Diamond Tree Energy Ltd. announces business combination with Crocotta Energy Inc. and releases Q2 2007 financial and operating results



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    WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES OF AMERICA./

    CALGARY, Aug. 13 /CNW/ - Diamond Tree Energy Ltd. (TSX: DT) ("Diamond
Tree") is pleased to announce today that its Board of Directors has approved a
business combination involving Diamond Tree and Crocotta Energy Inc.
(Crocotta). The business combination, which contemplates the transfer of
certain existing assets of Diamond Tree to a new oil and gas exploration and
development company ("Newco"), is to be effected through a Plan of Arrangement
(the "Arrangement"). Newco is currently a wholly owned subsidiary of Diamond
Tree. A definitive Arrangement Agreement was executed and delivered by Diamond
Tree, Crocotta and Newco on Friday, August 10, 2007 (the "Arrangement
Agreement"). Upon completion of the Arrangement, Diamond Tree shareholders
will receive 0.9527 of a Crocotta share and one Newco share for each Diamond
Tree share held as at that time. Completion of the transactions contemplated
by the Arrangement is subject to a number of customary conditions, including
receipt of all necessary court, regulatory and shareholder approvals and
completion by Crocotta of a financing involving the sale of not less than
$10 million of Crocotta common shares at a sale price of not less than
$1.35 per share. Crocotta has entered into financing arrangements with two
large institutions to satisfy this condition (see "Crocotta Financing" below).
    Crocotta is a non-trading public entity that is a reporting issuer under
securities laws in force in British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, Québec and New Brunswick. Historical information concerning Crocotta
can be found under Crocotta's issuer profile on SEDAR (at www.sedar.com).
Crocotta has advised Diamond Tree that it plans to continue to operate under
the name Crocotta Energy. The Arrangement Agreement contains conditions
relating to the listing of Crocotta shares and Newco shares on a stock
exchange in Canada.
    As a result of the business combination, Diamond Tree will become a
wholly owned subsidiary of Crocotta and Crocotta will indirectly acquire
approximately 1,500 barrels of oil equivalent per day of western Canadian
production. As well, Crocotta will assume Diamond Tree's net debt of
approximately $35 million, which is expected to be eliminated upon completion
of the Arrangement. The central and eastern Alberta oil and gas properties to
be transferred to Newco in connection with the Arrangement currently produce
approximately 700 barrels of oil equivalent per day.
    Kelly Ogle, President of Diamond Tree, is expected to become President
and Chief Executive Officer of Newco while Rob Zakresky, President & Chief
Executive Officer of Crocotta, will continue as President & Chief Executive
Officer of the combined entity. Don Copeland, Chairman and Chief Executive
Officer of Diamond Tree, is expected to join Crocotta's Board of Directors,
and Rob Zakresky is expected to join the board of Newco.
    Under the Arrangement Agreement, Diamond Tree has agreed that it will use
reasonable commercial efforts to make an application for an interim order (the
"Interim Order") of the Court of Queen's Bench of Alberta (the "Court") on or
prior to September 10, 2007.  The Interim Order is expected to contain
declarations and directions with respect to the proposed arrangement and the
calling and conduct of a special meeting of the securityholders of the
Company, at which securityholders will be asked to consider and, if thought
fit, authorize and approve the Arrangement (the "Special Meeting").  As well,
Diamond Tree has agreed to use reasonable commercial efforts to convene the
Special Meeting on or prior to October 19, 2007.
    Management and the directors of Diamond Tree believe the business
combination with Crocotta will produce two strong debt-free companies in a
market driven by acquisitions. Don Copeland noted: "This transaction allows
Diamond Tree shareholders to participate in two junior oil and gas companies
that will both be debt free and well positioned in an environment
characterized by increased acquisition opportunities and reduced competition
for those opportunities."
    Rob Zakresky indicated that the transaction "enhances Crocotta's position
in west central Alberta and provides increased size to pursue the company's
exploration and development projects. Crocotta will be in a net cash position
at closing and well positioned for additional acquisitions given the currently
weak natural gas prices and soft equity markets."

    Certain statements in this News Release constitute forward-looking
statements, including statements respecting the structure and effect of the
Arrangement, the attributes of Crocotta, Diamond Tree and Newco following
completion of the Arrangement (including pro forma financial and production
information), the timing of the Interim Order and certain other steps in the
Arrangement (including the mailing of information circular to the
securityholders of Diamond Tree), the consideration to be received by Diamond
Tree shareholders as a result of the Arrangement, certain members of the Board
of Directors of Crocotta and Newco following completion of the Arrangement,
perceived benefits of the business combination transaction to the shareholders
of Diamond Tree and Crocotta and the effect of softening service costs on
capital efficiency for the balance of 2007. Readers should refer to the
cautionary statement concerning forward-looking statements that appears at the
end of this News Release.

    Transaction Highlights

    Diamond Tree Shareholders:

    
    -   The combination with Crocotta is intended to provide Diamond Tree's
        shareholders an opportunity to participate in two growth-oriented
        junior oil and gas companies run by experienced management teams.
    -   Diamond Tree's existing debt and working capital deficiency are
        expected to be eliminated upon completion of the Arrangement.
    -   Increased access to capital is expected to allow for expanded capital
        programs and potential acquisitions.
    -   Synergies are expected by consolidating the west central Alberta
        properties of both Crocotta and Diamond Tree.
    -   Crocotta's large tax pool base is expected to provide an increased
        tax horizon.

    Crocotta Shareholders:

    -   The transaction is expected to be accretive to Crocotta's projected
        cash flow, production and proved plus probable reserves on a per
        share basis.
    -   Greater critical mass is expected to help the combined entity carry
        out larger exploration programs and participate in higher impact
        plays.
    -   The business combination will consolidate the Niton, Alberta Rock
        Creek property, which is partly owned by both Diamond Tree and
        Crocotta.
    -   Crocotta will indirectly acquire 1,500 barrels of oil equivalent per
        day of production, consisting of 30% light crude oil and NGLs and
        70% natural gas, approximately 3.6 million barrels of oil equivalent
        of proved plus probable (2.7 million barrels of oil equivalent
        proved) reserves (based on Crocotta's July 1, 2007 internal
        estimate), and approximately 36,000 net acres of undeveloped land.

    Pro Forma Highlights

    Management of Diamond Tree and Crocotta believe the transaction will
provide strategic advantages, including benefits of size and scale through a
larger production base, operational and geographic synergies, an expanded
inventory of projects and increased access to capital.

    -   Pro forma, Crocotta is expected to have the following:

        -  reserve base of approximately 6.4 million barrels of oil
           equivalent, consisting of 33% light crude oil and natural gas
           liquids and 67% natural gas;
        -  production of approximately 2,100 barrels of oil equivalent per
           day, consisting of approximately 40% light crude oil and NGLs and
           60% natural gas;
        -  undeveloped land base and farm-in lands exceeding 75,000 net
           acres;
        -  more than 30 identified drillable locations;
        -  approximately $7.5 million cash and no debt, assuming Crocotta is
           able to raise $22.5 million through the financing described below;
           and
        -  shares outstanding of 106.4 million, assuming maximum financing
           amount (35.5 million after a proposed 3 for 1 consolidation)

    -   Pro forma, Newco is expected to have the following:

        -  reserve base of approximately 2.1 million barrels of oil
           equivalent, consisting of 35% light crude oil and NGLs and 65%
           natural gas;
        -  production of approximately 700 barrels of oil equivalent per day,
           consisting of 35% light crude oil and NGLs and 65% natural gas;
        -  undeveloped land base of approximately 22,000 net acres;
        -  continued exposure to the Tupper, BC Triassic prospect through a
           one-third interest in the lands as well as some interests in the
           Sinclair area;
        -  10 or more lower risk, lower cost drilling opportunities;
        -  no debt; and
        -  shares outstanding of 25.3 million.
    

    Crocotta Financing

    Crocotta has confirmed to Diamond Tree that, as of June 30, 2007,
Crocotta had no debt and working capital of approximately $27.4 million,
assuming the exercise of existing put/call arrangements.
    Crocotta has also advised that it has entered into a financing
arrangement with two institutional investors to issue 9.3 million Crocotta
common shares, at $1.35 per share, for gross proceeds of $12.5 million,
contingent on closing of the Arrangement. One of the two institutions has
agreed to provide up to an additional $2.5 million at the same price if so
requested by Crocotta.
    In addition to the $12.5 million financing noted above, Crocotta has
indicated that it may seek to raise up to an additional $10 million at
$1.35 per share which would expand the current shareholder base.

    Board Recommendations

    The boards of directors of both Diamond Tree and Crocotta have determined
that the Arrangement is in the best interests of Diamond Tree and Crocotta,
respectively. The board of directors of Diamond Tree has resolved to recommend
to the Diamond Tree shareholders that they vote in favour of the Arrangement.
Management and directors of Diamond Tree, representing approximately 34% of
the outstanding fully diluted common shares of Diamond Tree, have agreed to
vote in favour of the Arrangement.
    The Arrangement prohibits Diamond Tree from soliciting or initiating any
discussions concerning the sale of any material assets or any other business
combination, and provides Crocotta with the right to match any competing
proposal made by a third party prior to consummation of the Arrangement. Under
the terms of the Arrangement Agreement, Crocotta is entitled to receive a
$2.7 million break fee from Diamond Tree in certain circumstances, including
if Diamond Tree enters into an agreement with another party for a takeover of
Diamond Tree or if the Diamond Tree board of directors recommends that Diamond
Tree shareholders deposit or vote their Diamond Tree Shares in support of
another proposal. The Arrangement Agreement also provides that Diamond Tree is
entitled to receive a $2.7 million break fee from Crocotta in certain
circumstances, including in the event of a material breach of any Crocotta
covenant set out in the Arrangement Agreement or if Crocotta enters into an
agreement with a third party involving a takeover of Crocotta, or if Crocotta
fails to complete a financing involving the sale by it of not less than
$10 million of common shares at a sale price of not less than $1.35 per share.
    Additional information concerning the Arrangement will be included in an
information circular, which is scheduled to be mailed to Diamond Tree
shareholders in early September 2007. If approved by the Diamond Tree
securityholders, the Arrangement is expected to close shortly after the
Special Meeting.

    Financial Advisors

    Acumen Capital Partners acted as sole financial advisor to Diamond Tree
and has advised the Board of Directors of Diamond Tree that it is of the
opinion, subject to its review of the final form of the documents effecting
the Arrangement, that the consideration to be received by the Diamond Tree
shareholders pursuant to the Arrangement is fair from a financial point of
view to the Diamond Tree shareholders.

    DIAMOND TREE'S Q2 2007 FINANCIAL AND OPERATING RESULTS

    Diamond Tree also announced today its results for the three and
six months ended June 30, 2007. Diamond Tree's second quarter 2007 financial
statements and related Management's Discussion and Analysis ("MD&A") are
included in this news release and are available under the Diamond Tree profile
on SEDAR at www.sedar.com, and on Diamond Tree's website at
www.diamondtree.ca.

    Financial Results

    Revenue for the three months ended June 30, 2007 was $8.9 million,
exceeding second quarter 2006 levels by $0.6 million. This increase is due to
stronger natural gas prices and higher oil and NGL volumes, partially offset
by lower natural gas volumes.
    Second quarter 2007 funds flow from operations was $4.0 million, or
$0.16/share (basic) and $0.15/share (diluted). This is approximately $544,000
lower than the comparable period in 2006 as higher revenue and lower royalty
costs were more than offset by increased operating, general and administrative
and interest expenses.
    Production levels were 10% lower than the first quarter and 12% below the
prior year's comparative quarter due to temporary production interruptions
associated with third party plant turnarounds, a power outage, compressor
problems and an early start and extended duration to spring breakup. The
resulting curtailments in operational activity had the additional effect of
restricting production, which in turn caused increases in per-unit operating
costs, as charges were absorbed over a lower quarterly production base. For
the most part, these operational challenges have been rectified.
    Although a net loss of $135,000 was recorded in the second quarter, it
was less than the first quarter loss primarily due to a reduction in future
income tax rates and a lower depletion rate. The softening of service costs
observed by Diamond Tree early in the second quarter is expected to have a
positive impact on capital efficiency for the remainder of 2007. In general,
however, depletion rates remain above prior year levels, reflecting the higher
cost of services and supplies required to explore for and develop reserves in
western Canada.

    Operations Review

    Diamond Tree resumed its 2007 drilling program in mid-June. As a result
of an early start and extended duration to spring breakup and an accelerated
first quarter drilling program, second quarter capital spending was limited to
$4.4 million, down $7.7 million from $12.1 million in the first quarter.
During the second quarter, the Company spent $2.5 million on drilling,
completion and re-completion activity, drilling one (1.0 net) well at
Manyberries, spudding a halfway gas well late in the quarter at Elmworth,
completing three (2.1 net) wells at Manyberries, Elmworth and Garrington and
re-completing two (1.8 net) wells at Caroline and Ferrybank.
    In addition, equipping and tie-in expenditures totalled $1.3 million,
with three wells coming on production at Garrington and three wells expected
on production in the third quarter of 2007 in the Elmworth and Carson Creek
areas.
    Diamond Tree produced approximately 2,300 barrels of oil equivalent per
day during the month of July 2007.

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    August 9, 2007

    This Management's Discussion and Analysis ("MD&A") of financial condition
and results of operations for Diamond Tree Energy Ltd. (the "Company" or
"Diamond Tree") should be read in conjunction with the interim consolidated
financial statements for the three and six months ended June 30, 2007 and the
Company's audited consolidated financial statements and MD&A for the year
ended December 31, 2006. The discussion provided herein is incremental to the
MD&A in respect of the audited consolidated financial statements for the year
ended December 31, 2006. Diamond Tree's audited consolidated financial
statements and other disclosure documents including the Company's Annual
Information Form ("AIF") are filed on SEDAR at www.sedar.com.
    The reporting and the measurement currency is the Canadian dollar unless
otherwise indicated.

    Statements throughout this MD&A that are not historical facts may be
considered "forward-looking statements." These forward-looking statements
sometimes include words to the effect that management believes or expects a
stated condition or result. All estimates and statements that describe the
Company's objectives, goals, future plans or outlook are forward-looking
statements. Since forward-looking statements address future events and
conditions, by their very nature they involve inherent risks and uncertainties
and actual results could differ materially from those currently anticipated.
These risks and uncertainties include, but are not limited to, regulatory,
shareholder and court approval of the Arrangement Agreement, volatility of oil
and gas prices, commodity supply and demand, fluctuations in currency and
interest rates, inherent risks associated in the exploration and development
of oil and gas properties, ultimate recoverability of reserves, timing,
results and costs of drilling activities and pipeline construction,
availability of financing, new regulations and legislation, reinstatement or
rescission of the Maximum Rate Limitation ("MRL") and availability of capital.
Additional risks and uncertainties affecting the Company are contained in the
Company's December 31, 2006 AIF. Certain information regarding the Company in
this MD&A including forecast capital expenditures, future exploration and
development plans, forecast operating costs and anticipated production rates
and production mix constitute forward-looking statements under applicable
securities laws. Forecast capital expenditures are based on Diamond Tree's
current budgets and development plans which are subject to change based on
commodity prices, market conditions, drilling success and potential timing
delays. Additionally, forecast capital expenditures do not include capital
required to pursue future acquisitions. Anticipated production and product mix
have been estimated based on the proposed drilling program with a success rate
based upon historical drilling success and an evaluation of the particular
wells to be drilled. Operating costs have been projected based on historical
information and anticipated increases in the cost of equipment and services.
Forward-looking statements are based on current expectations, estimates and
projections of future production and capital spending as at the date of this
MD&A and the Company assumes no obligation to update or revise forward-looking
statements to reflect new events or circumstances, except as required by law.
    Per barrel of oil equivalent ("boe") amounts have been calculated using a
conversion rate of six thousand cubic feet of natural gas to one barrel of
oil. BOEs may be misleading, particularly if used in isolation. The boe
conversion ratio used 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 MD&A contains the terms "funds flow from continuing operations,"
"funds flow from operations" and "field netback" which are non-GAAP financial
measures that do not have any standardized meaning prescribed by Canadian
Generally Accepted Accounting Principles ("GAAP") and are therefore unlikely
to be comparable to similar measures presented by other issuers. "Funds flow
from continuing operations", "funds flow from operations" and "field netback"
provide useful information to investors and management since they are an
indicator of the Company's ability to fund future capital expenditures, which
drives growth, and to repay debt. Funds flow from continuing operations and
funds flow from operations are calculated before changes in non-cash working
capital. See the Non-GAAP financial measures section of this MD&A for a
reconciliation of funds flow from operations and field netback to net
earnings, the most comparable measure calculated in accordance with GAAP.

    Subsequent Event - Proposed Business Combination:

    The Company has entered into an Arrangement Agreement (the "Agreement")
with Crocotta Energy Inc. ("Crocotta") and a newly formed wholly-owned
subsidiary of the Company ("Newco"). The Agreement provides for the transfer
of certain oil and gas properties of the Company to Newco and a subsequent
business combination between the Company and Crocotta.
    The Agreement contemplates that the transfer of assets and business
combination will be undertaken pursuant to a plan of arrangement, implemented
in accordance with the Business Corporations Act (Alberta) (the
"Arrangement"). The Company's management and directors have signed voting
agreements in which they have agreed to support the Arrangement.
    The Agreement provides that, upon implementation of the Arrangement, each
shareholder of the Company will receive 0.9527 of a Crocotta share and
1.0 Newco share in exchange for each Company share owned as of the effective
date of the Arrangement. Crocotta currently has 50,536,107 shares issued and
outstanding. As a condition of the Agreement, Crocotta is required to raise
not less than $10 million through the issuance of shares at not less than
$1.35 per share. Completion of the transactions contemplated by the Agreement
is subject to the receipt of all necessary regulatory, securityholder and
Court approvals as well as certain other customary due diligence processes.
The Agreement also contains conditions relating to the listing of Crocotta
shares and Newco shares on a stock exchange in Canada. At the current time,
the shares of Crocotta are not listed on any stock exchange.
    Under the terms of the Agreement, the Company is required to pay a
$2.7 million termination fee to Crocotta in certain circumstances, including
if the Company enters into an agreement with another person involving a
takeover of the Company or if the board of directors of Diamond Tree
recommends that the shareholders of the Company deposit or vote their shares
in support of another transaction involving the Company. Crocotta is also
required to pay Diamond Tree a $2.7 million termination fee in certain
circumstances, including a material breach of any Crocotta covenant set out in
the Agreement or if Crocotta enters into an agreement with a third party
involving a takeover of Crocotta.

    
    Summary of Quarterly Results:

    ($000s except per share
     and boe amounts)               Q2/2007    Q1/2007    Q4/2006    Q3/2006
    -------------------------------------------------------------------------
    Production (boe/d)                1,983      2,329      1,969      1,571
    -------------------------------------------------------------------------
    Revenue                           8,924     10,318      8,340      6,302
    -------------------------------------------------------------------------
    Revenue ($/boe)                   49.46      49.23      46.04      43.61
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       3,995      4,454      3,158      6,655
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Funds flow from continuing
     operations
     -$ per share basic                0.16       0.18       0.13       0.30
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations
     -$ per share diluted              0.15       0.17       0.12       0.26
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations             (135)      (557)       185      2,549
    -------------------------------------------------------------------------
    Net earnings (loss)                (135)      (557)       185      2,549
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations            (0.01)     (0.02)      0.00       0.12
      -$ per share basic/diluted      (0.01)     (0.02)      0.00       0.10
    -------------------------------------------------------------------------
    Net earnings (loss)               (0.01)     (0.02)      0.00       0.12
      -$ per share basic/diluted      (0.01)     (0.02)      0.00       0.10
    -------------------------------------------------------------------------




    ($000s except per share
     and boe amounts)               Q2/2006    Q1/2006    Q4/2005    Q3/2005
    -------------------------------------------------------------------------
    Production (boe/d)                2,092      2,244      2,992      2,565
    -------------------------------------------------------------------------
    Revenue                           8,343     10,056     19,153     15,057
    -------------------------------------------------------------------------
    Revenue ($/boe)                   43.82      49.80      69.58      63.82
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       4,535      6,429     11,060      8,992
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Funds flow from continuing
     operations
     -$ per share basic                0.20       0.29       0.53       0.48
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations
     -$ per share diluted              0.18       0.26       0.47       0.44
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations              103      1,299      3,352      3,540
    -------------------------------------------------------------------------
    Net earnings (loss)                 103      1,299      5,549      3,522
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations             0.00       0.06       0.16       0.19
      -$ per share basic/diluted       0.00       0.05       0.14       0.17
    -------------------------------------------------------------------------
    Net earnings (loss)                0.00       0.06       0.28       0.19
      -$ per share basic/diluted       0.00       0.05       0.25       0.17
    -------------------------------------------------------------------------
    

    Discussion of Quarterly Trends:

    Certain information contained in this section constitutes
"forward-looking statements." Refer to the introduction of this MD&A.
    During the second quarter of 2007, temporary production interruptions
from third party plant turnarounds, a power outage, compressor problems and an
early start and extended duration to spring breakup caused production to
decrease from first quarter levels. These outages have for the most part been
rectified. The Company is also encouraged by recent developments with its
Niton waterflood enhanced recovery scheme (refer to the "Outlook" section of
this MD&A) which would remove the gas-oil ratio ("GOR") production penalties
that were imposed during May and June of 2007.
    The Company's realized revenue per boe was essentially flat when compared
to the first quarter of 2007. On average, when compared to the first quarter,
West Texas Intermediate ("WTI") crude oil rose approximately 12% and NYMEX
natural gas rose approximately 5%. However, the Canadian dollar appreciated
approximately 7% against the US dollar, and as a result Edmonton Par pricing
rose only 8% and AECO natural gas fell 4%. Natural gas prices decreased from
the first quarter of 2007, due to continued strength of gas inventory storage
numbers.
    As a result of lower quarterly production, second quarter funds flow from
continuing operations was 10% below the previous quarter. The net loss of
$135,000, however, was less than the first quarter loss of $557,000 due to a
lower depletion, amortization and accretion provision and a reduction in
future income tax rates.
    When looking at other historical quarterly trends, third quarter 2006
funds flow from continuing operations and net earnings from continuing
operations surpassed second quarter 2006 levels due to a $4.4 million payment
(net of associated expenses) received by the Company as a non-completion fee
relating to the formal termination of a corporate business combination with
Blue Mountain. During the fourth quarter of 2005, the Company benefited from
production restriction relaxations in the aftermath of Gulf Coast hurricanes
Katrina and Rita and also realized a before tax gain of $2.0 million on the
sale of the Eveready Income Fund trust units in conjunction with the disposal
of its remaining oil field service assets.

    Outlook:

    Capital projects anticipated for the remainder of the third quarter
include equipping and bringing new gas wells onstream at Elmworth and Carson
Creek, bringing a re-completion onstream at Caroline, drilling a wells at
Ferrybank and continuing to evaluate the Elmworth halfway well spud late in
the second quarter.
    At its Niton, Alberta property, Diamond Tree has been informed that
Alberta Environment is proceeding to recommend approval of its application for
a groundwater license. Upon approval of its groundwater license, Diamond Tree
intends to apply to the EUB for approval of its Rock Creek "W" pool waterflood
enhanced recovery scheme. Upon approval of this scheme and completion of all
necessary facility alterations, the waterflood can commence and the EUB should
grant GPP for the pool, which is expected to increase production rates during
the fourth quarter of 2007.
    In the Tupper, British Columbia area, Diamond Tree expects to drill a
Triassic Halfway test well in the second half of 2007. This will complete the
Company's initial commitment on the Tupper farm-in lands. Management of the
Company believes that a number of high quality Triassic exploration
opportunities exist in the area.

    
    Results of Operations:

    Petroleum and natural gas sales - variance analysis
    -------------------------------------------------------------------------
                                                 Change due to:
    -------------------------------------------------------------------------
    ($000's)                        Q2/2007    Pricing     Volume    Q2/2006
    -------------------------------------------------------------------------
    Natural gas sales                 5,686        910       (560)     5,336
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Crude oil and natural gas
     liquids sales                    3,238        (78)       309      3,007
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Total petroleum and natural
     gas sales                        8,924        832       (251)     8,343
    -------------------------------------------------------------------------
    

    Petroleum and natural gas sales for the three months ended June 30, 2007
were $8.9 million, exceeding second quarter 2006 levels by $0.6 million. This
increase is due to stronger natural gas prices and higher oil and NGL volumes
being partially offset by lower natural gas volumes. The Company has no
hedging contracts or fixed price physical contracts in place at this time.

    
    Product Prices
    -------------------------------------------------------------------------
                        Q2/2007  Q2/2006 % Change YTD 2007 YTD 2006 % Change
    -------------------------------------------------------------------------
    Natural gas price
     ($/mcf)               7.43     6.24       19     7.59     6.89       10
    -------------------------------------------------------------------------
    Crude oil and
     natural gas liquids
     price ($/bbl)        61.33    62.80       (2)   58.63    61.62       (5)
    -------------------------------------------------------------------------
    

    Realized gas prices in the second quarter and year to date 2007 increased
from the same periods in 2006 and approximated the AECO benchmark gas price
movement.
    The WTI benchmark crude oil price decreased 8% from the second quarter of
2006 with the Edmonton par price following suit and falling 8.1% over the same
period.

    
    Product Sales
    -------------------------------------------------------------------------
                        Q2/2007  Q2/2006 % Change YTD 2007 YTD 2006 % Change
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Natural gas
     production (mcf/d)   8,414    9,397      (10)   9,181    9,451       (3)
    -------------------------------------------------------------------------
    Crude oil and
     natural gas liquids
     production (bbl/d)     580      526       10      625      592        6
    -------------------------------------------------------------------------
    

    Natural gas volumes decreased in the second quarter and first half of
2007 due to temporary production decreases resulting from plant turnarounds
and equipment repairs at Ferrybank and Willesden Green, an imposed GOR
production penalty at Niton and suspension of a well at Manyberries. Partially
offsetting these factors were new production additions in the Albright,
Sinclair and Willesden Green areas.
    Oil and natural gas liquids volumes increased both on a quarterly and
half year basis when compared to 2006 due to new production at Garrington
being partially offset by plant turnarounds and repairs at Ferrybank and a GOR
penalty at Niton.

    
    Royalties, net of ARTC:
    -------------------------------------------------------------------------
                                          Q2/2007               Q2/2006
    -------------------------------------------------------------------------
                                     $000's     Rate %     $000's     Rate %
    -------------------------------------------------------------------------
    Natural gas                         870         15      1,190         22
    -------------------------------------------------------------------------
    Crude oil and natural gas
     liquids                            734         23        602         20
    -------------------------------------------------------------------------
    Alberta royalty tax credit
     (ARTC)                               -          -       (120)         -
    -------------------------------------------------------------------------
    Total royalties, net of ARTC      1,604         18      1,672         20
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                          YTD/2007              YTD/2006
    -------------------------------------------------------------------------
                                     $000's     Rate %     $000's     Rate %
    -------------------------------------------------------------------------
    Natural gas                       2,785         22      3,006         25
    -------------------------------------------------------------------------
    Crude oil and natural gas
     liquids                          1,511         23      1,399         21
    -------------------------------------------------------------------------
    Alberta royalty tax credit
     (ARTC)                               -          -       (521)         -
    -------------------------------------------------------------------------
    Total royalties, net of ARTC      4,296         22      3,884         21
    -------------------------------------------------------------------------
    

    The natural gas royalty rate in the second quarter of 2007 was lower than
the prior year comparative quarter due to royalty holidays of $260,000 and a
gas cost allowance ("GCA") adjustment of $280,000. If these one-time
reductions were excluded, the natural gas royalty rate would be 24%. Year to
date 2007 royalty rates were similarly affected by these reductions.
    Oil and natural gas liquids royalty rates for the second quarter and the
first half of 2007 were consistent with 2006.
    Effective January 1, 2007 the Alberta government eliminated the Alberta
Royalty Tax Credit ("ARTC") program.

    
    Operating expenses:
    -------------------------------------------------------------------------
                                          Q2/2007                Q2/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Operating expenses                1,851      10.26      1,328       6.99
    -------------------------------------------------------------------------
    Transportation                      112       0.62         92       0.47
    -------------------------------------------------------------------------
    Total operating expenses          1,963      10.88      1,420       7.46
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                          YTD/2007              YTD/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Operating expenses                3,721       9.54      2,138       5.45
    -------------------------------------------------------------------------
    Transportation                      240       0.62        181       0.46
    -------------------------------------------------------------------------
    Total operating expenses          3,961      10.16      2,319       5.91
    -------------------------------------------------------------------------
    

    In addition to an overall rise in the cost structure of the Canadian oil
and gas industry, higher gas processing costs for sour gas wells, plant
turnaround charges, well servicing and receipt of annual property tax billings
led to higher second quarter operating costs.
    Plant turnarounds, power outages and an extended spring breakup with its
resultant curtailments in operational activity had the additional effect of
restricting production, which in turn drove up per-unit operating costs as
charges were absorbed over a lower quarterly production base.

    
    Field netback:
    -------------------------------------------------------------------------
                                          Q2/2007                Q2/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                        8,924      49.46      8,343      43.82
    -------------------------------------------------------------------------
    Royalties, net of ARTC           (1,604)     (8.89)    (1,672)     (8.78)
    -------------------------------------------------------------------------
    Other income                         20       0.11         35       0.18
    -------------------------------------------------------------------------
    Operating expenses               (1,963)    (10.88)    (1,420)     (7.46)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Field netback                     5,377      29.80      5,286      27.76
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Volumes (boe/d)                              1,983                 2,092
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          YTD/2007              YTD/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Petroleum and natural
     gas sales                       19,242      49.34     18,399      46.89
    -------------------------------------------------------------------------
    Royalties, net of ARTC           (4,296)    (11.01)    (3,884)     (9.90)
    -------------------------------------------------------------------------
    Other income                         34       0.09        118       0.30
    -------------------------------------------------------------------------
    Operating expenses               (3,961)    (10.16)    (2,319)     (5.91)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Field netback                    11,019      28.26     12,314      31.38
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Volumes (boe/d)                              2,155                 2,168
    -------------------------------------------------------------------------
    

    Quarter over quarter, field netback per-unit increased commensurate with
higher realized gas prices and lower royalties, offset slightly by higher
operating expenses. Year to date 2007 field net back per-unit decreased
compared to the same period in 2006 mainly due to higher royalties as a result
of the elimination of ARTC and higher operating costs. Refer to the section
entitled "Non-GAAP financial measures" for reconciliations of these figures to
net earnings.

    
    General and administrative expenses:
    -------------------------------------------------------------------------
                                 Q2/2007                    Q2/2006
    -------------------------------------------------------------------------
                         $000's        %    $/boe   $000's        %    $/boe
    -------------------------------------------------------------------------
    Total                   958                        737
    -------------------------------------------------------------------------
    Recoveries              (65)                       (25)
    -------------------------------------------------------------------------
    Capitalized            (196)      22              (170)      23
    -------------------------------------------------------------------------
    Net expensed            697       78     3.86      542       77     2.85
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                YTD/2007                   YTD/2006
    -------------------------------------------------------------------------
                         $000's        %    $/boe   $000's        %    $/boe
    -------------------------------------------------------------------------
    Total                 1,959                      1,508
    -------------------------------------------------------------------------
    Recoveries             (173)                       (86)
    -------------------------------------------------------------------------
    Capitalized            (393)      22              (355)      24
    -------------------------------------------------------------------------
    Net expensed          1,393       78     3.57    1,067       76     2.72
    -------------------------------------------------------------------------
    

    General and administrative expenses for the quarter and year to date were
slightly above comparative 2006 levels due to a general increase in salaries
and consulting services. Due to the relatively fixed nature of these costs,
quarterly per-unit figures can occasionally vary upwards or downwards from
prior quarters concurrent with changes in production.

    Interest expense:

    Second quarter interest expense of $642,000 is comprised of interest on
bank loans, flow-through share interest and interest associated with capital
leases relating to field infrastructure. The Company accrues interest to
Canada Revenue Agency on flow-through funds renounced in 2006 that remain
unexpended at the end of each month in 2007 and has recognized $253,000
related to unexpended qualifying expenditures to the end of June 30, 2007.
    At the end of the second quarter of 2007, the Company had $31 million
drawn against its $35 million credit facility.

    
    Depletion, amortization and accretion:
    -------------------------------------------------------------------------
                                          Q2/2007                Q2/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Oil and gas                       4,195      23.25      4,010      21.06
    -------------------------------------------------------------------------
    Office furniture and equipment       (9)     (0.05)        12       0.06
    -------------------------------------------------------------------------
    Accretion                           126       0.70         65       0.35
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Total provision                   4,312      23.90      4,087      21.47
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                         YTD/2007              YTD/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Oil and gas                       9,295      23.83      7,948      20.25
    -------------------------------------------------------------------------
    Office furniture and equipment       12       0.03         17       0.04
    -------------------------------------------------------------------------
    Accretion                           204       0.52        119       0.31
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Total provision                   9,511      24.38      8,084      20.60
    -------------------------------------------------------------------------
    

    The depletion, amortization and accretion provision for the quarter was
$225,000 higher than the comparative 2006 quarter and $1.4 million above
levels during the first half of 2006 due to higher costs of exploring for,
finding and developing reserves. The second quarter provision dropped
slightly, however, when compared to the first quarter of 2007. The Company's
external evaluation engineers provided 2006 year end reserve numbers and
quarterly additions to proved reserves are estimated internally.

    Taxes:

    The Company had no current taxes for the second quarter of 2007 and a
$61,000 current tax recovery in 2006 which relating to the repeal of the Large
Corporation's Tax. During the second quarter of 2007, the future tax provision
was positively affected by the substantive enactment of a future tax rate
reduction.

    Liquidity and Capital Resources:

    Cash flow:

    The Company believes that its existing credit facilities and expected
funds flow from operations will be sufficient to fund its capital program and
enable it to meet all current and expected financial requirements. Other than
the items noted in the "Commitments" section of this MD&A, capital spending is
discretionary. Refer to the "Outlook" section for a discussion of the
Company's future plans.
    Funds flow from continuing operations for the second quarter of 2007 was
$4.0 million or $0.15 per diluted share. This is approximately $544,000 lower
than the comparable period of 2006 as higher revenue and lower royalty costs
were more than offset by increased operating, general and administrative and
interest expenses.
    The following table summarizes funds flow from continuing operations per
unit of production:

    
    -------------------------------------------------------------------------
                                          Q2/2007                Q2/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Field netback                     5,377      29.80      5,286      27.76
    -------------------------------------------------------------------------
    General and administrative
     expenses(1)                       (697)     (3.86)      (542)     (2.85)
    -------------------------------------------------------------------------
    Interest expense                   (642)     (3.56)      (266)     (1.40)
    -------------------------------------------------------------------------
    Current taxes                         -          -         61       0.33
    -------------------------------------------------------------------------
    Abandonments                        (43)     (0.24)
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       3,995      23.14      4,539      23.84
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                         YTD/2007              YTD/2006
    -------------------------------------------------------------------------
                                     $000's      $/boe     $000's      $/boe
    -------------------------------------------------------------------------
    Field netback                    11,019      28.26     12,314      31.38
    -------------------------------------------------------------------------
    General and administrative
     expenses(1)                     (1,393)     (3.57)    (1,042)     (2.66)
    -------------------------------------------------------------------------
    Interest expense                 (1,134)     (2.91)      (343)     (0.87)
    -------------------------------------------------------------------------
    Current taxes                         -          -         50       0.12
    -------------------------------------------------------------------------
    Abandonments                        (43)     (0.11)       (12)     (0.01)
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       8,449      21.67     10,967      27.98
    -------------------------------------------------------------------------
    (1) YTD 2006 G&A is reduced by a $25,000 stock based compensation
        adjustment relating to Phantom Stock Options.
    

    Bank loan:

    At June 30, 2007 the Company had bank debt of $31.4 million drawn on its
$35.0 million revolving operating loan facility. The next review date has been
scheduled for April 30, 2008. At June 30, 2007 there were no covenant
violations.

    Working capital:

    At June 30, 2007, the Company had a working capital deficit, excluding
the bank loan, of $3.9 million compared to $6.8 million at the end of the
first quarter. The working capital deficit can be absorbed by the unutilized
portion of the credit facility.
    With second quarter production interruptions from plant turnarounds,
power outages, compressor problems and a long spring breakup ending and a
fourth quarter increase in Niton area production upon the EUB granting GPP,
the Company intends to use a combination of funds flow from operations, bank
debt and working capital to meet its flow-through share and farm-in spending
commitments.

    Use of proceeds of private placement:

    On December 7, 2006 the Company closed a private placement of 2.2 million
common shares on a "flow-through" basis at $5.25 per share and renounced $11.5
million effective December 31, 2006. This resulted in an obligation to spend
$11.5 million on qualifying expenditures by the end of 2007. The following
table shows the use of proceeds:

    
    --------------------------------------------------------
                                                 $ millions
    --------------------------------------------------------
    Proceeds, before share issue costs                $11.5
    --------------------------------------------------------
    Qualifying expenditures to June 30, 2007           (3.4)
    --------------------------------------------------------
    Qualifying expenditures to be incurred              8.1
    --------------------------------------------------------
    

    Equity:

    During the second quarter of 2007, warrant exercises provided cash of
$375,000.
    At June 30, 2007 the Company had 25.3 million common shares issued and
outstanding. At August 9, 2007, the Company had 25.3 million common shares,
2.3 million options and 2.2 million performance warrants outstanding.

    Capital expenditures:

    Exploration and development spending during the first half of 2007 is as
follows:

    
    -------------------------------------------------------------------------
    ($ millions)                                          Q2/2007    Q1/2007
    -------------------------------------------------------------------------
    Land and property acquisitions                            0.3        0.3
    -------------------------------------------------------------------------
    Seismic and geological and geophysical                    0.1        0.2
    -------------------------------------------------------------------------
    Intangible drilling, completions and re-completions       2.5       10.0
    -------------------------------------------------------------------------
    Well equipment and facilities                             1.3        1.4
    -------------------------------------------------------------------------
    Capitalized general and administrative expense            0.2        0.2
    -------------------------------------------------------------------------
    Total capital expenditures                                4.4       12.1
    -------------------------------------------------------------------------
    

    Diamond Tree resumed its 2007 drilling activity in mid-June. As a result
of an early start and extended duration to spring breakup and an accelerated
first quarter drilling program, second quarter capital spending was
$4.4 million, down $7.7 million from the first quarter.
    During the quarter, the Company spent $2.5 million on drilling,
completion and re-completion activity drilling one (1.0 net) well at
Manyberries, spudding a halfway gas well late in the quarter at Elmworth,
completing three (2.1 net) wells at Manyberries, Elmworth and Garrington and
re-completing two (1.8 net) wells at Caroline and Ferrybank.
    In addition, equipping and tie-in expenditures totalled $1.3 million,
with three wells coming on production at Garrington and three wells expected
on production in the third quarter of 2007 in the Elmworth and Carson Creek
areas.
    The Company has approximately 58,000 acres of undeveloped land and 5,000
additional acres under option through farm-in agreements.

    Commitments:

    With the exception of the Company's flow-through commitment and farm-in
commitment, all capital expenditures are discretionary. At June 30, 2007 the
Company has committed to future payments as follows:

    
    -------------------------------------------------------------------------
    ($000's)                          Total  Less than      1 - 3      After
                                                1 year      years    3 years
    -------------------------------------------------------------------------
    Operating leases (CDN$)
     - note (i)                         376        376          -          -
    -------------------------------------------------------------------------
    Capital lease obligations
     - note (ii)                      1,451        863        588          -
    Flow-through commitment
     and farm-in commitment
     - note (iii)                     8,100      8,100
    -------------------------------------------------------------------------
    Total contractual obligations     9,927      9,339        588          -
    -------------------------------------------------------------------------
    (i)   This is comprised of office and equipment leases.
    (ii)  These are leases for field compression facilities being accounted
          for as capital leases.
    (iii) In December of 2006, the Company raised $11.5 million by way of a
          flow-through share offering. This amount represents future
          qualifying exploration ("CEE") expenditures required to fulfill
          this flow-through share obligation. Included in this amount is
          $1.8 million of estimated future committed drilling costs relating
          to the final well of the Tupper farm-in agreement, which is
          expected to qualify as flow-through spending.
    

    Changes in Accounting Policies including initial adoption:

    As disclosed in the December 31, 2006 annual audited consolidated
financial statements, on January 1, 2007 the Company adopted the Canadian
Institute of Chartered Accountants ("CICA") Handbook Section 1530
"Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial
Instruments - Recognition and Measurement", and Section 3865 "Hedges",
retrospectively with no restatement of prior periods. See note 2 to the
consolidated interim financial statements and the Company's audited
consolidated financial statements and MD&A for the year ended December 31,
2006. The Company has evaluated the impact of these new standards and
determined that the adoption of these standards has had no material impact on
the Company's net earnings or cash flows.
    Beginning January 1, 2007 the Company adopted Section 1506 "Accounting
Changes" the only impact of which is to provide disclosure of when an entity
has not applied a new source of GAAP that has been issued but is not yet
effective.
    As of July 1, 2007, the Company will be required to adopt CICA Handbook
Section 3031, Inventory. This new standard is effective for interim and annual
financial statements relating to fiscal years beginning on or after July 1,
2007. This new standard will have no impact on the Company's consolidated
financial statements.
    As of January 1, 2008, the Company will required to adopt CICA Handbook
Sections 3862, Financial Instruments - Disclosures; 3863, Financial
Instruments - Presentation; 1535, Capital Disclosures and 1400, General
Standards of Financial Statement Presentation. The Company is assessing the
impact of these new standards on its consolidated financial statements and
anticipates the main impact will be in terms of additional disclosures
required.

    Business Risks:

    The Federal Government released on April 26, 2007, its Action Plan to
Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as
ecoACTION and which includes the Regulatory Framework for Air Emissions. This
Action Plan covers not only large industry, but regulates the fuel efficiency
of vehicles and the strengthening of energy standards for a number of
energy-using products. Regarding large industry and industry related projects,
the Government's Action Plan intends to achieve the following: (i) an absolute
reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing
mandatory targets; and (ii) air pollution from industry is to be cut in half
by 2015 by setting certain targets. New facilities using cleaner fuels and
technologies will have a grace period of three years. In order to facilitate
the companies' compliance of the Action Plan's requirements, while at the same
time allowing them to be cost-effective, innovative and adopt cleaner
technologies, certain options are provided. These are: (i) in-house
reductions; (ii) contributions to technology funds; (iii) trading of emissions
with below-target emission companies; (iv) offsets; and (v) access to Kyoto's
Clean Development Mechanism.
    On March 8, 2007, the Alberta Government introduced Bill 3, the Climate
Change and Emissions Management Amendment Act, which intends to reduce
greenhouse gas emission intensity from large industries. Bill 3 states that
facilities emitting more than 100,000 tonnes of greenhouse gases a year must
reduce their emissions intensity by 12% starting July 1, 2007; if such
reduction is not initially possible the companies owning the large emitting
facilities will be required to pay $15 per tonne for every tonne above the 12%
target. These payments will be deposited into an Alberta-based technology fund
that will be used to develop infrastructure to reduce emissions or to support
research into innovative climate change solutions. As an alternate option,
large emitters can invest in projects outside of their operations that reduce
or offset emissions on their behalf, provided that these projects are based in
Alberta. Prior to investing, the offset reductions, offered by a prospective
operation, must be verified by a third party to ensure that the emission
reductions are real.
    Given the evolving nature of the debate related to climate change and the
control of greenhouse gases and resulting requirements, it is not possible to
predict the impact of those requirements on Diamond Tree and its operations
and financial condition.

    Non-GAAP financial measures:

    The following table reconciles the non-GAAP financial measures "funds
flow from continuing operations", "funds flow from operations" and "field
netback" to "net earnings from continuing operations", the most comparable
measure calculated in accordance with GAAP:

    
    -------------------------------------------------------------------------
    ($000's)                        Q2/2007    Q1/2007    Q4/2006    Q3/2006
    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations             (135)      (557)       185      2,549
    Add back items not involving
     cash:
      Depletion, amortization
       and Accretion                  4,312      5,199      4,100      3,289
      Goodwill impairment                 -          -        246          -
      Unrealized loss (gain)              -          -        (24)        (2)
      Future income taxes              (222)      (271)    (2,134)       410
      Stock based compensation           83         83        785        409
      Abandonment costs                 (43)         -          -          -
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       3,995      4,454      3,158      6,655
    Funds flow from discontinued
     operations                           -          -          -          -
    -------------------------------------------------------------------------
    Funds flow from operations        3,995      4,454      3,158      6,655
    Add back (deduct) items not
     directly related to field
     operations:
      Other income                        -          -          -     (5,000)
      Discontinued operations
       cash flow                          -          -          -          -
      General and administrative
       expense(1)                       697        697        659      1,145
      Loss on disposition of
       investments                        -          -         45          4
      Interest                          642        491        448        408
      Current taxes                       -          -        (11)         -
      Abandonment costs                  43          -          -          -
    -------------------------------------------------------------------------
    Field netback                     5,377      5,642      4,299      3,212
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    ($000's)                        Q2/2006    Q1/2006    Q4/2005    Q3/2005
    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations              103      1,299      3,352      3,540
    Add back items not involving
     cash:
      Depletion, amortization
       and Accretion                  4,087      3,997      4,840      3,079
      Goodwill impairment                 -          -          -          -
      Unrealized loss (gain)             26          -          -          -
      Future income taxes               (44)       804      1,585      2,086
      Stock based compensation          363        341      1,306        287
      Abandonment costs                   -        (12)       (23)         -
    -------------------------------------------------------------------------
    Funds flow from continuing
     operations                       4,535      6,429     11,060      8,992
    Funds flow from discontinued
     operations                           -          -        332        (19)
    -------------------------------------------------------------------------
    Funds flow from operations        4,535      6,429     11,392      8,973
    Add back (deduct) items not
     directly related to field
     operations:
      Other income                        -          -         52         (1)
      Discontinued operations
       cash flow                          -          -       (332)        19
      General and administrative
       expense(1)                       542        499        909        427
      Loss on disposition of
       investments                        -          -          -          -
      Interest                          266         77         53        173
      Current taxes                     (61)        11        154          -
      Abandonment costs                   -         12         23          -
    -------------------------------------------------------------------------
    Field netback                     5,282      7,028     12,250      9,592
    -------------------------------------------------------------------------
    (1) Figures are adjusted for stock based compensation expenses for
        Phantom Stock Options.
    

    Disclosure Controls and Policies:

    Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated, recorded,
processed, summarized and communicated to the Company's management as
appropriate to allow timely decisions regarding required disclosure. The
Company's Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of the end of the period covered by this interim
filing, that the Company's disclosure controls and procedures as of the end of
such period are effective to provide reasonable assurance that material
information related to the Company is made known to them by others within the
entity. It should be noted that while the Company's Chief Executive Officer
and Chief Financial Officer believe that the Company's disclosure controls and
procedures provide a reasonable level of assurance that they are effective,
they do not expect that the disclosure controls and procedures will prevent
all errors and fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In reaching a reasonable level of
assurance, management necessarily is required to apply its judgement in
evaluating the cost-benefit relationship of possible controls and procedures.

    Internal Controls over Financial Reporting:

    The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls that require
commenting on in the MD&A.
    During the three months and six months ended June 30, 2007, there have
been no changes to Diamond Tree's internal controls over financial reporting
that have, or are reasonably likely to, materially affect the internal
controls over financial reporting.

    
    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
    For the three and six months ended June 30, 2007 and 2006

    DIAMOND TREE ENERGY LTD.
    Consolidated Interim Balance Sheets

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


                                                     ------------------------
    (unaudited)                                         June 30, December 31,
                                                           2007         2006
                                                         (000's)      (000's)
    -------------------------------------------------------------------------
    Assets

    Current assets:
      Accounts receivable                             $   3,685    $   5,063
      Prepaid expenses                                    1,135          242
    -------------------------------------------------------------------------
                                                          4,821        5,305

    Property and equipment (note 3)                     113,649      106,198

    -------------------------------------------------------------------------
                                                      $ 118,470    $ 111,503
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities:
      Accounts payable and accrued liabilities        $   7,899    $   9,718
      Bank loans (note 4)                                31,372       22,113
      Current portion of capital lease (note 5)             782          511
    -------------------------------------------------------------------------
                                                         40,053       32,342

    Capital lease (note 5)                                  543        1,076
    Asset retirement obligation (note 6)                  3,843        3,461
    Future income taxes                                  13,181       10,324
    -------------------------------------------------------------------------

    Total liabilities                                    57,620       47,203

    Shareholders' equity:
      Share capital (note 8)                             41,391       44,244
      Share purchase loan                                  (600)        (650)
      Contributed surplus (note 9)                        4,262        4,217
      Retained earnings                                  15,797       16,489
    -------------------------------------------------------------------------
                                                         60,850       64,300
    Commitments and contingencies (note 10)
    Subsequent event (note 12)
    -------------------------------------------------------------------------
                                                      $ 118,470    $ 111,503
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the consolidated interim financial statements

    Approved by the Board:

    (signed) "Don D. Copeland"            (signed) "Howard Dixon"
    Don D. Copeland                       Howard Dixon
    Director                              Director



    DIAMOND TREE ENERGY LTD.
    Consolidated Interim Statements of Income and
    Retained Earnings and Comprehensive Income

    -------------------------------------------------------------------------
    (unaudited)                 Three        Three          Six          Six
                               Months       Months       Months       Months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2007         2006         2007         2006
                               (000's)      (000's)      (000's)      (000's)
    -------------------------------------------------------------------------
    Revenue:
      Petroleum and natural
       gas sales            $   8,924    $   8,343    $  19,242    $  18,399
      Royalties, net of
       Alberta royalty
       credits                 (1,604)      (1,672)      (4,296)      (3,884)
      Other                        20           35           34          118
    -------------------------------------------------------------------------
                                7,340        6,706       14,980       14,633
    -------------------------------------------------------------------------

    Expenses:
      Operating                 1,963        1,420        3,961        2,319
      General and
       administrative             697          542        1,393        1,067
      Interest on bank loans      467          249          824          307
      Interest on capital
       lease                       27           17           57           35
      Interest - other            148            -          253            -
      Loss on disposition
       of investments               -            4            -            4
      Unrealized loss on
       investments                  -           26            -           26
      Stock based compensation
       (note 9)                    83          363          166          679
      Depletion, amortization
       and accretion            4,312        4,087        9,511        8,084
    -------------------------------------------------------------------------
                                7,697        6,708       16,165       12,521
    -------------------------------------------------------------------------
    Earnings (loss) before
     income taxes                (357)          (2)      (1,185)       2,112

    Income tax expense
     (recovery) (note 7):
      Current                       -          (61)           -          (50)
      Future                     (222)         (44)        (493)         760
    -------------------------------------------------------------------------
                                 (222)        (105)        (493)         710

    -------------------------------------------------------------------------
    Net earnings (loss) and
     comprehensive income
     (loss)                      (135)         103         (692)       1,401

    Retained earnings,
     beginning of period       15,932       13,652       16,489       12,353

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Retained earnings,
     end of period          $  15,797    $  13,754    $  15,797    $  13,754
    -------------------------------------------------------------------------

    Net earnings (loss)
     per share
      -basic                   ($0.01)       $0.00       ($0.03)       $0.06
      -diluted                 ($0.01)       $0.00       ($0.03)       $0.06


    Weighted average shares
     outstanding (note 8)
      Basic                    24,988       22,410       24,958       22,362
      Diluted                  26,245       25,043       26,225       25,100

    See accompanying notes to the consolidated interim financial statements


    Diamond Tree ENERGY Ltd.
    Consolidated Interim Statements of Cash Flows

    -------------------------------------------------------------------------
    (unaudited)                 Three        Three          Six          Six
                               Months       Months       Months       Months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2007         2006         2007         2006
                               (000's)      (000's)      (000's)      (000's)
    -------------------------------------------------------------------------
    Cash provided by
     (used in):

    Operating:
      Net earnings (loss)   $    (135)   $     103    $    (692)   $   1,401
      Items not involving
       cash:
        Depletion,
         amortization and
         accretion              4,312        4,087        9,511        8,084
        Future income taxes
         (recovery)              (222)         (44)        (493)         760
      Unrealized & realized
       loss on investments          -           30            -           30
      Stock based
       compensation                83          363          166          704
      Abandonments incurred
       during the period          (43)           -          (43)         (12)
    -------------------------------------------------------------------------
                                3,995        4,539        8,449       10,967

      Change in non-cash
       operating working
       capital - continuing
       operations (note 11)      (360)        (677)         (28)      (1,266)
      Change in non-cash
       operating working
       capital - discontinued
       operations                   -            -            -          423
    -------------------------------------------------------------------------
                                3,635        3,861        8,421       10,124
    -------------------------------------------------------------------------

    Investing:
      Exploration and
       development of
       properties              (4,430)     (11,038)     (16,537)     (32,886)
      Change in non-cash
       investing working
       capital - continuing
       operations (note 11)    (2,872)      (6,949)      (1,305)        (593)
    -------------------------------------------------------------------------
                               (7,302)     (17,987)     (17,842)     (33,479)
    -------------------------------------------------------------------------

    Financing:
      Issuance of common
       shares                     375          107          375          314
      Collection of share
       purchase loan               50            -           50            -
      Capital lease principal
       payments                  (121)         (65)        (262)        (131)
      Bank loan                 3,363       14,084        9,258       22,622
    -------------------------------------------------------------------------
                                3,667       14,126        9,421       22,805
    -------------------------------------------------------------------------

    Change in cash                  -            -            -         (550)

    Cash, beginning of
     period                         -            -            -          550
    -------------------------------------------------------------------------
    Cash, end of period     $       -    $       -    $       -    $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the consolidated interim financial statements

    -------------------------------------------------------------------------
    1.  Formation of Diamond Tree Energy Ltd.
    -------------------------------------------------------------------------

        Diamond Tree Energy Ltd. (the "Company") was formed on December 31,
        2004 as a result of the reverse takeover by Diamond Tree Resources
        Limited ("DTRL") of Wise Wood Corporation ("Wise Wood"). For
        accounting purposes, DTRL was deemed to have acquired Wise Wood and
        subsequent to the reverse takeover, Wise Wood changed its name to
        Diamond Tree Energy Ltd. DTRL was a private company incorporated in
        Alberta on April 9, 2001 and in the business of oil and gas
        exploration and development. Wise Wood was a TSX Venture Exchange
        listed public company in the oil field services business. In May
        2005, the Company sold its remaining oil field service assets. On
        January 1, 2007 Diamond Tree Energy Ltd. amalgamated with DTRL.

    -------------------------------------------------------------------------
    2.  Significant Accounting Policies
    -------------------------------------------------------------------------

        The unaudited interim consolidated financial statements include the
        accounts of the Company and its subsidiaries and are presented in
        accordance with Canadian generally accepted accounting principles.
        The preparation of financial statements in accordance with Canadian
        generally accepted accounting principles requires management to make
        estimates and assumptions that affect the amounts reported in the
        financial statements and accompanying notes. Actual results could
        differ from those estimates. The financial statements have, in
        management's opinion, been properly prepared using careful judgment
        with reasonable limits of materiality and should be read in
        conjunction with the annual audited consolidated financial statements
        and notes thereto for the year ended December 31, 2006 as filed on
        SEDAR at www.sedar.com. Except as noted below, these financial
        statements have been prepared following the same accounting policies
        and methods of computation as the financial statements for the year
        ended December 31, 2006. The disclosures provided below are
        incremental to those included with the year end financial statements.

        Changes in Accounting Policies and Practices

        As disclosed in the December 31, 2006 annual audited consolidated
        financial statements, on January 1, 2007 the Company adopted the
        Canadian Institute of Chartered Accountants ("CICA") Handbook Section
        1530 "Comprehensive Income", Section 3251 "Equity", Section 3855
        "Financial Instruments - Recognition and Measurement", and Section
        3865 "Hedges", retrospectively with no restatement of prior periods.

        The Company has evaluated the impact of these new standards and
        determined that the adoption of these standards has had no material
        impact on the Company's net earnings or cash flows. The other effects
        of the implementation of the new standards are discussed below.

        Comprehensive Income

        The new standards introduce comprehensive income, which consists of
        net earnings and other comprehensive income ("OCI"). Because the
        Company does not have any OCI, the Company's interim consolidated
        financial statements do not include a Statement of Comprehensive
        Income which would otherwise describe the components of comprehensive
        income. Accordingly, since there are no cumulative changes in OCI to
        be included in accumulated other comprehensive income ("AOCI"), the
        Company has not presented AOCI as a new category within shareholders'
        equity in the interim consolidated balance sheet and has not included
        a Statement of Accumulated Other Comprehensive Income, which would
        otherwise provide the continuity of the AOCI balance.

        Financial Instruments

        The financial instruments standard establishes the recognition and
        measurement criteria for financial assets, financial liabilities and
        derivatives. All financial instruments are required to be measured at
        fair value on initial recognition of the instrument, except for
        certain related party transactions. Measurements in subsequent
        periods depend on whether the financial instrument has been
        classified as "held-for-trading", "available-for-sale", "held-to-
        maturity", "loans and receivables", or "other financial liabilities"
        as defined by the standard.

        Financial assets and financial liabilities "held-for-trading" are
        measured at fair value with changes in those fair values recognized
        in net earnings. Financial assets "available-for-sale" are measured
        at fair value, with changes in those fair values recognized in OCI.
        Financial assets "held-to-maturity", "loans and receivables" and
        "other financial liabilities" are measured at amortized cost using
        the effective interest method of amortization. The methods used by
        the Company in determining fair value of financial instruments are
        unchanged as a result of implementing the new standard.

        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 and
        the share purchase loan are designated as "loans and receivables".
        Accounts payable and accrued liabilities, bank loans and capital
        leases are designated as "other liabilities".

        Risk management assets and liabilities are derivative financial
        instruments classified as "held-for-trading" unless designated for
        hedge accounting. The Company has no commodity contracts or fixed-
        price physical contracts in place at this time.

        Accounting Changes

        Beginning January 1, 2007 the Company adopted Section 1506
        "Accounting Changes" the only impact of which is to provide
        disclosure of when an entity has not applied a new source of GAAP
        that has been issued but is not yet effective.

        As of July 1, 2007, the Company will be required to adopt CICA
        Handbook Section 3031 "Inventory". This new standard is effective for
        interim and annual financial statements relating to fiscal years
        beginning on or after July 1, 2007. This new standard will have no
        impact on the Company's consolidated financial statements.

        As of January 1, 2008, the Company will be required to adopt the
        following CICA Handbook Sections: Section 3862 "Financial Instruments
        Disclosures", Section 3863 "Financial Instruments Presentation",
        Section 1535 "Capital Disclosures" and Section 1400 "General
        Standards of Financial Statement Presentation. The Company is
        assessing the impact of these new standards on its consolidated
        financial statements and anticipates the main impact will be in terms
        of additional disclosures required.

    -------------------------------------------------------------------------
    3.  Property and Equipment
    -------------------------------------------------------------------------

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
                                                         (000's)      (000's)
        ---------------------------------------------------------------------
        Petroleum and natural gas properties          $ 151,387    $ 134,855
        Equipment under capital lease                     2,049        2,049
        Asset retirement cost                             3,343        3,121
        Other                                               182          178
        ---------------------------------------------------------------------
                                                        156,961      140,203
        Accumulated depletion and amortization          (43,312)     (34,005)
        ---------------------------------------------------------------------
                                                      $ 113,649    $ 106,198
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three and six months ended June 30, 2007, $196,000 and
        $392,000 (three months June 30, 2006 - $171,000, six months June 30,
        2006 - $356,000) of general and administrative costs related to
        exploration and development activity were capitalized.

        The net book value of equipment under capital lease is $1,547,000 net
        of accumulated amortization of $501,600 (December 31, 2006 -
        $1,686,000 net of accumulated amortization of $363,000).

        At June 30, 2007, the depletion calculation excluded unproved
        properties of $12,270,000 (December 31, 2006 - $11,430,000) and
        salvage values of $2,286,000 (December 31, 2006 - $2,137,000). Future
        development costs of proved undeveloped reserves of $6,541,000
        (December 31, 2006 - $7,640,000) were included in the depletion and
        amortization calculations.

    -------------------------------------------------------------------------
    4.  Bank Loans
    -------------------------------------------------------------------------

        At June 30, 2007 the Company had available a $35 million
        (December 31, 2006 - $35 million) revolving operating loan facility
        with a Canadian chartered bank. At June 30, 2007 drawings against
        this loan were $31 million (December 31, 2006 - $22 million). The
        loan bears interest at the bank's prime rate plus 0.25% with an
        annual review date of April 30, 2008. Security for this facility is
        by way of a general security agreement providing a security interest
        over all present and after acquired personal property and a floating
        charge on all lands. The Company is in compliance with the covenants
        of this credit facility.

    -------------------------------------------------------------------------
    5.  Capital Lease
    -------------------------------------------------------------------------

        In 2005 and 2006 the Company entered into two lease obligations for
        field compression facilities that are being treated as capital leases
        for accounting purposes. Details of the leases are as follows:

        On March 23, 2005, the Company entered into a lease obligation with
        an interest rate implicit in the lease of 7.55% per annum and a
        monthly lease instalment of $27,687. Security for the lease is the
        equipment itself and the term of the lease is three years, with an
        April 2008 expiry.

        On December 15, 2006, the Company entered into a lease obligation
        with an interest rate implicit in the lease of 7.90% per annum and a
        monthly lease instalment of $21,766. Security for the lease is the
        equipment itself and the term of the lease is three years, with a
        December 2009 expiry.

        The following is a reconciliation of combined annual repayments:

        ---------------------------------------------------------------------
                                            Future    Executory
                                           Minimum        Costs       Annual
                                             Lease  and Imputed    principal
                                          Payments     Interest   repayments
                                            (000's)      (000's)      (000's)
        ---------------------------------------------------------------------
        2007                                   297          (47)         250
        2008                                   697          (53)         644
        2009                                   457          (26)         431
        ---------------------------------------------------------------------
        Total                                1,451         (126)       1,325
        Less current portion                  (863)          81         (782)
        ---------------------------------------------------------------------
        Long term capital lease portion  $     588    $     (45)   $     543
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    -------------------------------------------------------------------------
    6.  Asset Retirement Obligation ("ARO")
    -------------------------------------------------------------------------

        Total future asset retirement obligations were estimated by
        management based on the Company's working interest in its wells and
        facilities, estimated costs to remediate, reclaim and abandon the
        wells and facilities, before deduction of salvage values, and the
        estimated timing of the costs to be incurred in future periods.  The
        Company has estimated its total asset retirement obligations to be
        approximately $3.8 million at June 30, 2007 (December 31, 2006 -
        $3.5 million), based on a total future liability of $9.2 million
        (December 31, 2006 - $8.6 million). It is expected that $4.1 million
        of the total future liability will be incurred before 2019 and the
        remaining $5.1 million by 2033. The following table reconciles change
        in the Company's total asset retirement obligation:

        ---------------------------------------------------------------------
                                                          As at        As at
                                                        June 30, December 31,
                                                           2007         2006
                                                         (000's)      (000's)
        ---------------------------------------------------------------------
        ARO, beginning of period                      $   3,461    $   2,394
        Increase in liabilities                             222          818
        Settlement of liabilities                           (43)         (12)
        Disposition of liabilities                            -            -
        Accretion expense                                   203          261
        ---------------------------------------------------------------------
        ARO, end of period                            $   3,843    $   3,461
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    -------------------------------------------------------------------------
    7.  Income Taxes
    -------------------------------------------------------------------------

        The provision for income taxes in the consolidated financial
        statements differs from the result which would have been obtained by
        applying the combined federal and provincial tax rate of 32.1%
        (June 30, 2006 - 34.5%) to the Company's earnings before income
        taxes. The difference results from the following items:

    -------------------------------------------------------------------------
                                Three        Three          Six          Six
                               Months       Months       Months       Months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2007         2006         2007         2006
                               (000's)      (000's)      (000's)      (000's)
    -------------------------------------------------------------------------
    Expected income taxes
     (recovery) on earnings
     (loss) before income
     taxes                  $    (116)   $      (1)   $    (381)   $     728
    Difference between
     resource allowance
     and non-deductible
     resource items                 -          (22)           -          (37)
    Alberta Royalty Credits         -          (71)           -         (121)
    Other - change in rates
     & finalization of tax
     returns                     (138)         (91)        (172)         (67)
    Non-deductible expenses,
     including stock based
     compensation                  32          141           60          257
    -------------------------------------------------------------------------
    Future tax expense
     (recovery)                  (222)         (44)        (493)         760
    Current tax expense
     (recovery)                     -          (61)           -          (50)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total                   $    (222)   $    (105)   $    (493)   $     710
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

        Current tax recoveries at June 30, 2006 $61,000 and $50,000 for the
        three and six months ended respectively were due to the Federal Large
        Corporation's tax being repealed and the finalization of 2005 year
        end tax returns.

    -------------------------------------------------------------------------
    8.  Share Capital
    -------------------------------------------------------------------------

        (a)  Authorized:
             -----------

             Unlimited number of common voting shares.

             Unlimited number of preferred shares issuable in series, with
             rights and privileges to be determined upon issuance.

        (b)  Common shares issued:
             ---------------------

             ----------------------------------------------------------------
                                                      Number of
                                                         Shares       Amount
                                                         (000's)      (000's)
             ----------------------------------------------------------------
             Balance, December 31, 2005                  22,495    $  32,092
             Issued for cash upon exercise of options       384          692
             Issued for cash upon exercise of warrants      108          269
             Issued for cash upon private placement       2,200       11,550
             Share issue costs (net of $212,000 future
              tax benefit)                                              (531)
             Contributed surplus drawdown re: option
              exercises                                                  172
             ----------------------------------------------------------------
             Balance, December 31, 2006                  25,187    $  44,244
             Tax effect of flow-through shares renounced              (3,349)
             Issued for cash upon exercise of warrants      150          375
             Contributed surplus drawdown re: option
              exercises                                                  121
             ----------------------------------------------------------------
             Balance, June 30, 2007                      25,337    $  41,391
             ----------------------------------------------------------------
             ----------------------------------------------------------------

        (c)  Stock options:
             --------------

             The Company has a stock option program whereby directors,
             officers, employees and consultants are eligible to receive
             options.  Exercise prices range from $2.50 to $6.00 per share
             and expiry dates range from December 31, 2009 to December 14,
             2011. For options granted, one third of the options vest at the
             time of grant, one third on the first anniversary and the
             remaining options vest on the second anniversary.


             ----------------------------------------------------------------
                                                                    Weighted
                                                                     average
                                                      Number of     exercise
                                                        options        price
                                                         (000's)          ($)
             ----------------------------------------------------------------
             Exercisable, December 31, 2006               1,861         3.42
             ----------------------------------------------------------------
             Outstanding, December 31, 2006               2,421         3.81
             Forfeited                                      (27)        5.46
             ----------------------------------------------------------------
             Options outstanding, June 30, 2007           2,394         3.79
             ----------------------------------------------------------------
             Exercisable, June 30, 2007                   1,859         3.42
             ----------------------------------------------------------------
             Weighted average remaining contractual life    3.0
             ----------------------------------------------------------------
             ----------------------------------------------------------------

             For the three and six months ended June 30, 2007, compensation
             expense of $83,000 and $166,000 respectively (three months
             June 30, 2006 - $121,000, six months June 30, 2006 - $220,000)
             has been recorded for the stock options. No stock options were
             granted for the six months ended June 30, 2007.

        (d)  Performance Warrants:
             ---------------------

             At June 30, 2007, there were 2.25 million (December 31, 2006 -
             2.4 million) performance warrants outstanding.  All 2.25 million
             performance warrants are fully vested and exercisable. For the
             six months ended June 30, 2007, 150,000 warrants were exercised.
             Compensation expense for the warrants was fully recognized in
             2006. For the three and six months ended June 30, 2006, $238,000
             and $477,000 respectively of compensation expense has been
             recorded for the performance warrants.

        (e)  Phantom Stock Options:
             ----------------------

             During the second quarter of 2007, the Company granted
             additional phantom stock option ("PSO") awards to certain
             employees, entitling them to a cash payment, for each vested
             PSO, equal to the excess of the 10 day volume weighted average
             trading price of the common shares at the time of exercise over
             the exercise price of the PSO. The PSOs expire after a five year
             term and become vested and exercisable as to one third at the
             time of grant, one third on the first anniversary and the
             remainder on the second anniversary. Concurrent with this grant,
             all PSO agreements previously outstanding were cancelled.

             The following table summarizes the information about the
             outstanding PSOs:

             ----------------------------------------------------------------
                                                                    Weighted
                                                      Number of      average
                                                           PSOs     exercise
                                                         (000's)    price ($)
             ----------------------------------------------------------------
             PSOs outstanding, December 31, 2006             80         4.50
             Granted                                        235         3.50
             Exercised                                        -            -
             Cancelled                                      (80)        4.50
             ----------------------------------------------------------------
             PSOs outstanding, June 30, 2007                235         3.50
             ----------------------------------------------------------------
             Exercisable at June 30, 2007                    78         3.50
             ----------------------------------------------------------------
             Weighted average remaining
              contractual life                   4.8 years
             ----------------------------------------------------------------

             Included in accounts payable and accrued liabilities (with an
             offset to stock based compensation expense) is $nil relating to
             the PSOs as the Company's 10 day volume weighted average trading
             price was below the exercise price as at June 30, 2007.

        (f)  Outstanding stock options and performance warrants are the only
             instruments that are currently dilutive to earnings per share.
             In computing diluted per share amounts for the six months ended
             June 30, 2007, 1.3 million shares (June 30, 2006 - 2.7 million )
             were added to the basic weighted average shares outstanding for
             the dilutive effect of stock options, performance warrants and
             the share purchase loans. At June 30, 2007, 1.1 million options
             to purchase common shares (June 30, 2006 - nil) were not
             included in the computation because they were out of the money.
             No adjustments were required to the reported earnings in
             computing diluted per share amounts.

    -------------------------------------------------------------------------
    9.  Contributed Surplus
    -------------------------------------------------------------------------

        The following schedule shows the continuity of contributed surplus:

        --------------------------------------------------------
                                                         (000's)
        --------------------------------------------------------
        Balance, December 31, 2006                    $   4,217
        Stock option expense                                 83
        --------------------------------------------------------
        Balance, March 31, 2007                           4,300
        Exercise of stock options and warrants             (121)
        Stock option expense                                 83
        --------------------------------------------------------
        Balance, June 30, 2007                        $   4,262
        --------------------------------------------------------
        --------------------------------------------------------

    -------------------------------------------------------------------------
    10. Commitments and Contingencies
    -------------------------------------------------------------------------

        The Company is committed to lease office premises, which expires on
        May 31, 2008. Future rent obligations for the remainder of 2007 and
        2008 are $199,000 and $166,000 respectively.

        The Company enters into equipment rental agreements with certain
        equipment manufacturers on an as required basis. The Company is
        usually committed to a minimum rental period of three months. The
        minimum guaranteed rental payments at June 30, 2007 are approximately
        $11,000 (December 31, 2006 - $26,194).

        On December 12, 2005, the Company announced the signing of a farm-in
        agreement with a four well commitment. Estimated committed drilling
        costs relating to this farm-in over the next twelve months total
        $1.8 million.

        On December 7, 2006, as a result of completing a private placement
        financing, the Company is required to spend $11.5 million on eligible
        "flow-through" expenditures in 2007. As of June 30, 2007 the Company
        has spent $3.4 million on eligible expenditures. Of the $8.1 million
        of eligible expenditures remaining, $1.8 million relating to
        committed farm-in costs is expected to qualify as eligible
        expenditures.

    -------------------------------------------------------------------------
    11. Supplemental Cash Flow Disclosure
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                Three        Three          Six          Six
                               Months       Months       Months       Months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2007         2006         2007         2006
                               (000's)      (000's)      (000's)      (000's)
    -------------------------------------------------------------------------
    Accounts receivable     $   1,986    $   2,217    $   1,378    $   2,556
    Prepaid expenses             (550)        (39)         (893)         (25)
    Short term investments          -          36             -         (387)
    Income taxes payable            -        (154)            -         (143)
    Accounts payable and
     accrued liabilities       (4,668)     (9,686)       (1,818)      (3,860)
    -------------------------------------------------------------------------
                            $  (3,232)   $ (7,626)    $  (1,333)   $  (1,859)
    -------------------------------------------------------------------------

    Change in non-cash
     working capital from
     continuing operations
    Operating               $    (360)   $   (677)    $     (28)   $  (1,266)
    Investing                  (2,872)     (6,949)       (1,305)        (593)
    -------------------------------------------------------------------------
                            $  (3,232)   $ (7,626)    $  (1,333)   $  (1,859)
    -------------------------------------------------------------------------
    Continuing operations
    -------------------------------------------------------------------------
      Cash interest paid    $     642    $    266     $   1,134    $     342
      Cash taxes paid       $       -    $    104     $       -    $     104
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    12. Subsequent Events
    -------------------------------------------------------------------------

        The Company has entered into an Arrangement Agreement (the
        "Agreement") with Crocotta Energy Inc. ("Crocotta") and a newly
        formed wholly-owned subsidiary of the Company ("Newco"). The
        Agreement provides for the transfer of certain oil and gas properties
        of the Company to Newco and a subsequent business combination between
        the Company and Crocotta.

        The Agreement contemplates that the transfer of assets and business
        combination will be undertaken pursuant to a plan of arrangement,
        implemented in accordance with the Business Corporations Act
        (Alberta) (the "Arrangement"). The Company's management and directors
        have signed voting agreements in which they have agreed to support
        the Arrangement.

        The Agreement provides that, upon implementation of the Arrangement,
        each shareholder of the Company will receive 0.9527 of a Crocotta
        share and 1.0 Newco share in exchange for each Company share owned as
        of the effective date of the Arrangement. Crocotta currently has
        50,536,107 shares issued and outstanding. As a condition of the
        Agreement, Crocotta is required to raise not less than $10 million
        through the issuance of shares at not less than $1.35 per share.
        Completion of the transactions contemplated by the Agreement is
        subject to the receipt of all necessary regulatory, securityholder
        and Court approvals as well as certain other customary due diligence
        processes. The Agreement also contains conditions relating to the
        listing of Crocotta shares and Newco shares on a stock exchange in
        Canada. At the current time, the shares of Crocotta are not listed on
        any stock exchange.

        Under the terms of the Agreement, the Company is required to pay a
        $2.7 million termination fee to Crocotta in certain circumstances,
        including if the Company enters into an agreement with another person
        involving a takeover of the Company or if the board of directors of
        Diamond Tree recommends that the shareholders of the Company deposit
        or vote their shares in support of another transaction involving the
        Company. Crocotta is also required to pay Diamond Tree a $2.7 million
        termination fee in certain circumstances, including a material breach
        of any Crocotta covenant set out in the Agreement or if Crocotta
        enters into an agreement with a third party involving a takeover of
        Crocotta.
    

    Forward-Looking Statements

    Certain information set out in this News Release constitutes
forward-looking information. Forward-looking statements are often, but not
always, identified by the use of words such as "seek", "anticipate", "plan",
"continue", "estimate", "expect", "may", "will", "intend", "could", "might",
"should", "believe" and similar expressions. Forward-looking statements are
based upon the opinions and expectations of management of the Company, as at
the effective date of such statements and, in certain cases, information
provided or disseminated by third parties (including Crocotta). Although the
Company believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, and that information
obtained from third party sources is reliable, it can give no assurance that
those expectations will prove to have been correct. Forward-looking statements
are subject to certain risks and uncertainties (known and unknown) that could
cause actual outcomes to differ materially from those anticipated or implied
by such forward-looking statements. These factors include, but are not limited
to such things as volatility of oil and gas prices, commodity supply and
demand, fluctuations in currency and interest rates, inherent risks associated
with the exploration and development of oil and gas properties, ultimate
recoverability of reserves, timing, results and costs of drilling activities
and pipeline construction, availability of financing, new regulations and
legislation, reinstatement or rescission of the Maximum Rate Limitation and
availability of capital. Accordingly, readers should not place undue reliance
upon the forward-looking statements contained in this News Release and such
forward-looking statements should not be interpreted or regarded as guarantees
of future outcomes. Forward-looking information respecting the structure and
effect of the Arrangement is based upon the terms of the Arrangement Agreement
and the transactions contemplated hereby. Forward-looking information
concerning the attributes of Crocotta, Diamond Tree and Newco following
completion of the Arrangement is based upon the existing attributes of each of
Crocotta, Diamond Tree and Newco (including financial and operating
attributes), the opinions of management and the directors of Diamond Tree and
Crocotta concerning perceived synergies associated with the Arrangement.
Forward-looking information concerning the timing of the Interim Order and
certain other steps in the Arrangement is based upon the terms of the
Arrangement Agreement and advice received from counsel to Diamond Tree
relating to timing expectations. Forward-looking information concerning the
consideration to be received by Diamond Tree shareholders as a result of the
Arrangement is based upon the terms of the Arrangement Agreement.
Forward-looking information relating to certain members of the boards of
directors of Crocotta and Newco following completion of the Arrangement is
based upon the terms of the Arrangement Agreement and discussions between
Crocotta and Diamond Tree. Forward-looking information concerning the
perceived benefits of the business combination transaction is based upon the
financial and operating attributes of both Diamond Tree and Crocotta as at the
date hereof, anticipated operating and financial results from the date hereof
to the date of closing of the transactions contemplated by the Arrangement,
the views of management and the Board of Directors of Diamond Tree respecting
the synergies associated with the Arrangement, current and anticipated market
conditions. Forward-looking information respecting the effect of softening
service costs on capital efficiency for the balance of 2007 is based upon the
views of management of Diamond Tree and Crocotta. The forward-looking
statements of the Company contained in this News Release are expressly
qualified, in their entirety, by this cautionary statement. Various risks to
which the Company is exposed in the conduct of its business (including
exploration activities) are described in detail in the Company's Annual
Information Form for the year ended December 31, 2006, which was filed on
SEDAR on March 15, 2007 and is available under the Company's profile at
www.SEDAR.com. Subject to applicable securities laws, the Company does not
undertake any obligation to publicly revise the forward-looking statements
included in this News Release to reflect subsequent events or circumstances.

    BOE Conversions

    A barrel of oil equivalent (boe), derived by converting gas to oil in the
ratio of six thousand cubic feet of gas to one barrel of oil, may be
misleading, particularly if used in isolation. A boe conversion is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.

    Non-GAAP Measures

    References are made to "funds flow from operations" and "field netback"
which are non-GAAP financial measures that do not have any standardized
meaning prescribed by Canadian Generally Accepted Accounting Principles
("GAAP") and are therefore unlikely to be comparable to similar measures
presented by other issuers. "Funds flow from operations" and "field netback"
provide useful information to investors and management since they are an
indicator of the Company's ability to fund future capital expenditures, which
drives growth. Funds flow from operations is calculated before changes in
non-cash working capital. A reconciliation of funds flow from operations and
field netback to net earnings, the most comparable measure calculated in
accordance with GAAP, is contained in the Company's interim MD&A. The
reporting and the measurement currency is the Canadian dollar unless otherwise
indicated.

    Not for distribution into the United States of America or to U.S. news
wire services or for dissemination in the United States of America. The common
shares of Diamond Tree have not been and will not be registered under the
United States Securities Act of 1933, as amended, and may not be offered and
sold in the United States absent registration or an applicable exemption from
registration requirements.






For further information:

For further information: DIAMOND TREE ENERGY LTD. 1200, 111 - 5th Avenue
SW, Calgary, Alberta, T2P 3T3, Phone: (403) 237-9175, www.diamondtree.ca;
Kelly J. Ogle, President, kogle@diamondtree.ca; Don D. Copeland, Chairman &
CEO, dcopeland@diamondtree.ca

Organization Profile

DIAMOND TREE ENERGY LTD.

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