Rally Energy Reports Record Revenue and Earnings for Second Quarter 2007



    "RAL" - TSX Exchange
    "RLE" - Frankfurt Stock Exchange
    www.rallyenergy.com

    CALGARY, Aug. 10 /CNW/ - Rally Energy (the "Corporation") is pleased to
announce the following operational and financial results for the period ended
June 30, 2007:

    
    HIGHLIGHTS

                              -----------------------------------------------
                                   Quarter ended          Six Months ended
                                      June 30                 June 30
                              -----------------------------------------------
                                2007    2006  Change    2007    2006  Change
                                ----    ----  ------    ----    ----  ------
    Production (boe/d)         5,909   4,575     29%   6,101   3,663     67%
    Average Price ($/boe)      47.98   47.09      2%   44.23   44.75    (1)%
    Revenue ($ million)         25.8    19.6     32%    48.8    29.7     64%
    Cash Flow ($ million)       10.9     8.4     30%    19.7    11.8     67%
    Net Earnings ($ million)     5.8     4.2     38%    10.4     5.1    104%
    Capital Expenditures
     ($ million)                20.4     7.1    187%    47.5    14.2    235%
                              -----------------------------------------------
    

    Rally Energy reported record earnings of $10.4 million ($0.10/share) for
the six months ended June 30, 2007, an increase of 104% from $5.1 million
($0.06/share) for the comparable 2006 period. Cash flow increased by 67% to
$19.7 million ($0.18/share) for the first six months of 2007 as compared to
$11.8 million ($0.13/share) for the first six months of 2006.
    Working capital at the end of the first quarter was $8.5 million with no
bank debt. An additional $12.1 million was held in drilling and facilities
inventory to be used for future capital expenditures in Egypt and Pakistan.

    EGYPT

    Average production during the second quarter was 5,900 boe/d. Eleven
wells were drilled during the same period and were completed as oil wells.
    Average production in July 2007 was 5,894 boe/d with approximately
1,000 boe/d from 12 thermal wells. Drilling of four new thermal wells and
construction of a third 2,500 boe/d central production facility in the Issaran
Field are currently underway.

    PAKISTAN

    Natural gas production from the Salsabil Field commenced on June 29, 2007
at a gross rate of 9.5 mmcf/d from one well and current production is
20 mmcf/d (6 mmcf/d, 1,000 boe/d net) from two wells.
    The Al-Baraka-1 exploration well commenced drilling on July 20, 2007 and
has run first intermediate casing at 358 meters. The well is expected to reach
its projected total depth of 2,200 meters by early September.

    CORPORATE

    Current corporate production is approximately 6,900 boepd.
    On July 24, 2007, the Corporation closed a transaction with an
independent public company to dispose of its remaining Canadian oil and gas
properties at Gold Creek for $1.5 million. The agreement has an effective date
of April 1, 2007.
    On August 1, 2007, the Corporation announced that it has entered into an
Arrangement Agreement whereby Logria Corporation ("Purchaser"), a subsidiary
of National Petroleum Company S.A.E. and an affiliate of Citadel Capital
Company, will acquire the Corporation in a transaction valued at approximately
$898 million. Under the terms of the Arrangement Agreement, the Purchaser will
acquire all of the issued and outstanding common shares of the Corporation at
a price of $7.30 per share in cash and all outstanding in-the-money options
for their in-the-money value pursuant to a plan of arrangement. The
Transaction will have to be approved by 66 2/3% of the votes cast by Rally's
security-holders at a special meeting to be held in mid-September. Closing is
subject to certain other conditions, including court approval.

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

    Based in Calgary, Alberta, Canada, Rally Energy is an oil and gas
exploration, development and production company. The Corporation's primary
area of operations is in Egypt, where it has a 100% operating interest in the
Issaran Oilfield, a significant heavy oil development opportunity with strong
growth potential. In Pakistan, the Corporation holds a 30% interest in the
Safed Koh Block, where it is participating in the development of a large
natural gas/condensate discovery.

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

                                  ADVISORY
    

    Except for statements of historical fact, all statements in this news
release - including, without limitation, statements regarding production
estimates, potential reserves and future plans and objectives of Rally - are
forward-looking statements that involve various risks and uncertainties. There
can be no assurance that such statements will prove to be accurate; actual
results and future events could differ materially from those anticipated in
such statements. Important factors that could cause actual results to differ
materially from anticipated results include risks and uncertainties most of
which are beyond Rally's control such as: risks relating to estimates of
reserves and recoveries; production rates and operating cost assumptions;
development risks and costs; the risk of commodity price and currency
fluctuations; general economic and industry conditions; political and
regulatory risks; environmental risks; stock market volatility; access to
sufficient capital from internal and external sources; and other risks and
uncertainties as disclosed under the heading "Risk Factors" and elsewhere in
Rally's documents filed from time-to-time with the Toronto Stock Exchange and
other regulatory authorities. The reader is cautioned that assumptions used in
the preparation of such information, while considered reasonable by Rally at
the time, may prove to be incorrect. The Corporation disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
    In conformity with Canadian Securities Administrators National Instrument
51-101, natural gas volumes have been converted to equivalent barrels of oil
("boe") using a conversion ratio of six thousand cubic feet ("mcf") to one
boe. This ratio is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead. Readers are cautioned that boe's may be misleading, particularly if
used in isolation.

    The TSX has neither approved nor disapproved of the contents of this news
    release.

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


                             RALLY ENERGY CORP.
                Management's Discussion and Analysis ("MD&A")
                  For the Three Months ended June 30, 2007
    

    This discussion and analysis outlines management's assessment of the
consolidated financial and operating results of Rally Energy Corp. ("Rally
Energy" or the "Corporation") and its subsidiaries, including its future
opportunities and risks, and should be read in conjunction with the audited
consolidated financial statements and MD&A for the year ended December 31,
2006. Additional information regarding the Corporation can be found at
www.sedar.com and www.rallyenergy.com.
    These financial statements and the accompanying interim consolidated
balance sheet as at June 30, 2007 and the interim consolidated statements of
operations and deficit and cash flows for the three month period then ended,
are the responsibility of the Corporation's management.
    The financial information contained herein has been prepared by
management and includes the selection of appropriate accounting principles,
judgments and estimates necessary to prepare these financial statements in
accordance with Canadian Generally Accepted Accounting Principles ("Canadian
GAAP"). Unless otherwise indicated, all dollar amounts in this report are in
thousands of Canadian dollars. The majority of the Corporation's production is
heavy oil (reported in barrels), however, the Corporation also uses the
"barrels of oil equivalent" ("BOE") reference in this report to reflect
natural gas sales. All BOE conversions are derived by converting gas to oil in
the ratio of six thousand cubic feet of gas to one barrel of oil, representing
the approximate energy equivalency. This MD&A is dated August 9, 2007.

    Non-GAAP Measures

    Certain measures in this MD&A do not have any standardized meaning as
prescribed by Canadian GAAP such as cash flow, cash flow per share, cash flow
from operations, and netback from operations. Therefore, they are considered
non-GAAP measures and may not be comparable to similar information presented
by other issuers. These measures have been described and presented in order to
provide shareholders and potential investors with additional information
regarding the Corporation's liquidity and its ability to generate funds to
finance its operations. Management's use of these measures is disclosed
further in this MD&A.

    Forward-Looking Statements

    This disclosure contains certain forward-looking statements that involve
substantial known and unknown risks and uncertainties, including the impact of
general economic conditions in all the jurisdictions in which the Corporation
operates, changes in industry conditions, changes in laws and regulations
including the adoption of new environmental laws, increased competition, the
lack of availability of qualified personnel or management, fluctuations in
foreign exchange or interest rates, stock market volatility and the
Corporation's ongoing ability to obtain financing for its operations. Rally
Energy's actual results, performance or achievements could differ materially
from those expressed in or implied by these forward-looking statements.
Accordingly, no assurance can be given that any of the events anticipated will
transpire or occur, or that benefits, including the amount of revenues or
proceeds, will be derived therefrom. These factors, many of which are outside
the control of the Corporation, are discussed further in the December 31, 2006
MD&A and in the 2006 Annual Information Form filed on April 30, 2007.

    
    Production, Revenue and Netback
    (thousands of dollars, unless otherwise stated)

                                                         2007
                                         ------------------------------------
                                           Second Quarter     First Quarter
                                           --------------     -------------
    Production:
      Oil (bbls/d)                              5,901             6,294
      Natural gas (mcfd)                           48                 -
      Total BOE (boe/d)                         5,909             6,294
                                                     $/boe             $/boe
                                                     -----             -----
    Gross revenue                         $25,798   $47.98  $23,037   $40.67
    Production entitlement
      - GPC (Egypt)                        (7,327)  (13.63)  (6,630)  (11.70)
    Overriding royalty (Egypt)               (471)   (0.87)    (416)   (0.74)
    Marketing fees                           (353)   (0.66)    (448)   (0.79)
    Royalties (Canada)                         (5)   (0.01)      (1)       -
    Royalties (Pakistan)                       (1)       -        -        -
    Operating expenses                     (4,971)   (9.25)  (5,062)   (8.94)
                                         ------------------------------------
    Netback from operations               $12,670   $23.56  $10,480   $18.50
                                         ------------------------------------
                                         ------------------------------------


                                                         2006
                                         ------------------------------------
                                           Fourth Quarter     Third Quarter
                                           --------------     -------------
    Production:
      Oil (bbls/d)                              5,289             5,658
      Natural gas (mcfd)                          258               348
      Total BOE (boe/d)                         5,332             5,716
                                                     $/boe             $/boe
                                                     -----             -----
    Gross revenue                         $19,420   $39.58  $25,708   $48.89
    Production entitlement
      - GPC (Egypt)                        (5,692)  (11.61)  (7,397)  (14.08)
    Overriding royalty (Egypt)                  -        -        -        -
    Marketing fees                           (247)   (0.50)    (257)   (0.49)
    Royalties (Canada)                        (35)   (0.07)    (108)   (0.21)
    Royalties (Pakistan)                        -        -        -        -
    Operating expenses                     (4,612)   (9.40)  (3,601)   (6.85)
                                         ------------------------------------
    Netback from operations                $8,834   $18.00  $14,345   $27.26
                                         ------------------------------------
                                         ------------------------------------



                                                         2006
                                         ------------------------------------
                                           Second Quarter     First Quarter
                                           --------------     -------------
    Production:
      Oil (bbls/d)                              4,509             2,676
      Natural gas (mcfd)                          396               388
      Total BOE (boe/d)                         4,575             2,741
                                                     $/boe             $/boe
                                                     -----             -----
    Gross revenue                         $19,605   $47.09  $10,061   $40.79
    Production entitlement
      - GPC (Egypt)                        (5,585)  (13.41)  (2,695)  (10.93)
    Overriding royalty (Egypt)             (1,061)   (2.55)    (611)   (2.48)
    Marketing fees                           (213)   (0.51)    (171)   (0.69)
    Royalties (Canada)                       (105)   (0.25)    (142)   (0.57)
    Operating expenses                     (2,898)   (6.96)  (2,122)   (8.60)
                                         ------------------------------------
    Netback from operations                $9,743   $23.41   $4,320   $17.52
                                         ------------------------------------
                                         ------------------------------------


                                                         2005
                                         ------------------------------------
                                           Fourth Quarter     Third Quarter
                                           --------------     -------------
    Production:
      Oil (bbls/d)                              2,656             2,558
      Natural gas (mcfd)                          462               330
      Total BOE (boe/d)                         2,733             2,613
                                                     $/boe             $/boe
                                                     -----             -----
    Gross revenue                         $10,019   $39.85  $10,698   $44.51
    Production entitlement
      - GPC (Egypt)                        (2,631)  (10.47)  (2,898)  (12.07)
    Overriding royalty (Egypt)               (255)   (1.02)    (629)   (2.62)
    Marketing fees                           (159)   (0.63)    (103)   (0.43)
    Royalties (Canada)                       (143)   (0.57)    (104)   (0.43)
    Operating expenses                     (2,098)   (8.35)  (1,672)   (6.96)
                                         ------------------------------------
    Netback from operations                $4,733   $18.81   $5,292   $22.00
                                         ------------------------------------
                                         ------------------------------------
    

    Gross revenue for the second quarter of 2007 was $25.8 million
($47.98/boe; production of 5,909 boe/d), up 32% from $19.6 million
($47.09/boe; production of 4,575 boe/d) for the second quarter of 2006. For
the six months ended June 30, 2007, gross revenue increased 64% to
$48.8 million ($44.23/boe; production of 6,101 boe/d) from $29.7 million
($44.75/boe; production of 3,663 boe/d) for the comparable 2006 period. The
revenue increase is primarily attributable to significantly higher production
from the Issaran oilfield in Egypt and the June 29, 2007 commencement of gas
production from the Salsabil field in Pakistan. New production from the
Corporation's ongoing drilling program and thermal recovery, coupled with
ongoing production optimization, resulted in consistently higher production
levels and additional reserves.
    Heavy oil produced from the Issaran oilfield is marketed as the Ras
Gharib blend. In the first six months of 2007, the Corporation's realized
wellhead oil price represented 62% of the Brent oil price as compared to 58%
for the comparable 2006 period.

    Production Entitlements, Marketing Costs and Royalties

    For the quarter ended June 30, 2007, the production entitlement of The
General Petroleum Co. SAE ("GPC") totaled $7.3 million ($13.63/boe),
representing 28% of gross revenue. For the corresponding 2006 period, GPC's
entitlement was $5.6 million ($13.41/boe), representing 28% of gross revenue.
For the six months ended June 30, 2007, GPC's production entitlement totaled
$14.0 million ($12.64/boe) as compared to $8.3 million ($12.49/boe) for the
2006 six month period.
    Revenue-based royalty payment obligations of $471,000 ($0.87/boe) for the
2007 second quarter decreased from $1,061,000 ($2.55/boe) in the 2006 second
quarter, a significant reduction on a per-barrel of production basis. For the
six months ended June 30, 2007, the obligations totaled $0.9 million
($0.80/boe) as compared to $1.7 million ($2.52/boe) for the comparable 2006
period. Commencing January 1, 2007, the revenue-based royalty declined from
10% of Issaran oil revenues (net of marketing fees and GPC entitlement) to
2.6%. The 2.6% entitlement continues to December 31, 2012. No revenue-based
royalty is charged on production above 7,000 boe/d.
    Pursuant to the terms of certain marketing agreements pertaining to
Issaran oil sales, marketing fees, linked to realized oil prices and
production, of $353,000 ($0.66/boe) were paid during the second quarter of
2007 as compared to $213,000 ($0.51/boe) for the comparable 2006 period. For
the six months ended June 30, 2007, the marketing fees totaled $0.8 million
($0.73/boe) as compared to $0.4 million ($0.58/boe) for the 2006 six month
period. The obligations increased commensurate with higher Issaran production.

    Operating Expenses

    For the second quarter of 2007, operating expenses were $5.0 million
($9.25/boe), up from $2.9 million ($6.96/boe) for the 2006 second quarter.
Operating expenses for the six months ended June 30, 2007 were $10.0 million
($9.09/boe) as compared to $5.0 million ($7.57/boe) for the comparable 2006
period. On a general basis, costs have increased commensurate with the higher
oil production in 2007 and are lower, on a per-unit basis, than costs reported
in the fourth quarter of 2006 ($9.40/boe). Primary contributors to operating
expenses are workovers, diesel fuel costs, trucking costs and health, safety
and environmental programs. Diesel fuel is used for generators that provide
electricity for field operations in the Issaran oilfield. In the second
quarter of 2007, Rally Energy commenced utilization of lower cost natural gas
from nearby sources as an alternative, cheaper than diesel, fuel supply for
steam generation and some generators. Trucking rates for the Corporation's
Issaran oil deliveries are expected to decline, on a per-unit basis, in future
quarters as a result of completion of the new Central Production Facility,
commissioned in April 2007, which allows for shipping of oil with lower water
cuts.

    
    General and Administrative Expenses
    (thousands of dollars, unless otherwise stated)

                                       Three months ended June 30
                          ---------------------------------------------------
                                Total  Capitalized     Expensed        $/boe
                          ------------ ------------ ------------ ------------
    2007
                   Canada    $  1,686     $    204     $  1,482        $2.76
                    Egypt    $    708     $      -     $    708        $1.32
                 Pakistan    $    257     $    181     $     76        $0.13
                          ---------------------------------------------------
                    Total    $  2,651     $    385     $  2,266        $4.21
                          ---------------------------------------------------
                          ---------------------------------------------------
    2006
                   Canada    $  2,240     $    201     $  2,039        $4.90
                    Egypt    $    371     $      -     $    371        $0.89
                 Pakistan    $    148     $    109     $     39        $0.09
                          ---------------------------------------------------
                    Total    $  2,759     $    310     $  2,449        $5.88
                          ---------------------------------------------------
                          ---------------------------------------------------


                                         Six months ended June 30
                          ---------------------------------------------------
                                Total  Capitalized     Expensed        $/boe
                          ------------ ------------ ------------ ------------
    2007
                   Canada    $  2,951     $    392     $  2,559        $2.32
                    Egypt    $  1,353     $      -     $  1,353        $1.23
                 Pakistan    $    470     $    324     $    146        $0.13
                          ---------------------------------------------------
                    Total    $  4,774     $    716     $  4,058        $3.68
                          ---------------------------------------------------
                          ---------------------------------------------------
    2006
                   Canada    $  3,244     $    396     $  2,848        $4.30
                    Egypt    $    645     $      -     $    645        $0.97
                 Pakistan    $    212     $    157     $     55        $0.08
                          ---------------------------------------------------
                    Total    $  4,101     $    553     $  3,548        $5.35
                          ---------------------------------------------------
                          ---------------------------------------------------
    

    For the six months ended June 30, 2007, consolidated general and
administrative ("G&A") expenses were $4.1 million ($3.68/boe) as compared to
$3.5 million ($5.35/boe) for the comparable 2006 period. For the second
quarters, G&A costs were $2.3 million ($4.21/boe) and $2.4 million ($5.88/boe)
for 2007 and 2006, respectively. G&A cost changes are primarily attributable
to staff additions and wage increases. Non-cash expenses included in expensed
G&A related to the valuation of share options vesting during the six months
ended June 30, 2007, were $0.7 million as compared to $1.6 million for the
2006 comparable period. Exclusive of the non-cash component, G&A costs for the
six months ended June 30, 2007 were $3.4 million ($3.05/boe) and $2.0 million
($2.98/boe) for the comparable 2006 period.

    
    Interest and Finance Charges
    (thousands of dollars, unless otherwise stated)

                                  Three months ended       Six months ended
                                        June 30                 June 30
                               ----------------------  ----------------------
                                    2007        2006        2007        2006
                               ----------------------  ----------------------
    Interest expense            $     74    $    110    $    546    $    163
    Accretion expense on
     debentures                        -          13           -          26
    Amortization of deferred
     charge                          252         106         505         119
                               ----------------------  ----------------------
      Total expense                  326         229       1,051         308
                               ----------------------  ----------------------
    Interest income                  225          13         315          22
    Loss on foreign exchange      (1,450)        (91)     (1,430)       (105)
    Loss on asset disposition          -         (36)          -         (36)
                               ----------------------  ----------------------
      Total income (expense)      (1,225)       (114)     (1,115)       (119)
                               ----------------------  ----------------------
      Net expense               $  1,551    $    343    $  2,166    $    427
                               ----------------------  ----------------------
                               ----------------------  ----------------------
        $/boe                   $   2.88    $   0.82    $   1.96    $   0.64
                               ----------------------  ----------------------
                               ----------------------  ----------------------
    

    Total interest and finance charges increased to $2.2 million during the
six months ended June 30, 2007 from $427,000 in the comparable 2006 quarter
primarily as a result of non-cash foreign exchange losses related to the
appreciating Canadian currency. Included in the 2007 amount are $505,000 (2006
- $119,000) of non-cash deferred charges related to the revolving credit
facility. For the 2007 second quarter, interest and finance charges were
$1.6 million compared to $343,000 for the 2006 second quarter. The revolving
credit facility was entirely paid down on March 26, 2007, therefore no ongoing
interest expenses are currently being incurred, only minimal standby charges.

    
    Depletion, Depreciation and Accretion
    (thousands of dollars, unless otherwise stated)

                                  Three months ended       Six months ended
                                        June 30                 June 30
                               ----------------------  ----------------------
                                    2007        2006        2007        2006
                               ----------------------  ----------------------
    Depletion, depreciation
     and accretion              $  3,072    $  2,738    $  6,479    $  5,008
                               ----------------------  ----------------------
                               ----------------------  ----------------------
      $/boe                     $   5.71    $   6.58    $   5.87    $   7.55
                               ----------------------  ----------------------
                               ----------------------  ----------------------
    

    Total depletion, depreciation and accretion ("DD&A") charges for the six
months ended June 30, 2007 were $6.5 million ($5.87/boe), of which depletion
pertaining to producing properties in Egypt represented $6.0 million. The
remainder represents fixed asset depreciation. For the six months ended
June 30, 2006, DD&A charges totaled $5.0 million ($7.55/boe). DD&A charges for
the second quarter of 2007 were $3.1 million ($5.71/boe) and $2.7 million
($6.58/boe) for the 2006 second quarter.
    The significant increase in the Corporation's proved reserve base at
December 31, 2006, as evaluated by DeGolyer and MacNaughton Canada Limited, an
independent reservoir evaluation firm, including the anticipated future
capital requirements, has resulted in a lower consolidated DD&A rate for 2007.

    Capital Invested

    During the first six months of 2007, Rally Energy drilled 19 successful
oil wells (19 net) in Egypt. The Corporation also drilled a water disposal
well and six water supply wells for use in the thermal recovery program. In
Pakistan, Rally Energy participated (30%) in drilling a development well that
was abandoned due to drilling problems encountered; a new well is expected to
be drilled during the third quarter. Capital expenditures totaled
$47.5 million during the first six months of 2007, up from $14.2 million for
the comparable 2006 period.

    
                                  Three months ended       Six months ended
                                        June 30                 June 30
                               ----------------------  ----------------------
    (thousands of dollars)          2007        2006        2007        2006
                               ----------------------  ----------------------
    Egypt
      Drill, complete and
       workovers                $  8,812    $  4,761    $ 17,363    $ 10,191
      Facilities, equipment
       and other                   5,745         574       9,662       1,069
      Thermal project              1,687         360       4,631         704
      Inventory change               (60)        205       4,359          16
      Capitalized admin. costs       204           -         392           -
                               ----------------------  ----------------------
        Total                   $ 16,388    $  5,900    $ 36,407    $ 11,980
                               ----------------------  ----------------------
    Canada
      Drill, complete and
       workovers                $     47    $    792    $     65    $  1,545
      Facilities, equipment
       and other                      23         114         185         119
      Capitalized admin. costs         -         201           -         396
                               ----------------------  ----------------------
        Total                   $     70    $  1,107    $    250    $  2,060
                               ----------------------  ----------------------
    Pakistan
      Drill and complete        $      -    $      -    $    434    $      -
      Facilities, equipment
       and other                   3,964         (37)      8,882          27
      Inventory change              (198)          -       1,240           -
      Capitalized admin. costs       178         109         324         157
                               ----------------------  ----------------------
        Total                   $  3,944    $     72    $ 10,880    $    184
                               ----------------------  ----------------------
    Grand Total
      Drill, complete and
       workovers                $  8,860    $  5,553    $ 17,863    $ 11,736
      Facilities, equipment
       and other                   9,731         651      18,728       1,215
      Thermal project              1,687         360       4,631         704
      Inventory change              (258)        205       5,599          16
      Capitalized admin. costs       382         310         716         553
                               ----------------------  ----------------------
        Total                   $ 20,402    $  7,079    $ 47,537    $ 14,224
                               ----------------------  ----------------------
                               ----------------------  ----------------------
    

    Included in the above amounts are capital-related inventory costs of
$12.1 million at June 30, 2007 (2006 - $1.8 million) for supplies and
equipment intended to be used for future capital expenditures in Egypt and
Pakistan.
    At June 30, 2007 the Corporation continued to meet the asset impairment
test for the capitalized costs and no ceiling test write-down was required.

    Cash Flow from Operations

    Cash flow from operations represents net earnings plus items not
affecting cash which include accretion, depletion, depreciation and other
non-cash items. For the quarter ended June 30, 2007, Rally Energy's cash flow
from operations was $10.9 million ($0.09/share), an increase of 31% compared
to $8.4 million ($0.09/share) for the 2006 second quarter. For the six months
ended June 30, 2007, cash flow from operations increased by 67% to
$19.7 million ($0.18/share) as compared to $11.8 million ($0.13/share) for the
comparable 2006 period.

    Net Earnings

    Rally Energy recorded net earnings of $5.8 million ($0.05/share) for the
second quarter of 2007, a 37% increase over net earnings of $4.2 million
($0.05/share) for the comparable 2006 quarter. For the six months ended
June 30, 2007, Rally Energy's net earnings were $10.4 million ($0.10/share) as
compared to $5.1 million ($0.06/share) for the first six months of 2006.

    
    SUMMARY OF QUARTERLY RESULTS
    (thousands of dollars, unless otherwise stated)

                               Cash flow
                                    from     $/share    Earnings     $/share
                     Revenue  operations     - basic     (loss)      - basic
                  ----------- ----------------------- -----------------------

    2007:      Q2    $25,798     $10,942       $0.09     $ 5,781      $0.050
               Q1    $23,037     $ 8,792       $0.09     $ 4,665      $0.045
    2006:      Q4    $19,420     $ 6,347       $0.06     $ 1,534      $0.016
               Q3    $25,708     $13,092       $0.14     $  (505)    $(0.000)
               Q2    $19,605     $ 8,362       $0.09     $ 4,213      $0.046
               Q1    $10,061     $ 3,445       $0.04     $   866      $0.010
    2005:      Q4    $10,019     $ 3,405       $0.05     $   618      $0.007
               Q3    $10,693     $ 4,387       $0.05     $ 1,334      $0.016
    

    Liquidity and Capital Resources

    At June 30, 2007, Rally Energy had cash and cash equivalents of
$10.7 million and has a fully available US$20 million reserve-based revolving
bank credit facility with the International Finance Corporation (a member of
the World Bank group). At December 31, 2006, the Corporation had cash and cash
equivalents of $17.7 million and was utilizing the entire US$20 million
facility debt. Increased drilling activity, equipment additions and well
optimization programs during 2007 have resulted in a higher level of accounts
payable as compared to June 30, 2006, but lower than at December 31, 2006.
Working capital at June 30, 2007 was $8.5 million, as compared to working
capital of $3.3 million at December 31, 2006.
    On March 13, 2007, the Corporation issued 11 million common shares at
$5.00 per share for gross proceeds of $55 million, pursuant to the terms of a
short-form prospectus. Agent commissions of $2.8 million were paid in relation
to common share subscriptions. Proceeds of the Offering are being used to fund
the Corporation's exploration and development programs in Egypt and Pakistan,
for potential acquisitions, and for general corporate purposes.
    During the six months ended June 30, 2007, Rally Energy received proceeds
of $2.8 million from the exercise of an aggregate of 2,553,266 common share
options at an average price of $1.10/share. Subsequent to June 30, 2007, the
Corporation received $156,000 pursuant to the exercise of 260,000 common share
options (at an average price of $0.60/share).

    Financial Reporting

    Effective January 1, 2007, Rally Energy adopted the Canadian Institute of
Chartered Accountants ("CICA") Section 3855, Financial Instruments -
Recognition and Measurement; Section 3251, Equity; Section 3865, Hedges;
Section 1530, Comprehensive Income; and Section 3861, Financial Statements -
Disclosure and Presentation. These standards have been adopted prospectively.
See Note 1 to the consolidated financial statements.

    Accounting Changes

    The Corporation also adopted, effective January 1, 2007, the revised
recommendations of CICA Section 1506, Accounting Changes. The new
recommendations permit voluntary changes in accounting policy only if they
result in financial statements which provide more relevant and reliable
financial information. Accounting policy changes must be applied
retrospectively unless it is impractical to determine the period or cumulative
impact of the change in policy. Additionally, when an entity has not applied a
new primary source of GAAP that has been issued but is not yet effective, the
entity must disclose that fact along with information relevant to assessing
the possible impact that application of the new primary source of GAAP will
have on the entity's financial statements in the period of initial
application.

    Disclosure Controls and Procedures

    Rally Energy's President and Chief Executive Officer ("CEO") and Vice
President, Finance and Chief Financial Officer ("CFO") are responsible for
establishing and maintaining disclosure controls and procedures and internal
controls over financial reporting as defined in Multilateral Instrument
52-109. The Corporation's CEO and CFO have designed disclosure controls and
procedures, or caused them to be designed under their supervision, to provide
reasonable assurance that information to be disclosed by Rally Energy is
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure. The CEO and CFO have also designed
internal controls over financial reporting, or caused them to be designed
under their supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. During the period ended June 30, 2007, there have been no changes
to Rally Energy's internal controls over financial reporting that have
materially, or are reasonably likely to, materially affect the internal
controls over financial reporting.
    Because of their inherent limitations, disclosure controls and procedures
and internal controls over financial reporting may not prevent or detect
misstatements, error or fraud. Control systems, no matter how well conceived
or operated, can provide only reasonable, not absolute assurance, that the
objectives of the control system are met.

    2007 OUTLOOK

    The 2007 capital program is expected to include drilling up to
30 conventional and 30 thermal wells in Egypt and a development and an
exploration well in Pakistan. To facilitate the drilling programs, a second
rig has been contracted in Pakistan (August 2007 commencement), and two
additional rigs have been contracted in Egypt (October 2007 and March 2008
commencement). In Egypt, additional thermal and production facilities are also
planned to accommodate higher production expected from phased development of
the CSS thermal expansion program. The Corporation has now finalized an order
for eight 50 MMBTU steam generators, with delivery commencing in November
2007, that will satisfy field requirements into 2009. In addition to the
existing 10 CSS wells at December 31, 2006, the 2007 drilling program will
increase the CSS program to a total of 40 CSS wells by the end of 2007. In
Pakistan, production facilities will be completed to accommodate gas
production from the Salsabil development program. Exploration drilling results
on the Safed Koh Concession will determine any additional production facility
requirements.

    
    -------------------------------------------------------------------------
                                                           Rally Energy Corp.
                                                 Consolidated Balance Sheets
                                                                  (unaudited)
                                                       June 30,  December 31,
                                                          2007          2006
    -------------------------------------------------------------------------
    Assets

    Current
      Cash and cash equivalents                   $ 10,695,527  $ 17,743,645
      Restricted cash (Note 2)                         432,872     1,169,768
      Accounts receivable                           25,287,112    20,594,214
      Inventory (Note 4)                             1,051,222       617,427
      Prepaid expenses and deposits                    577,829       627,228
                                                  ------------- -------------
                                                    38,044,562    40,752,282

    Long-term investments (Note 3)                   1,905,500     1,905,500
    Property, plant and equipment (Note 4)         130,913,188    89,853,531
    Deferred costs (Note 6)                          2,063,366     2,568,325
                                                  ------------- -------------
                                                  $172,926,616  $135,079,638

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

    Liabilities and Shareholders' Equity

    Current
      Accounts payable and accrued liabilities
        - operations                              $  8,421,044  $  6,780,795
        - capital                                   21,133,850    30,626,765
                                                  ------------- -------------
                                                    29,554,894    37,407,560

    Asset retirement obligations (Note 5)              842,171       770,740
    Long-term debt (Note 6)                                  -    23,308,000
                                                  ------------- -------------
                                                    30,397,065    61,486,300
                                                  ------------- -------------

    Shareholders' equity
      Equity instruments (Note 7(a))               131,843,910    73,248,886
      Contributed surplus (Note 7(e))                3,025,300     3,130,482
      Retained earnings (deficit)                    7,660,341    (2,786,030)
                                                  ------------- -------------
                                                   142,529,551    73,593,338
                                                  ------------- -------------

                                                  $172,926,616  $135,079,638

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

    The accompanying notes are an integral part of these consolidated
    financial statements.



    -------------------------------------------------------------------------
                                                           Rally Energy Corp.
          Consolidated Statements of Earnings and Retained Earnings (Deficit)
                                                                  (unaudited)

                           Three months ended           Six months ended
                                June 30                      June 30
                      -------------------------------------------------------
                           2007          2006          2007          2006

    Oil and gas
     revenue          $ 25,797,838  $ 19,605,132  $ 48,834,859  $ 29,666,579
      Less: Royalties
       and related
       credits          (8,156,518)   (6,964,098)  (15,651,723)  (10,583,517)
                      --------------------------- ---------------------------
                        17,641,320    12,641,034    33,183,136    19,083,062
      Operating
       expenses          4,971,464     2,897,946    10,033,519     5,019,866
                      --------------------------- ---------------------------

                        12,669,856     9,743,088    23,149,617    14,063,196
                      --------------------------- ---------------------------

    Expenses
      Administrative
       expenses:
        Administration   1,874,418     1,157,407     3,372,020     1,974,357
        Stock-based
         compensation      391,690     1,291,508       686,330     1,573,910
                      --------------------------- ---------------------------
                         2,266,108     2,448,915     4,058,350     3,548,267
      Interest expense      73,362       110,406       545,783       163,352
      Depletion,
       depreciation
       and accretion     3,072,442     2,738,046     6,479,193     5,008,341
      Amortization of
       deferred charges    251,900       105,630       505,347       118,851
      Accretion expense
       on convertible
       debentures                -        13,221             -        26,445
                      --------------------------- ---------------------------
                         5,663,812     5,416,218    11,588,673     8,865,256
                      --------------------------- ---------------------------

    Income before
     other items
     and taxes           7,006,044     4,326,870    11,560,944     5,197,940
                      --------------------------- ---------------------------

    Other items
      Interest income      224,730        13,037       315,168        22,468
      Foreign exchange
       gain (loss)      (1,449,430)      (90,505)   (1,429,741)     (105,214)
      Loss on asset
       disposition               -       (35,856)            -       (35,856)
                      --------------------------- ---------------------------
                        (1,224,700)     (113,324)   (1,114,573)     (118,602)

    Net earnings         5,781,344     4,213,546    10,446,371     5,079,338

    Other
     comprehensive
     income                      -             -             -             -

                      --------------------------- ---------------------------
    Comprehensive
     earnings            5,781,344     4,213,546    10,446,371     5,079,338

    Retained earnings
     (deficit),
     beginning of
     period              1,878,997    (8,027,893)   (2,786,030)   (8,893,685)
                      --------------------------- ---------------------------

    Retained earnings
     (deficit), end
     of period        $  7,660,341  $ (3,814,347) $  7,660,341  $ (3,814,347)

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

    Net earnings per
     share (Note 7(f))
      Basic           $      0.050  $      0.046  $      0.095  $      0.055
      Diluted         $      0.049  $      0.043  $      0.093  $      0.053

    The accompanying notes are an integral part of these consolidated
    financial statements.



    -------------------------------------------------------------------------
                                                           Rally Energy Corp.
                                       Consolidated Statements of Cash Flows
                                                                  (unaudited)

                           Three months ended           Six months ended
                                June 30                      June 30
                      -------------------------------------------------------
                           2007          2006          2007          2006

    Cash flows from
     operating
     activities
      Net earnings
       for the period $  5,781,344  $  4,213,546  $ 10,446,371  $  5,079,338
      Non-cash items:
        Stock-based
         compensation      391,690     1,291,508       686,330     1,573,910
        Accretion
         expense on
         convertible
         debentures              -        13,221             -        26,445
        Amortization
         of deferred
         charges           251,900       105,630       505,347       118,851
        Depletion,
         depreciation
         and accretion   3,072,442     2,738,046     6,479,193     5,008,341
        Unrealized
         foreign
         exchange loss   1,444,656             -     1,616,723             -
                      --------------------------- ---------------------------
                        10,942,032     8,361,951    19,733,964    11,806,885

      Changes in
       non-cash working
       capital balances:
        Accounts
         receivable     (3,091,589)   (7,608,889)   (4,692,898)   (8,411,307)
        Inventory         (494,053)     (142,786)     (433,795)     (194,196)
        Prepaid expenses
         and deposits      172,702        68,736        49,399       (42,634)
        Accounts payable
         - operations    1,961,080     1,458,855     1,640,249       846,501
                      --------------------------- ---------------------------
                         9,490,172     2,137,867    16,296,919     4,005,249
                      --------------------------- ---------------------------

    Cash flows from
     investing
     activities
      Oil and gas
       assets          (20,456,735)   (7,079,587)  (44,351,059)  (14,224,247)
      Restricted cash
       decrease
       (increase)          196,385      (752,618)      736,896      (752,618)
      Changes in
       accounts payable
       - capital        (5,133,890)      841,101   (10,368,923)    2,858,112
                      --------------------------- ---------------------------
                       (25,394,240)   (6,991,104)  (53,983,086)  (12,118,753)
                      --------------------------- ---------------------------
    Cash flows from
     financing
     activities
      Issuance of
       equity
       instruments
       (Note 7(a))       1,133,137     1,240,410    54,736,362     1,380,016
      Bank debt
       increase
       (decrease)                -    (2,349,306)            -             -
      Long-term debt
       increase
       (decrease)                -    11,194,500   (23,308,000)   11,194,500
      Increase in
       deferred
       financing
       charges                 580      (698,010)         (388)     (698,010)
      Redemption of
       convertible
       debentures                -        (7,006)                     (7,006)
      Changes in
       accounts payable
       - financing          62,895             -       (49,210)            -
                      --------------------------- ---------------------------
                         1,196,612     9,380,588    31,378,764    11,869,500
                      --------------------------- ---------------------------

    Foreign exchange
     gain (loss) on
     cash held in a
     foreign currency     (670,920)      (10,010)     (740,715)      (40,294)
                      --------------------------- ---------------------------

    Increase (decrease)
     in cash           (15,378,376)    4,517,341    (7,048,118)    3,715,702

    Cash and cash
     equivalents,
     beginning of
     period             26,073,903             -    17,743,645       801,639
                      --------------------------- ---------------------------

    Cash and cash
     equivalents, end
     of period        $ 10,695,527  $  4,517,341  $ 10,695,527  $  4,517,341

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

    The accompanying notes are an integral part of these consolidated
    financial statements.



    -------------------------------------------------------------------------
                                                           Rally Energy Corp.
                         Selected Notes to Consolidated Financial Statements
                                   Six months ended June 30, 2007 (unaudited)
    -------------------------------------------------------------------------
    

    The interim consolidated financial statements of Rally Energy Corp. (the
"Corporation") have been prepared by management in accordance with accounting
principles generally accepted in Canada on a consistent basis with the audited
consolidated financial statements for the fiscal year ended December 31, 2006,
unless otherwise stated below. The disclosure which follows does not conform
in all respects to the requirements of generally accepted accounting
principles ("GAAP") for annual consolidated financial statements and, as such,
should be read in conjunction with the consolidated financial statements and
notes thereto in the Corporation's annual report for the year ended
December 31, 2006.

    
    1.  Changes in Accounting Policies
    -------------------------------------------------------------------------

        (a) Effective January 1, 2007 the Corporation adopted the Canadian
            Institute of Chartered Accountants ("CICA") Section 1530,
            Comprehensive Income; Section 3251, Equity; Section 3855,
            Financial Instruments - Recognition and Measurement; Section
            3861, Financial Instruments - Disclosure and Presentation; and
            Section 3865, Hedges. The Corporation has adopted these standards
            prospectively and the comparative interim consolidated financial
            statements have not been restated. Transition amounts have been
            recorded in accumulated other comprehensive income.

            The adoption of these standards has had no material impact on net
            earnings or cash flows. The other effects of the implementation
            of the new standards are discussed below.

            (i)   Financial instruments

                  Under the new standards, financial assets and financial
                  liabilities are initially recognized at fair value and are
                  subsequently accounted for based on their classification as
                  described below. The classification depends on the purpose
                  for which the financial instruments were acquired and their
                  characteristics. Except in very limited circumstances, the
                  classification is not changed subsequent to initial
                  recognition.

                  Held-for-trading

                  Financial assets that are purchased and incurred with the
                  intention of generating profits in the near term are
                  classified as held-for-trading. These instruments are
                  accounted for at fair value with the change in the fair
                  value recognized in net earnings during the period. Cash
                  and cash equivalents, and restricted cash are classified as
                  held-for-trading as at January 1, 2007.

                  Available-for-sale

                  Financial assets classified as available-for-sale are
                  carried at fair value with the changes in fair value
                  recorded in other comprehensive income. When a decline in
                  fair value is determined to be other than temporary, the
                  cumulative loss included in accumulated other comprehensive
                  income is removed and recognized in net income. Gains and
                  losses realized on disposal of available-for-sale
                  securities are recognized in other income. Long-term
                  investments are classified as available-for-sale as at
                  January 1, 2007.

                  Held-to-maturity

                  Financial assets that have a fixed maturity date and which
                  the Corporation has the intention and the ability to hold
                  to maturity are classified as held-to-maturity and
                  accounted for at amortized cost using the effective
                  interest rate method. There were no financial assets
                  classified as held-to-maturity.

                  Loans and receivables

                  Loans and receivables are accounted for at amortized cost.
                  This classification is consistent with the classification
                  under the prior accounting standards. Accounts receivable
                  are classified as loans and receivables as at January 1,
                  2007.

                  Other liabilities

                  Other liabilities are accounted for at amortized cost and
                  include all liabilities, other than derivatives. This
                  classification is consistent with the classification under
                  the prior accounting standards. Accounts payable and
                  accrued liabilities and long-term debt are classified as
                  other liabilities.

            (ii)  Derivative instruments and hedging activities

                  The Corporation did not have any outstanding derivative or
                  hedging contracts during the second quarter ended June 30,
                  2007.

            (iii) Embedded derivatives

                  Embedded derivatives are derivatives embedded in a host
                  contract. The embedded derivatives are measured at their
                  fair value with subsequent changes recognized directly in
                  earnings. The Corporation has elected July 10, 2002 as its
                  transition date for accounting for any potential embedded
                  derivatives. No material embedded derivatives requiring
                  separate recognition and measures were identified. The
                  adoption of this new standard had no impact on the
                  Corporation's consolidated financial statements.

            (iv)  Determination of fair value

                  The Corporation's financial instruments recognized in the
                  Consolidated Balance Sheet consist of cash and cash
                  equivalents, restricted cash, accounts receivable, long-
                  term investments, current liabilities, and long-term debt.
                  Unless otherwise noted, carrying values reflect the current
                  fair value of the financial instruments. The estimated fair
                  values of recognized financial instruments have been
                  determined based on the Corporation's assessment of
                  available market information and appropriate methodologies,
                  or through comparisons to similar instruments. The current
                  fair value of short-term financial instruments is equal to
                  their carrying value due to their short-term nature; long-
                  term debt will fluctuate with market rates and therefore,
                  approximate fair value.

            (v)   Comprehensive income

                  Comprehensive income consists of net earnings and other
                  comprehensive income and represents the change in
                  shareholders' equity, which results from transactions and
                  events from sources other than the Corporation's
                  shareholders. These transactions and events include changes
                  in the currency translation adjustment and unrealized gains
                  and losses resulting from changes in fair value of
                  available-for-sale financial instruments and the effective
                  portion of the change in fair value of any designated cash
                  flow hedges. The adoption of this new standard had no
                  impact on the Corporation's consolidated financial
                  statements.

        (b) Effective January 1, 2007 the Corporation adopted the revised
            recommendations of CICA Section 1506, Accounting Changes.

            (i)   The new recommendations permit voluntary changes in
                  accounting policy only if they result in financial
                  statements which provide more relevant and reliable
                  financial information. Accounting policy changes must be
                  applied retrospectively unless it is impractical to
                  determine the period or cumulative impact of the change in
                  policy. Additionally, when an entity has not applied a new
                  primary source of GAAP that has been issued but is not yet
                  effective, the entity must disclose that fact along with
                  information relevant to assessing the possible impact that
                  application of the new primary source of GAAP will have on
                  the entity's financial statements in the period of initial
                  application.

            (ii)  As of January 1, 2008, the Corporation will be required to
                  adopt two new CICA requirements, Section 3862, Financial
                  Instruments - Disclosures and Section 3863, Financial
                  Instruments - Presentation, which will replace current
                  Section 3861. The new standards require disclosure of the
                  significance of financial instruments to an entity's
                  financial statements, the risks associated with the
                  financial instruments, and how those risks are managed. The
                  new presentation standard essentially carries forward the
                  current presentation requirements. The Corporation is
                  assessing the impact of these new standards in its
                  consolidated financial statements and anticipates that the
                  main impact will be in terms of additional disclosures
                  required.

            (iii) As of January 1, 2008 the Corporation will be required to
                  adopt CICA Section 1535, Capital Disclosures, which
                  requires entities to disclose their objectives, policies
                  and processes for managing capital, and in addition,
                  whether the entity has complied with any externally imposed
                  capital requirements. The Corporation is assessing the
                  impact of this new standard on its consolidated financial
                  statements and anticipates that the main impact will be in
                  terms of additional disclosures required.

    2.  Restricted Cash
    -------------------------------------------------------------------------

        As security for letters of credit issued for work commitments in
        Pakistan, $432,872 is held on deposit with a Foreign chartered bank.
        The funds are invested in an interest-bearing revolving term deposit
        and will expire on February 1, 2008.

    3.  Long-term Investments
    -------------------------------------------------------------------------

        The Corporation holds minority equity positions in a private
        independent company and a public independent company. At June 30,
        2007, the valuation was reviewed by management and considered
        adequate.

    4.  Property, Plant and Equipment
    -------------------------------------------------------------------------

        The Corporation holds various working interests in developed and
        undeveloped petroleum and natural gas properties and facilities
        through a Petroleum Service Agreement in Egypt, a Concession
        Agreement in Pakistan and working interests in Canada. The carrying
        amounts of these assets are as follows:

                                                     June 30,    December 31,
                                                       2007          2006
        ---------------------------------------------------------------------
        Petroleum and natural gas assets          $177,738,658  $130,283,985
        Furniture, machinery and equipment           4,978,244     4,896,264
                                                  ---------------------------
                                                   182,716,902   135,180,249
        Accumulated depletion, depreciation
         and write-downs                           (51,803,714)  (45,326,718)
                                                  ---------------------------
        Net book value                            $130,913,188  $ 89,853,531
                                                  ---------------------------
                                                  ---------------------------

        During the three and six months ended June 30, 2007, the Corporation
        capitalized general and administrative expenditures, which were
        included in petroleum and natural gas assets as follows:

                               Three months ended         Six months ended
                                     June 30                   June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006
                           ------------------------  ------------------------
          Egypt            $  204,271   $        -   $  391,906   $        -
          Pakistan            180,915      108,382      324,268      156,828
          Canada                    -      201,458            -      395,925
                           ------------------------  ------------------------
                           $  385,186   $  309,840   $  716,174   $  552,753
                           ------------------------  ------------------------
                           ------------------------  ------------------------

        No interest has been capitalized.

        At June 30, 2007, the Corporation held $13,150,063 (December 31, 2006
        - $7,117,814) of inventory available for future capital expenditures
        in Egypt and Pakistan. Of this amount, (i) $12,098,841 (December 31,
        2006 - $6,500,387) relates to capital equipment, primarily pipe, and
        is included in property and equipment and (ii) $1,051,222
        (December 31, 2006 - $617,427) represents consumable supplies to be
        used in oilfield operations and is recorded as inventory under
        current assets. Capital inventory is being utilized in the
        Corporation's ongoing drilling program. No amortization has been
        taken on such inventory.

    5.  Asset Retirement Obligations
    -------------------------------------------------------------------------

        The Corporation has asset retirement obligations in Egypt (resulting
        from the PSA), Pakistan (resulting from the Concession Agreement) and
        in Canada, from net ownership interests in petroleum and natural gas
        assets. The Corporation estimates the total undiscounted amount of
        cash flows required to settle its asset retirement obligations and
        time frame, as follows.

                                           Cost Incurrence
                                           ---------------
                         June 30,                                December 31,
                           2007           Range     Majority         2006
                       ------------       -----     --------     ------------
          Egypt         $1,407,206      2015-2018     2021        $1,222,824
          Pakistan         223,734      2015-2020     2020            39,332
          Canada            40,000      2009-2014     2014            40,000
                       ------------                              ------------
                        $1,670,940                                $1,302,156
                       ------------                              ------------
                       ------------                              ------------

        A credit-adjusted risk-free rate of 7% and an inflation rate of 2%
        were used to calculate the fair value of the asset retirement
        obligations. A reconciliation of the discounted asset retirement
        obligations is provided below:

                                                       Six
                                                  months ended   Year ended
        Asset retirement obligations                 June 30,    December 31,
                                                       2007          2006
                                                  ------------- -------------
        Balance, beginning of period              $    770,740  $    590,382
        Liability adjustments from prior period              -        57,829
        Liability adjustments from disposition
         of assets                                           -      (186,486)
        Liabilities incurred in period, net             62,567       282,591
        Accretion expense                                8,864        26,424
                                                  ------------- -------------
        Balance, end of period                    $    842,171  $    770,740
                                                  ------------- -------------
                                                  ------------- -------------

    6.  Long-term Debt
    -------------------------------------------------------------------------

        The Corporation has a reserve-based US$20 million revolving credit
        facility with the International Finance Corporation ("IFC") (a member
        of the World Bank Group) that matures on October 15, 2009. At
        June 30, 2007, the entire facility remains available. Setup costs
        pertaining to these facilities have been recorded as deferred
        financing costs and will be amortized over the life of the facility.

    7.  Equity Instruments
    -------------------------------------------------------------------------

        (a) Issued and outstanding
            ----------------------

                               Six months ended             Year ended
                                 June 30, 2007           December 31, 2006
                          ------------------------- -------------------------
                            Number of                 Number of
                               Shares      Amounts       Shares      Amounts
                          ------------------------- -------------------------
        Common shares
        Balance, beginning
         of period        100,697,648 $ 75,524,480   91,025,379  $56,908,614
        Private placement
         (Note 7(c))        1,372,846    3,116,360            -            -
        Prospectus issue
         (Note 7(d))       11,000,000   55,000,000            -            -
        Stock options
         exercised          2,553,266    3,612,699    1,484,093    1,589,758
        Debentures
         converted                  -            -    1,188,176    1,743,993
        Warrants
         exercised                  -    7,000,000   15,282,115
                          ------------------------- -------------------------
                          115,623,760  137,253,539  100,697,648   75,524,480
                          ------------------------- -------------------------

        LESS: Share
         issue costs                    (5,409,629)           -   (2,275,594)
                                       ------------ -------------------------
                                       131,843,910  100,697,648   73,248,886
                                       ------------ -------------------------
        Share purchase
         warrants -
         common shares
        Balance, beginning
         of period                  -            -    4,000,000      904,242
        Issued                      -            -    3,000,000    2,217,873
        Exercised                   -            -   (7,000,000)  (3,122,115)
                          ------------------------- -------------------------
                                    -            -            -            -
                          ------------------------- -------------------------

        Balance, end
         of period,
         all equity
         instruments                  $131,843,910               $73,248,886
                                      -------------             -------------
                                      -------------             -------------

        (b) Options
            -------

            The shareholders of the Corporation have annually approved a
            formal stock option plan under which directors, officers,
            employees and consultants are eligible to receive grants. Stock
            option agreements have vesting periods varying from immediate to
            three years and expiration terms of up to five years.

            For the six months ended June 30, 2007, there were 3,444,000
            options granted with an average exercise price of $4.83/share and
            an estimated fair value of $1.73/share using the Black- Scholes
            option pricing model. In the pricing model, assumptions were as
            follows: risk free interest rate was 5.0%; average volatility was
            47%; and an expected life was 5 years. The stock-based
            compensation expense associated with the value ascribed to
            options granted is recorded as contributed surplus. The
            Corporation recorded an expense for options issued and vested as
            noted below.

                               Three months ended         Six months ended
                                     June 30                   June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006
                           ------------------------  ------------------------
        Stock-based
         compensation
         expense           $  391,690  $ 1,291,508   $  686,330  $ 1,573,910



                               Six months ended             Year ended
                                 June 30, 2007           December 31, 2006
                          ------------------------- -------------------------
                                          Weighted                  Weighted
                                           Average                   Average
                                Share     Exercise        Share     Exercise
                              Options        Price      Options        Price
                          ------------------------- -------------------------
        Outstanding,
         beginning of
         period             6,862,666        $2.45    7,356,759        $1.02
          Granted           3,444,000        $4.83    1,165,000        $2.36
          Cancelled          (391,666)       $3.93   (1,484,093)       $0.73
          Exercised        (2,553,266)       $1.10     (175,000)       $1.34
                          ------------------------- -------------------------
        Outstanding,
         end of period      7,361,734        $2.88    6,862,666        $1.30
                          ------------------------- -------------------------
                          ------------------------- -------------------------

        (c) Private placement
            -----------------

            On March 2, 2007, having received the requisite approvals from
            relevant Pakistan government agencies to close a property
            purchase, the purchase price of US$11.4 million accrued at
            December 31, 2006 was satisfied by way of US$8.55 million in cash
            and 1,372,846 common shares of Rally Energy Corp.  The shares are
            subject to a four month hold, and were valued at $2.27 per share,
            the prevailing price when announced in June 2006.

        (d) Prospectus issue
            ----------------

            On March 13, 2007, the Corporation issued 11 million common
            shares at $5.00 per share for gross proceeds of $55 million,
            pursuant to the terms of a short-form prospectus.  Agent
            commissions of $2.8 million and $264,694 of other share issue
            costs were incurred in relation to common share subscriptions.

        (e) Contributed surplus
            -------------------

                                                     Six months
                                                       ended      Year ended
                                                      June 30,   December 31,
                                                        2007         2006
                                                    ------------ ------------
        Balance, beginning of period                $ 3,130,482  $ 1,968,082
          Stock-based compensation expense              686,330    2,103,992
          Options exercised, transferred
           to share capital                            (791,512)    (504,592)
          Debentures exercised, transferred to
           share capital
                                                              -     (437,000)
                                                    ------------ ------------
        Balance, end of period                      $ 3,025,300  $ 3,130,482
                                                    ------------ ------------
                                                    ------------ ------------

        (f) Per share amounts
            -----------------

            Earnings per share figures have been calculated using the
            weighted average number of common shares outstanding during the
            periods. Diluted per share amounts reflect the potential dilution
            that could occur if in-the-money securities or other contracts to
            issue common shares were exercised or converted to common shares.
            The treasury stock method is used to determine the dilutive
            effect of stock options and other dilutive instruments. Anti-
            dilutive options or instruments are not included in the
            calculation.

            The following table summarizes the calculation of basic and
            diluted net earnings per share.

                                                       Three months ended
                                                            June 30
                                                   --------------------------
                                                        2007         2006
                                                   --------------------------
        Net earnings available to
         common shareholders                        $ 5,781,344  $ 4,213,546
                                                   ------------- ------------
                                                   ------------- ------------

        Weighted-average number of common
         shares outstanding - basic                 115,386,789   92,498,721
        Dilution effect of stock options              3,768,312    3,198,639
        Dilution effect of warrants                           -    1,391,373
                                                   ------------- ------------
        Weighted-average number of
         common shares outstanding - diluted        119,155,101   97,088,733
                                                   ------------- ------------
        Net earnings per share ($/share)
          Basic                                          $0.050       $0.046
                                                   ------------- ------------
          Diluted                                        $0.049       $0.043
                                                   ------------- ------------



                                                        Six months ended
                                                            June 30
                                                   --------------------------
                                                        2007         2006
                                                   --------------------------
        Net earnings available to
         common shareholders                        $10,446,371  $ 5,079,338
                                                   ------------- ------------
                                                   ------------- ------------

        Weighted-average number of common
         shares outstanding - basic                 109,614,994   91,799,988
        Dilution effect of stock options              2,702,032    2,686,018
        Dilution effect of warrants                           -      798,176
                                                   ------------- ------------
        Weighted-average number of common
         shares outstanding - diluted               112,317,026   95,284,182
                                                   ------------- ------------
        Net earnings per share ($/share)
          Basic                                          $0.095       $0.055
                                                   ------------- ------------
          Diluted                                        $0.093       $0.053
                                                   ------------- ------------

        Outstanding stock options are the only instruments that are currently
        dilutive to earnings per share. At June 30, 2007, no stock options
        were antidilutive and excluded from the computation of diluted
        earnings per share.

    8.  Related Party Transactions
    -------------------------------------------------------------------------

        For the three and six months ended June 30, 2007 and 2006, the
        Corporation paid consulting fees to a company, whose principal is a
        director of the Corporation. The transactions occurred in the normal
        course of business operations and represent consideration established
        and agreed to by the related parties which is similar to those
        negotiated with third parties.

                               Three months ended         Six months ended
                                     June 30                   June 30
                                 2007         2006         2007         2006
                           --------------------------------------------------
        Administrative
         expenses             $   36,063  $   39,375  $   77,713  $   94,675
        Capitalized                    -      39,375           -     101,625
                           ------------------------  ------------------------
                              $   36,063  $   78,750  $   77,713  $  196,300
                           ------------------------  ------------------------
                           ------------------------  ------------------------

    9.  Commitments
    -------------------------------------------------------------------------

        The Corporation has committed to purchase steam generators and
        related facilities that will be delivered during 2007 and 2008 for
        use in the Issaran oilfield. Current obligations related to these
        commitments are approximately US$2 million based on the current
        construction progress and the total obligation under this contract
        would be US$7.2 million.

        The Corporation has signed agreements to contract additional drilling
        rigs that will commence operation in 2007 and 2008, for its
        operations in Egypt and Pakistan. Current obligations related to all
        drilling rig contracts is approximately US$13 million payable up to
        and including March 2010.

    10. Segmented Information
    -------------------------------------------------------------------------

        The Corporation operates in the petroleum and natural gas industry
        and has operations in Egypt, Pakistan and Canada. Its reportable
        segments are identified on a geographic basis. Gross revenue for the
        three and six months ended June 30 and capital assets are summarized
        on a country basis below:

        ---------------------------------------------------------------------
                          Egypt        Canada       Pakistan       Total
        ---------------------------------------------------------------------
        Three months
         ended June 30,
         2007
        ---------------------------------------------------------------------
        Gross revenue $ 25,774,881  $     16,018  $      6,939  $ 25,797,838
                      -------------------------------------------------------
                      -------------------------------------------------------
        Net earnings
         (loss)       $  7,368,371  $ (1,694,226) $    107,199  $  5,781,344
                      -------------------------------------------------------
                      -------------------------------------------------------

        ---------------------------------------------------------------------
        Three months
         ended June 30,
         2006
        ---------------------------------------------------------------------
        Gross revenue $ 18,982,754  $    622,378  $          -  $ 19,605,132
                      -------------------------------------------------------
                      -------------------------------------------------------
        Net earnings
         (loss)       $  6,375,691  $ (2,134,268) $    (27,877) $  4,213,546
                      -------------------------------------------------------
                      -------------------------------------------------------

        ---------------------------------------------------------------------
        Six months
         ended June 30,
         2007
        ---------------------------------------------------------------------
        Gross revenue $ 48,807,723  $     20,197  $      6,939  $ 48,834,859
                      -------------------------------------------------------
                      -------------------------------------------------------
        Net earnings
         (loss)       $ 13,248,315  $ (2,987,165) $    185,221  $ 10,446,371
                      -------------------------------------------------------
                      -------------------------------------------------------

        ---------------------------------------------------------------------
        Six months
         ended June 30,
         2006
        ---------------------------------------------------------------------
        Gross revenue $ 28,156,614  $  1,509,965  $          -  $ 29,666,579
                      -------------------------------------------------------
                      -------------------------------------------------------
        Net earnings
         (loss)       $  8,470,912  $ (3,349,268) $    (42,306) $  5,079,338

        Property and
         equipment
        June 30,
         2007         $ 97,666,021  $    822,299  $ 32,424,868  $130,913,188
                      -------------------------------------------------------
                      -------------------------------------------------------
        June 30,
         2006         $ 38,737,045  $ 17,118,201  $  1,822,008  $ 57,677,254
                      -------------------------------------------------------
                      -------------------------------------------------------

    11. Statement of Cash Flows and Non-Cash Transactions
    -------------------------------------------------------------------------

                               Three months ended         Six months ended
                                     June 30                   June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006
                           ------------------------  ------------------------
        (a) Interest paid  $   16,392  $   118,012   $  484,541  $   229,427
                           ------------------------  ------------------------
                           ------------------------  ------------------------

        (b) Taxes paid     $        -  $         -   $        -  $         -
                           ------------------------  ------------------------
                           ------------------------  ------------------------



                                     June 30, 2007         December 31, 2006
                           ------------------------  ------------------------
        (c) Cash and cash
             equivalents
              Cash                   $  10,695,527              $  9,549,396
              Term deposits                      -                 8,194,249
                           ------------------------  ------------------------
              Cash and cash
               equivalents           $  10,695,527              $ 17,743,645
                           ------------------------  ------------------------
                           ------------------------  ------------------------

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

        (a) On July 24, 2007, the Corporation closed a transaction with an
            independent public company to dispose of certain Canadian oil and
            gas properties for $1.5 million. The agreement has an effective
            date of April 1, 2007. A director and officer of the Corporation
            is also a director of the purchaser. The transaction was done on
            similar terms and conditions as those entered into with unrelated
            parties and measured at the exchange amount, the amount of
            consideration established and agreed to by the parties.

        (b) On August 1, 2007, the Corporation announced that it has entered
            into an Arrangement Agreement whereby Logria Corporation
            ("Purchaser"), a subsidiary of National Petroleum Company S.A.E.
            and an affiliate of Citadel Capital Company, will acquire the
            Corporation in a transaction valued at approximately
            $898 million. Under the terms of the Arrangement Agreement, the
            Purchaser will acquire all of the issued and outstanding common
            shares of the Corporation at a price of $7.30 per share in cash
            and all outstanding in-the-money options for their in-the-money
            value pursuant to a plan of arrangement. The Transaction will
            have to be approved by 66 2/3% of the votes cast by Rally's
            securityholders at a special meeting of securityholders to be
            held in mid-September. Closing is subject to certain other
            conditions, including court approval. In the event a superior
            proposal is accepted the Corporation will be required to pay a
            $24 million termination fee to the Purchaser, and, in certain
            circumstances, will indemnify the Purchaser for certain costs
            incurred in connection with the transaction for up to an
            additional $12 million. There can be no assurances this
            transaction will be completed or completed as described.

        (c) Subsequent to June 30, 2007, 260,000 options in the Corporation
            were exercised into 260,000 common shares at $0.60 per share.
    





For further information:

For further information: Abby Badwi, President & CEO, Tel: (403)
538-0000; Douglas Urch, Vice President, Finance & CFO, Fax: (403) 538-3705

Organization Profile

RALLY ENERGY CORP.

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