IFRS starting in 2011 and is assessing the
        potential impacts of this changeover and developing its plan
        accordingly.

    3.  Restricted Cash
        ---------------------------------------------------------------------
        As at                                          June 30,  December 31,
                                                          2008          2007
        ---------------------------------------------------------------------
        (000s)                                              ($)           ($)

        Restricted cash, current                             -         5,150
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The current balance in restricted cash consists of short-term
        deposits maturing in less than 90 days.

        ---------------------------------------------------------------------
        As at                                          June 30,  December 31,
                                                          2008          2007
        ---------------------------------------------------------------------
        (000s)                                              ($)           ($)

        Restricted cash, non-current                     1,245         1,224
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The non-current balance in restricted cash consisted of term deposits
        with a maturity in excess of 90 days.

        As at June 30, 2008, there was no current amount (2007 -
        $5.2 million) of restricted cash outstanding and a non-current amount
        of $1.2 million (2007 - $1.2 million) was on deposit within an escrow
        account. The escrow account was created to support eligible
        expenditures related to the Tomahawk farm-in agreement as a condition
        for extending the 22-well drilling commitment in the Tomahawk project
        area and is administered by the farmors' legal counsel. The Company
        may access the remaining $1.2 million (2007 - $6.4 million) upon
        completion and tie-in or abandonment and reclamation of the 21
        Tomahawk wells standing as at the date of this report (see note 10).

        The decrease in the December 31, 2007 restricted cash, current
        balance from $5.2 million to $nil was a result of satisfying the 22-
        well drilling commitment, allowing for the release of those funds to
        the Company during the first quarter of 2008.

        4. Property, Plant and Equipment
        ---------------------------------------------------------------------
                                                     Accumulated
                                                    Depletion and   Net Book
                                              Cost  Depreciation       Value
        ---------------------------------------------------------------------
        (000s)                                  ($)          ($)          ($)

        June 30, 2008
        Petroleum and natural gas
         properties                         82,797      (39,987)      42,810
        Production equipment                32,809      (16,560)      16,249
        Office furniture, equipment
         and other                             156          (61)          95
        ---------------------------------------------------------------------
                                           115,762      (56,608)      59,154
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        December 31, 2007
        Petroleum and natural gas
         properties                         83,285      (37,424)      45,861
        Production equipment                32,741      (15,548)      17,193
        Office furniture, equipment and
         other                                 150          (49)         101
        ---------------------------------------------------------------------
                                           116,176      (53,021)      63,155
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three and six months ended June 30, 2008, the Company
        capitalized $0.1 million (2007 - $0.1 million) and $0.2 million (2007
        - $0.2 million), respectively, of general and administrative expenses
        directly related to exploration and development activities.

        As at June 30, 2008, costs incurred to acquire and evaluate unproved
        properties totaling $23.6 million (June 30, 2007 - $13.1 million) had
        been excluded from the depletion calculation. As at June 30, 2008,
        future development costs of $3.4 million (June 30, 2007 -
        $6.3 million) had been included in the depletion calculation.

        During the first quarter of 2007, the Company incurred a ceiling test
        write-down of $2.3 million related to oil and gas assets subject to
        the impairment test for the period. The write-down was included in
        the depletion expense recorded for the period. No write-down was
        required for the three or six-month periods ended June 30, 2008.

        The Company disposed of its Saskatchewan land holdings during the
        first quarter of 2008 for proceeds of $1.4 million and part of its
        southeastern Alberta holdings during the second quarter of 2008 for
        proceeds of $0.6 million.

    5.  Bank Debt

        The Company has a revolving operating demand loan facility of
        $10.4 million (2007 - $13.0 million) with a Canadian bank. This
        demand loan facility bears interest at the bank's prime rate plus
        1.25%. As at June 30, 2008, the Company had $9.0 million drawn on the
        facility and the interest rate was 6.0% (2007 - 7.25%).

        The Company also has a non-revolving acquisition/development demand
        loan facility of $0.5 million (2007 - $1.0 million) with a Canadian
        bank. This demand loan facility bears interest at the bank's prime
        rate plus 0.5% and requires monthly principal repayments of $45,000.
        As at June 30, 2008, the Company had $0.5 million drawn on this
        facility and the interest rate was 5.25% (2007 - 6.5%).

        The non-revolving acquisition/development demand loan facility and
        revolving operating demand loan facility noted above are secured by a
        $50.0 million debenture with a floating charge over all fixed assets
        of the Company. The review of these loan facilities was scheduled for
        May 2008 and has been temporarily deferred by the bank while the
        Company pursues strategic alternatives.

        As at June 30, 2008, the Company had two Irrevocable Letters of
        Guarantee outstanding totaling $160,000. The Letters of Guarantee are
        funded by the revolving operating demand loan facility. The Company
        holds a deposit from a joint interest partner in the amount of
        $41,250, securing the partner's share of this obligation.

        As at June 30, 2008, the Company had a Letter of Guarantee
        outstanding with a vendor totaling $50,000. This Letter of Guarantee
        is funded by the revolving operating demand loan facility and is in
        place to ensure the construction of natural gas infrastructure on
        certain properties of the Company.

        As at June 30, 2008, Silverwing was in breach of a covenant that
        required the Company to maintain a positive working capital ratio of
        1:1 for the revolving operating demand loan facility and the non-
        revolving acquisition/development demand facility. Consequently, the
        bank has the right to demand repayment on the entire balance drawn on
        the facilities. Management has informed the bank of the covenant
        breach.

    6.  Asset Retirement Obligations

        Changes to the asset retirement obligations were as follows:

        ---------------------------------------------------------------------
        As at                                           June 30, December 31,
                                                           2008         2007
        ---------------------------------------------------------------------
        (000s)                                               ($)          ($)

        Balance - beginning of period                     4,044        2,999
        Liabilities incurred                                140          793
        Revisions                                           233            -
        Accretion                                           168          252
        ---------------------------------------------------------------------
        Balance - end of period                           4,585        4,044
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company's asset retirement obligations result from net ownership
        interests in petroleum and natural gas assets, including wellsites,
        gathering systems and processing facilities. At June 30, 2008, the
        Company estimated the total undiscounted amount of cash flows
        required to settle its asset retirement obligations was approximately
        $6.8 million (2007 - $6.4 million), which will be incurred over the
        next 14 years. In calculating the Company's future asset retirement
        obligations, an annual credit adjusted risk-free interest rate of
        8.0% and an annual inflation rate of 2.0% were used.

    7.  Share Capital

        (a) Authorized

            Unlimited number of common shares.
            Unlimited number of preferred shares, of which none have been
            issued.

        (b) Issued
            -----------------------------------------------------------------
            As at                         June 30, 2008    December 31, 2007
                                   ------------------------------------------
                                         Shares  Amount       Shares  Amount
            -----------------------------------------------------------------
                                           (No.) ($000s)        (No.) ($000s)

            Common Shares
            Balance - beginning of
             period                 188,068,316  66,936   33,826,150  53,149
            Issued for cash pursuant
             to private placements            -       -  142,303,000  17,787
            Issued for cash pursuant
             to flow-through share
             placements                       -       -    6,414,166   1,540
            Issued as a financing
             fee                              -       -    5,525,000   1,105
            Tax effect of flow-
             through share
             renunciation                     -    (477)           -  (4,948)
            Share issue costs                 -       -            -  (2,566)
            Tax benefit of share
             issue costs                      -       -            -     793
            Repayment of share
             purchase loan                    -       -            -      76
            -----------------------------------------------------------------
            Balance - end of period 188,068,316  66,459  188,068,316  66,936
            -----------------------------------------------------------------

            In August 2007, the Company closed a private placement for gross
            proceeds of $30.0 million, involving the issue of 142,303,000
            units and 6,414,166 flow-through common shares priced at $0.20
            and $0.24 per share, respectively. The units were comprised of
            one common share and one common share purchase warrant with each
            warrant enabling the holder to purchase one additional share from
            the Company at $0.25 per share on or prior to August 2, 2010. The
            valuation of the common shares was determined by prorating the
            fair value of the net proceeds and issuance costs to the common
            shares and warrants.

            In June 2007, the Company completed a bridge loan financing that
            required a non-refundable payment of $1.1 million, paid in the
            form of 3,683,333 shares issued prior to June 30, 2007 and
            1,841,667 issued in August 2007. The shares were issued at $0.20
            per share, which was the market price at the final measurement
            date on August 2, 2007.

        (c) Contributed Surplus
            -----------------------------------------------------------------
            As at                                       June 30, December 31,
                                                           2008         2007
            -----------------------------------------------------------------
            (000s)                                           ($)          ($)

            Balance - beginning of period                 2,907        2,739
            Stock-based compensation expensed               213          123
            Stock-based compensation capitalized             67           45
            Transfer on expiry of warrants                4,344            -
            -----------------------------------------------------------------
            Balance - end of period                       7,531        2,907
            -----------------------------------------------------------------
            -----------------------------------------------------------------

    (d)     Stock Option Plan

            The Company has a stock option plan (the "Plan"), which is
            administered by the Board of Directors of the Company. All
            directors, officers, employees and key consultants are eligible
            to participate under the Plan. The aggregate number of shares
            reserved for issuance under the Plan shall not exceed 10% of the
            total number of issued and outstanding shares of the Company.
            Optons will vest over a period of two years from the date of
            grant and expire after four years.

            The following table summarizes the number of options outstanding
            and the exercise price:
            -----------------------------------------------------------------
                                                                    Weighted
                                                                     Average
                                                                    Exercise
                                                        Options        Price
            -----------------------------------------------------------------
                                                           (No.)   ($/option)

            Outstanding at December 31, 2007          9,497,500         0.46
            Forfeited                                  (256,250)        2.08
            -----------------------------------------------------------------
            Outstanding at June 30, 2008              9,241,250         0.41
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            As at June 30, 2008, the weighted average remaining life of the
            options outstanding was 4.06 years (December 31, 2007 - 4.47
            years).

            As at June 30, 2008, 1,051,250 (December 31, 2007 - 1,307,500)
            options were exercisable between $2.00 and $2.10 per share with a
            weighted average exercise price of $2.07 per share (December 31,
            2007 - $2.07 per share).

            -----------------------------------------------------------------
                                                     Weighted
                                        Number of     Average      Number of
                                          Options   Remaining        Options
            Exercise Price            Outstanding        Life   Exerciseable
            -----------------------------------------------------------------
            ($)                              (No.)     (years)          (No.)

            As at June 30, 2008
            0.20                        8,190,000        4.47              -
            2.00 - 2.10                 1,051,250        0.82      1,051,250
            -----------------------------------------------------------------
                                        9,241,250        4.06      1,051,250
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (e) Share Purchase Warrants

    As at                  June 30, 2008              December 31, 2007
    -------------------------------------------------------------------------
                                      Weighted                      Weighted
                                       Average                       Average
                                      Exercise                      Exercise
                    Shares    Amount     Price    Shares    Amount     Price
    -------------------------------------------------------------------------
                                           ($/                           ($/
                  (No.000s)   ($000s)  warrant) (No.000s)   ($000s)  warrant)

    Balance -
     beginning of
     period        161,691    15,402      0.38    10,638     4,344      2.25
    Expired        (10,638)   (4,344)     2.25         -         -         -
    Issue of
     warrants            -         -         -   142,303    10,673      0.25
    Warrant issue
     costs               -         -         -         -    (1,415)        -
    Tax benefit
     of warrant
     issue costs         -         -         -         -       441         -
    Issue of broker
     warrants to
     purchase common
     shares at $0.25
     per share           -         -         -     3,500       513      0.25
    Issue of broker
     warrants to
     purchase common
     shares at $0.20
     per share           -         -         -     5,250       846      0.20
    -------------------------------------------------------------------------
    Balance - end
     of period     151,053    11,058      0.25   161,691    15,402      0.38
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

            In August 2007, the Company closed a private placement for gross
            proceeds of $30.0 million, involving the issue of
            142,303,000 units priced at $0.20 per share. The units were
            comprised of one common share and one common share purchase
            warrant with each warrant enabling the holder to purchase one
            additional common share from the Company at $0.25 per share on or
            prior to August 2, 2010. In addition, 1,750,000 broker warrants
            were issued to purchase common shares at an exercise price of
            $0.20 per warrant and 3,500,000 broker warrants were issued to
            purchase units consisting of one common share with an exercise
            price of $0.20 and one warrant to purchase an additional share at
            $0.25 per share. The fair value of the warrants was determined
            using the Black-Scholes model at the date of issue. The valuation
            of the warrants was determined by prorating the fair value of the
            net proceeds and issuance costs to the common shares and
            warrants.

            -----------------------------------------------------------------
                                                       Weighted
                                         Number of      Average    Number of
                                          Warrants    Remaining     Warrants
            Exercise Price             Outstanding         Life Exerciseable
            -----------------------------------------------------------------
            ($)                               (No.)      (years)        (No.)

            As at June 30, 2008        151,053,000         2.69  151,053,000
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            On February 22, 2008, 10,637,500 warrants priced at $2.25 expired
            unexercised.

        (f) Per Share Amounts

            Per share amounts have been calculated based on the weighted
            average number of common shares issued and outstanding, which for
            the three and six months ended June 30, 2008 totaled 188,068,316
            (2007 - 34,769,557 and 34,300,459, respectively).

            In calculating the net loss per share, options and warrants
            totaling 160,294,250 (2007 - 15,965,000) were excluded from the
            dilution calculation, as they were anti-dilutive. No adjustments
            were required to net loss in computing diluted per share amounts.

    8.  Capital Structure

        The Company's capital structure is comprised of shareholder's equity,
        working capital and bank debt. The Company's current objectives when
        managing its capital structure are to meet its financial obligations
        and allow for financial flexibility to strategically maintain its oil
        and gas reserves base. The Company monitors its capital structure and
        short-term financing requirements using non-GAAP financial
        measurements of bank debt to capitalization rate and the adjusted
        working capital ratio.

        Due to the nature of the Company being a junior oil and gas company
        and the difficulty in raising external funds, the Company has not
        been able to maintain its target bank debt to capitalization ratio
        between 30% and 40%, which has led to a significant working capital
        deficit. The target level of the adjusted working capital ratio is to
        maintain a level near 1:1 with a minimum of $2.0 million being
        available on the revolving demand loan facility. As at the date of
        this report, the Company's management has been actively pursuing new
        sources of external financing to bring the capital structure back to
        target and to improve its adjusted working capital ratio.

        ---------------------------------------------------------------------
        As at                                           June 30, December 31,
                                                           2008         2007
        ---------------------------------------------------------------------
        (000s)                                               ($)          ($)

        Demand loan                                       9,539       11,207
        Total shareholders' equity                       42,729       46,106
        ---------------------------------------------------------------------
        Total capitalization                             51,858       57,313
        Bank debt to capitalization ratio                   18%          20%
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
        As at                                           June 30, December 31,
                                                           2008         2007
        ---------------------------------------------------------------------
        (000s)                                               ($)          ($)

        Currents assets                                   2,709        8,997
        Current liabilities                             (15,794)     (23,703)
        Bank debt                                         9,539       11,207
        ---------------------------------------------------------------------
        Adjusted working capital (deficiency)            (3,546)      (3,499)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        The Company's share capital is not subject to external restrictions,
        however the bank debt facilities are based on petroleum and natural
        gas reserves and subject to certain financial covenants (see note 5).

        The Company's future capital structure may vary significantly from
        that presented in prior periods as the financial circumstances of the
        Company change. There were no changes in the Company's approach to
        capital management during the period.

    9.  Related Party Transactions

        Included in general and administrative expenses are amounts for
        services provided to the Company through entities affiliated with
        and/or controlled by the Secretary of the Company. The transactions
        with this related company are in the normal course of operations.
        During the three and six months ended June 30, 2008, the Company paid
        the affiliated entity $44,300 and $77,000 (2007 - $58,200 and
        $102,400), respectively, representing the fair market value based on
        the exchange amount for services received. There was an outstanding
        balance with the related Company as at June 30, 2008 of $42,800
        (2007- $nil).

        The Company utilizes the services of a consulting company in which an
        officer of the Company has an interest. This company provides
        construction, drilling and completions services to Silverwing that
        are in the normal course of operations. During the three and six
        months ended June 30, 2008, the Company paid the related party a
        total of $nil and $35,800 (2007 - $9,680 received and $5,120 paid),
        respectively, representing the fair market value based on the
        exchange amount for those services. There was $nil (2007 - $92,176)
        outstanding balance at June 30, 2008. This officer resigned from the
        Company on May 31, 2008.

        During the period ended June 30, 2008, the Company utilized the
        services of a drilling company of which a director of Silverwing is
        an officer. The total purchased services amounted to $nil and $32,600
        (2007 - $nil and $18,500), respectively, for the three and six-month
        periods. There was no balance owing to the related company as at
        June 30, 2008 (2007 - $1.4 million). The transactions are in the
        normal course of operations and are measured at the exchange amount
        that approximates the fair market value of the services.

        The Company granted share purchase loans to employees in 2004 for the
        purchase of the Company's flow-through shares at that time. The loans
        were non-interest bearing and were fully repaid on October 31, 2007
        according to the terms of the agreement. The loan balance from the
        employees was $30,600 at June 30, 2007.

    10. Commitments

        (a) As at June 30, 2008, the Company had the following annual rental
            commitments on a sublease for office premises and equipment as
            follows:

            -----------------------------------------------------------------
            (000s)                                                        ($)
            2008                                                         142
            2009                                                         284
            2010                                                         278
            2011                                                         298
            2012                                                         298
            Thereafter                                                   217
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) Drilling Contracts

            During 2006, the Company entered into a three-year drilling
            contract. The contract commits Silverwing to a 560-day guarantee
            within an 830-day period commencing October 14, 2006 with
            302 days remaining at June 30, 2008. If the Company is unable to
            fulfill the operating day commitment, a shortfall penalty of
            $18,720 for each day or portion thereof will be charged to
            Silverwing upon completion of the term. The contract has been
            extended to December 31, 2009.

            If Silverwing does not require the use of the rig during the
            duration of the contract term, the drilling contractor will put
            forth best efforts to contract the rig to another party. Should
            the drilling contractor be successful, any days worked for the
            other party during the contract term will be credited towards
            Silverwing's guaranteed day contract commitment on a prorated
            basis equal to each day worked for the other party. The drilling
            commitment for the rig as at June 30, 2008 was $5.7 million. Upon
            change of control of the Company, the drilling contractor may
            demand payment of the balance at that time.

            Subsequent to June 30, 2008, the Company entered into an
            agreement with the drilling contractor to terminate the
            aforementioned drilling contract and thereby extinguish any
            further commitments or liabilities related to the contract in
            exchange for a cash payment of $0.9 million. The termination
            payment will be made upon closing of the acquisition of the
            Company by Bonterra (see note 13) on or before November 15, 2008.

        (c) Farm-In Agreement Contingency

            The Company has a farm-in agreement to drill 29 wells to earn
            lands in the Tomahawk project area of west central Alberta. As at
            June 30, 2008, 22 of these wells had been drilled with seven
            remaining to be drilled, subject to securing regulatory
            approvals. If the Company does not drill the remaining seven
            wells in a timely manner, subject to securing regulatory
            approvals, the Company will forfeit any interest earned in the
            Tomahawk project area with respect to costs incurred to date and
            any balance remaining in the escrow account (see note 3).

            As at August 14, 2008, management estimates that the total
            maximum contingent liability for noncompliance of the terms of
            the farm-in agreement is $6.8 million, being penalties associated
            with not drilling the seven Nisku wells and loss of any interest
            of the properties at that time.

            Subsequent to June 30, 2008, the Company renegotiated the terms
            of the 29-well farm-in agreement. The renegotiated terms are
            conditional upon closing of the acquisition of the Company by
            Bonterra (see note 13). Under the amended terms of the farm-in
            agreement, the Company will earn interests in the Tomahawk
            project area and receive certain funds from escrow by completing
            or abandoning blocks of seven wells. Upon completing the third
            and final block of seven wells, the Company will also earn the
            rights to the 22nd well that had been previously drilled and
            abandoned. The amended agreement also eliminates the obligation
            for the Company to drill the remaining seven wells under the
            original 29-well farm-in agreement in exchange for cash
            consideration of $2.625 million.

    11. Risks

        The Company's financial assets and liabilities are comprised of cash
        and restricted cash, accounts receivable, accounts payable and
        accrued liabilities, risk management liabilities and bank debt. Risk
        management assets and liabilities arise from the use of derivative
        financial instruments. Fair values of financial assets and
        liabilities, summarized information related to risk management
        positions and discussion of risks associated with financial assets
        and liabilities are presented below.

        (a) Fair Value of Financial Assets and Liabilities

            Cash and cash equivalents are designated as "held-for-trading"
            and are measured at carrying value, which approximates fair value
            due to the short-term nature of these instruments. Accounts
            receivable are designated as "loans and receivables" and are
            measured at amortized cost. Restricted cash is designated as
            "held-for-trading" and is measured at carrying amount which
            approximates fair value due to the floating market rate on
            interest received. Accounts payable and accrued liabilities and
            bank debt are designated as "other financial liabilities" and are
            measured at amortized cost.

            Risk management liabilities are recorded at their estimated fair
            value based on the mark-to-market method of accounting.

            -----------------------------------------------------------------
            As at                June 30, 2008           December 31, 2007
                            -----------------------   -----------------------
                             Carrying         Fair     Carrying         Fair
                               Amount        Value       Amount        Value
            -----------------------------------------------------------------
            (000s)                 ($)          ($)          ($)          ($)

            Financial assets
              Held-for-trading
                Restricted
                 cash, current      -            -        5,150        5,150
                Restricted
                 cash,
                 non-current    1,245        1,245        1,224        1,224
              Loans and
               receivables
                Accounts
                 receivable     2,709        2,709        3,847        3,847
            Financial
             liabilities
              Held-for-trading
                Risk
                 management
                 liabilities    2,026        2,026            -            -
              Other financial
               liabilities
                Accounts
                 payable and
                 accrued
                 liabilities    4,229        4,229       12,496       12,496
              Bank debt         9,539        9,539       11,207       11,207
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) Risk Management Assets and Liabilities

            On February 29, 2008, the Company entered into a derivative
            contract to predetermine the selling price of a portion of its
            natural gas production as part of its risk management program.
            The future contract is subject to market risk from fluctuating
            commodity prices and exchange rates; however, realized gains or
            losses on the contract is offset by the value of the Company's
            production and is recognized in income in the same period. The
            Company does mark-to-market the derivatives outstanding at each
            reporting period with unrealized changes in fair value recognized
            in earnings. The following table summarizes the derivative
            contract:

    -------------------------------------------------------------------------
                                                  Daily                 Fair
                                                 Notional     Fixed   Market
    Product       Index           Term            Volume      Price    Value
    -------------------------------------------------------------------------
    Natural Gas  AECO-C   Apr.1/08 - Mar.31/09   2,000 GJs  $8.13/GJ  (2,026)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

            The Company recorded an unrealized loss of $2.0 million,
            representing the mark-to-market loss on the commodity derivative
            contract in the statement of operations during the period. The
            Company also recorded settlement or realized losses of
            $0.3 million in the statement of operations during the period.

            As at August 14, 2008, the commodity contracts have an unrealized
            gain or asset value of $0.2 million due to a significant decrease
            in natural gas prices since June 30, 2008.

        (c) Risk Associated with Financial Assets and Liabilities

            Credit Risk

            Credit risk is the risk of financial loss to the Company if a
            customer or counterparty to a financial instrument fails to meet
            its contractual obligations, and arises principally from the
            Company's receivables from joint venture partners and petroleum
            and natural gas marketers. As at June 30, 2008, the Company's
            receivables consisted of $0.7 million (2007 - $0.7 million) from
            joint venture partners, $0.9 million (2007 - $1.1 million) of
            receivables from petroleum and natural gas marketers and
            $0.3 million (2007 - $1.3 million) of other trade receivables.

            Receivables from petroleum and natural gas marketers are normally
            collected on the 25th day of the month following production. The
            Company's policy to mitigate credit risk associated with these
            balances is to establish marketing relationships with large
            purchasers. The Company historically has not experienced any
            collection issues with its petroleum and natural gas marketers.
            Joint venture receivables are typically collected within one to
            three months of the joint venture bill being issued to the
            partner. The Company attempts to mitigate the risk from joint
            venture receivables by obtaining partner approval of significant
            capital expenditures prior to expenditure. However, the
            receivables are from participants in the petroleum and natural
            gas sector, and collection of the outstanding balances is
            dependent on industry factors such as commodity price
            fluctuations, escalating costs and the risk of unsuccessful
            drilling. In addition, further risk exists with joint venture
            partners as disagreements occasionally arise that increase the
            potential for non-collection. The Company does not typically
            obtain collateral from petroleum and natural gas marketers or
            joint venture partners; however, the Company does have the
            ability to withhold production from joint venture partners in the
            event of non-payment.

            Cash and cash equivalents and restricted cash consist of cash
            bank balances and short-term deposits maturing in less than 90
            days. The Company manages the credit exposure related to short-
            term investments by selecting counterparties based on credit
            ratings and monitors all investments to ensure a stable return,
            avoiding complex investment vehicles with higher risk such as
            asset backed commercial paper.

            The carrying amount of accounts receivable, cash and cash
            equivalents and restricted cash represents the maximum credit
            exposure. The Company did not have an allowance for doubtful
            accounts for the six months ended June 30, 2008 and the year
            ended December 31, 2007 and did not provide for any doubtful
            accounts nor was it required to write-off any receivables during
            those periods.

            As at June 30, 2008 and December 31, 2007, the Company considers
            its receivable to be aged as follows:

            -----------------------------------------------------------------
            As at                                      June 30,  December 31,
                                                          2008          2007
            -----------------------------------------------------------------
            (000s)                                          ($)           ($)

            Aging
            Not past due (less than 120 days)            1,700         2,415
            Past due (120 days to 1 year)                  232           773
            -----------------------------------------------------------------
            Total accounts receivable                    1,932         3,188
            Other assets                                   777           659
            -----------------------------------------------------------------
            Total accounts receivable and other assets   2,709         3,847
            -----------------------------------------------------------------
            -----------------------------------------------------------------

            Liquidity Risk

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

            The Company prepares annual capital expenditure budgets, which
            are regularly monitored and updated as considered necessary.
            Further, the Company utilizes authorizations for expenditures on
            both operated and non-operated projects to further manage capital
            expenditures. To facilitate the capital expenditure program, the
            Company has a revolving reserve based credit facility, as
            outlined in note 5, that is reviewed periodically throughout the
            year by the lender. The Company also attempts to match its
            payment cycle with collection of petroleum and natural gas
            revenues on the 25th day of each month.

            The Company's contractual maturities of financial liabilities
            consisting of accounts payable and accrued liabilities,
            derivative contracts and bank debt are all due within one year.

            Market Risk

            Foreign Currency Exchange Rate Risk

            Foreign currency exchange rate risk is the risk that the fair
            value or future cash flows will fluctuate as a result of changes
            in foreign exchange rates. Substantially all of the Company's
            petroleum and natural gas sales are denominated in Canadian
            dollars, although the underlying market prices in Canada for
            petroleum and natural gas are impacted by changes in the exchange
            rate between the Canadian and United States dollar.

            The Company had no forward exchange rate contracts in place as at
            or during the six months ended June 30, 2008.

            Interest Rate

            Interest rate risk is the risk that future cash flows will
            fluctuate as a result of changes in market interest rates. The
            Company is exposed to floating interest rates with respect to its
            non-revolving acquisition/development demand loan facility and
            revolving operating demand loan facility (see note 5). As at June
            30, 2008, if interest rates had been 100 basis points lower with
            all other variables held constant, the net loss for the period
            would have been $0.1 million lower, due to lower interest
            expense. An equal and opposite impact would have occurred to the
            net loss had interest rates been 100 basis points higher.

            The Company had no interest rate swap or financial contracts in
            place as at or during the six months ended June 30, 2008.

            Commodity Price Risk

            Commodity price risk is the risk that the fair value or future
            cash flows will fluctuate as a result of changes in commodity
            prices. Commodity prices for petroleum and natural gas are
            impacted by not only the relationship between the Canadian and
            United States dollar, as outlined above, but also world economic
            events that dictate the levels of supply and demand. The Company
            has attempted to mitigate commodity price risk through the use of
            various financial derivative contracts. The Company's policy is
            to enter into commodity contracts considered appropriate to a
            maximum of 50% of the greater of current or forecasted production
            volumes.

            As at the period ended June 30, 2008, there were $0.3 million in
            hedging loss settlements incurred and an unrealized loss of $2.0
            million for derivatives for the period April 1 to June 30, 2008.
            The unrealized gain or loss from financial contracts for future
            periods has been included on the balance sheet with changes in
            the fair value included in petroleum and natural gas sales. As at
            June 30, 2008, if natural gas prices were $0.10/GJ lower, with
            all other variables held constant, the net loss for the period
            would have been $54,800 lower, due to changes in the fair value
            of the financial contracts. An equal and opposite impact would
            have occurred to the net loss had natural gas been $0.10/GJ
            higher. There were no derivative contracts in place in the prior
            periods.

    12. Contingent Liability

            In 2008, the Company was named as a defendant in a wrongful
            dismissal suit by a former employee wherein the plaintiff is
            seeking damages totaling $750,000 for breach of contract and
            special damages. The Company has accrued $78,000 in connection
            with this claim reflecting management's best estimate of the most
            likely settlement amount.

            However, as at the date of this report, the claim has not been
            officially discharged, and therefore, uncertainty remains
            regarding the final settlement. While management believes that
            the likelihood of additional loss in excess of the accrued amount
            is remote, there exists an exposure to a maximum of the original
            damages claimed that has not been accrued in these financial
            statements.

    13. Subsequent Event

            On August 14, 2008, the Company announced that it had entered
            into an agreement whereby Bonterra will acquire all of the issued
            and outstanding shares of the Company at a gross purchase price
            of $30.45 million to be reduced based on outstanding debt,
            negative working capital and settlements to be incurred in
            connection with the drilling contract buy-out and the amended
            Tomahawk farm-in agreement, which is estimated to be $16.5
            million at the closing of the acquisition for a net purchase
            price of approximately $13.95 million. Under the agreement,
            shareholders of Silverwing will be entitled to receive at their
            election either 0.002226 of a trust unit of Bonterra at a deemed
            price equal to $33.70 per Bonterra trust unit for each Silverwing
            share, or cash in an amount equal to such securityholder's pro
            rata share of the net purchase price estimated to be
            approximately $0.075 per Silverwing share.

            The acquisition is subject to approval by the Company's
            shareholders as well as final court and regulatory approval.

            In certain circumstances where either Bonterra or the Company are
            determined to be in a material breach of certain covenants under
            the agreement, a non-compliance fee of $1 million may be payable
            to the other party.
    





For further information:

For further information: Oleh Wowkodaw, President and Chief Executive
Officer; Terry O'Connor, Senior Vice President, Business Development; Martin
D. Rude, Vice President, Finance and CFO, Silverwing Energy Inc., 1250, 635 -
8th Avenue SW, Calgary, Alberta, T2P 3M3, Phone: (403) 263-5555, Fax: (403)
263-5549

Organization Profile

SILVERWING ENERGY INC.

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