pearl exploration and production ltd

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PEARL EXPLORATION AND PRODUCTION LTD. Suite 700, 444 – 7th Avenue SW, Calgary, AB T2P 0X8

Ph. (403) 215-8313 Fax (403) 265-8324 www.pearleandp.com

NEWS RELEASE February 28, 2008

PEARL ANNOUNCES FINANCIAL RESULTS FOR PERIOD ENDED DECEMBER 31, 2007

CALGARY, ALBERTA - Pearl Exploration and Production Ltd. ("Pearl" or the "Company") (TSX Venture: PXX and First North: PXXS) is pleased to announce the results of the fifteen months ended December 31, 2007 and twelve months ended September 30, 2006. An updated investors’ presentation is available on Pearl’s website at www.pearleandp.com. Quarterly Results (Amounts in Canadian Dollars unless otherwise indicated) The effective date of this report is February 27, 2008. Additional information relating to the Company is available on SEDAR at www.sedar.com and on the Company’s web-site. Message from the President To our shareholders, Unlocking the value of heavy oil is what Pearl is all about - since the day of inception. Heavy oil will be playing an ever increasing role in world oil consumption as new sources of light crude become more and more elusive. Global energy demand will persistently push the limits of available supply. Diminishing availability of conventional oil and high prices will drive improved technology, refining capacity and infrastructure to recover and process heavy oil. Recognizing this as a largely overlooked opportunity, Pearl has been on a mission to accumulate heavy oil assets and has built a portfolio of quality projects. The emphasis is on large resource upside potential while achieving a balance of low-risk development. The focus is in North America where much of the world’s quality heavy oil resources lay and offer the most value due to proximity to markets. The untapped potential in North America is huge and Pearl is positioning itself to take full advantage. Over the course of 2007, Pearl added substantially to its production and resource/reserve base through six corporate and land acquisitions and a major development drilling program – accomplishments we are very proud of. Much of the operations were focused on development drilling to raise production levels to the 2007 guidance range of 12,000 to 14,000 Boepd. Our year end exit rate came in at the low end of the range at 12,100 boepd yet represents a 55% increase over year end 2006 exit rate. In total the Company drilled 170 wells in 2007 throughout its properties utilizing as many as 5 rigs at a time. As a result of these efforts, our Proved Reserves increased by 90%, our Probable Reserves by 89% and our Possible Reserves by over 500%. The quadrupling of our combined total Proved plus Probable plus Possible Reserves from 50.7 to 194.9 MMboe illustrates the value and quality of the assets acquired and developed during the year.

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Other activities during the year focused on converting our large-scale resources into reserves through steam and other enhanced oil recovery techniques and this work will continue with much greater emphasis in 2008. Contingent resources today stand at over 326 MMboe with oil in place numbers internally estimated at 5 – 8 billion barrels. The Company has set a capital budget of $61 million for 2008 with the majority of it allocated to resource conversion programs, including continued work on steam pilots at the San Miguel project in Texas, the Onion Lake project in Saskatchewan and the Blackrod project in the Athabasca region of northern Alberta, all of which offer great upside potential. Pearl will also be initiating studies to examine options for upgrading and/or refining technologies on its core properties to increase per barrel netback economics. In addition, in order to dedicate more capital and intellectual resources to core properties, the Company will investigate the rationalization of certain non-core assets located in Saskatchewan and Southern Alberta. As a predominately heavy oil producer, the Company’s realized oil price is exposed to significant fluctuations resulting from the market volatility of the light-to-heavy price differential. Although, West Texas Intermediate pricing is at historic highs, the light-to-heavy differential varies widely from month to month and can result in significant revenue swings. During the fourth quarter of 2007, the Company’s realized well head pricing ranged from the low $50/bbl range in November to the low $30/bbl range in December. This negatively impacted revenue in the fourth quarter. For the first quarter of 2008, the light-to-heavy differential has narrowed considerably and the Company is expecting to realize well head pricing for the quarter to average in the low to mid $50/bbl range. The year 2007 was a busy, productive year for the Company. The management team was greatly strengthened by the appointment of Randy Neely as CFO and Dean Tucker as VP Canadian Business Unit as well as the addition of several other key members of the team. As well, our shareholder base was broadened through the listing of its shares on the First North Exchange in Stockholm. In the months to come, the Company will continue to strengthen and focus on adding value. Pearl has recognized the enormous potential in heavy oil and will continue to aggressively grow and upgrade its heavy oil resources creating a unique, innovative and highly attractive niche for itself in the oil and gas sector. Investment in heavy oil stands to reap extraordinary rewards and the Company intends to be front and center. I would like to very much thank our shareholders for their continued support through the market turbulence of 2007 and look forward to a successful 2008 and beyond as we follow our mission of unlocking the value of heavy oil. On Behalf of the Board Keith Hill President and CEO Overview Pearl is a Canadian-based oil and gas company whose common shares are traded on the TSX Venture Exchange under the symbol “PXX”. Pearl’s main focus is large, heavy oil projects in Canada and the USA. The Company also holds interests in a number of natural gas properties. Prior to September 30, 2005, Pearl was a Calgary based mining company known as Newmex Minerals Inc. and traded on the TSX Venture Exchange under the symbol “NMM”. During the quarter ended December 31, 2005, the Company began its transition into an oil and gas company, and completed several significant acquisitions which are described more fully in the Company’s Annual Report dated September 30, 2006 and filed on SEDAR. In February 2006, the Company changed its name to Pearl.

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Pearl’s core properties in Canada include: • Onion Lake, Saskatchewan – heavy oil; • Mooney, Alberta – heavy oil; • Blackrod, Alberta – Heavy oil; • Fishing Lake, Alberta – heavy oil;

The Company is also involved with several projects in the USA including:

• San Miguel, Texas – heavy oil • Palo Duro, Texas – gas • Fiddler Creek, Montana – heavy oil

Change of Financial Year End The Company changed its financial year end from September 30 to December 31 effective October 1, 2006. The Company made this change in order that its financial results would be more comparable to its peers in the oil and gas industry. As a result of this change, the Company will have a transitional 15-month financial year ending December 31, 2007. Significant Events On October 20, 2006 the Company announced it had settled the land dispute surrounding the Onion Lake lands that were acquired from Pan-Global in April 2006. On November 15, 2006 the Company completed an equity financing of common shares, and flow-through shares for gross proceeds of $111 million. 22,444,444 common shares were issued at a price of $4.50 each and 1,709,401 flow-through common shares were issued at a price of $5.85 each. A 3.9 percent underwriter’s fee was paid to qualified persons in respect of a portion of the equity financing. On December 22, 2006 the Company acquired all of the issued and outstanding shares of Atlas Energy Inc. (“Atlas”) for total consideration, including transaction costs, of approximately $267.0 million. The Company issued 55,670,226 common shares and paid approximately $157,000 in cash to the Atlas shareholders. On January 1, 2007 the Company amalgamated Nevarro and Pan-Global with Atlas and renamed the combined subsidiary Pearl E&P Canada Ltd. On February 2, 2007 the Company announced the closing of a credit agreement with Alberta Treasury Branches for a $65 million Revolving 364 Day Extendible Term Facility and a $10 million Demand Revolving Operating Facility. On March 1, 2007, the Company acquired all of the issued and outstanding shares of Cipher Exploration Inc. (“Cipher”), a privately-held oil and gas company with heavy oil assets in western Canada. The Company assumed Cipher’s debt of approximately $8.3 million and issued 2,047,502 common shares to the Cipher shareholders for a total deemed purchase price of $20 million. Cipher’s key heavy oil assets include Ear Lake, Reward and Eagle Creek, Saskatchewan. Production at the time of the acquisition was approximately 340 boe/d. On May 8, 2007 the Company sold all of its Gulf of Mexico exploration assets to Bayou Bend Petroleum Ltd. (“Bayou Bend”; formerly Kit Resources Ltd.) in exchange for ten million shares of Bayou Bend having a deemed value of $2.20 per share. The Gulf of Mexico assets comprised the Company’s 100% working interest in five Gulf of Mexico offshore blocks (including Mustang Island), farm-in rights to acquire a 25% working interest in a sixth offshore block and all material contracts, physical data, work products and files and records associated with these blocks. The Company subsequently disposed of its Bayou Bend holdings in two transactions for cash proceeds of $12 million. ($10 million in the 3rd quarter and $2 million in the 5th quarter).

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On July 10, 2007 the Company sold on a non-brokered, private placement basis an aggregate of 12 million common shares at a price of $5.05 per share for gross proceeds of $60.6 million. A 4 percent finder’s fee was paid on the gross proceeds of the private placement. On August 2, 2007, the Company announced that it had closed the acquisition of a 24% working interest in the Mooney oil field from Ravenwood Energy Corp. (“Ravenwood”), a private oil and gas company for $20.0 million net of standard industry adjustments. The acquisition increased Pearl’s working interest in the Mooney field to over 98% and added approximately 625 boepd of production at the time of the acquisition. On August 23, 2007 the Company acquired a 35% working interest in 2,816 contiguous hectares of oil sands leases (Blackrod) located south of Fort McMurray, in the Athabasca Oil Sands region of northern Alberta. The purchase price was $5.0 million. On October 17th, 2007, the Company sold, on a bought-deal, private placement basis, an aggregate of 29.4 million common shares at a price of $3.75 per share for gross proceeds of $110.3 million. The net proceeds of the private placement were used to fund the acquisition of heavy oil assets from PetroHunter and will be used in the Company’s ongoing development programs as well as for general working capital purposes. On October 19th, 2007, the Company acquired all of the issued and outstanding shares of Watch Resources Ltd. (“Watch”), a junior oil and gas company with conventional heavy oil interests in the Fishing Lake area of north-central Alberta, in an all-share transaction at an exchange ratio of 0.23 common shares of Pearl for each common share of Watch. At closing, the Company issued 10,542,927 common shares of Pearl to former Watch shareholders at a deemed price of $4.76 per share, based on the weighted average trading price of Pearl’s shares shortly before and after the announcement of the acquisition. The deemed consideration, including transaction costs, for the Watch acquisition totaled $51.0 million. Included in the assets of Watch is a $5.0 million term deposit which is part of the non-bank-sponsored Asset Backed Commercial Paper (“ABCP”). The liquidity and settlement of the ABCP has been suspended pending the restructuring of the notes as determined by the Montreal Accord. At this time the timing of when the ABCP will have a liquid market is uncertain.. On November 6th, 2007, the Company acquired heavy oil assets in the states of Montana and Utah from PetroHunter Energy Corporation (“PetroHunter”). The purchase price is a maximum of US $30 million, payable as follows: (a) US $7.5 million in cash at closing; (b) the issuance of up to 2.5 million common shares of Pearl, the equivalent of up to US $10 million based on US $4.00 per share; and (c) a performance payment of US $12.5 million in cash at such time as either: (i) production from the assets reaches 5,000 bopd; or (ii) proven reserves from the assets is greater than 50 million barrels of oil. Of the 2.5 million common shares potentially issuable, 947,153 of these shares were issued on closing, 592,822 shares, are held in escrow, and are to be issued upon settlement of certain closing conditions related to title, and 960,025 of these shares are contingently issuable based on the outcome of negotiations with a third party. In the event that the Company fails to reach an agreement with the third party by May, 2008, the performance payment will be reduced to $9.8 million and the contingent shares will remain unissued.

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Selected Quarterly Information The following is a summary of selected financial information for the Company for the quarters indicated:

Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 ($000s, except where noted)

2007 2007 2007 2007 2006 2006 2006 2006

Oil & gas revenue 35,250 32,786 29,801 24,464 6,223 1,876 1,362 397 Production (boe/d) 9,507 9,093 7,910 6,966 1,674 454 270 121 Revenue per boe($) 40.30 39.17 41.40 38.98 40.40 44.89 55.40 36.59 Royalties 7,828 7,889 6,322 5,285 1,171 366 192 25

As a % of sales 22 24 21 22 19 19 14 6 Per boe ($) 8.95 9.43 8.78 8.43 7.60 8.76 7.81 2.30 Interest Income 551 19 40 243 266 413 252 54 Production Costs 14,835 12,245 10,949 10,132 2,370 527 302 19

Per boe ($) 16.96 14.64 15.21 16.16 15.38 12.60 12.27 1.72 Transportation Costs 829 498 1,074 999 168 - - -

Per boe ($) 0.95 0.59 1.49 1.59 1.09 - - - General and Administrative costs 6,356 4,268 3,953 2,559 2,006 2,280 1,176 394

Per boe ($) 7.27 5.10 5.49 4.08 13.02 54.55 47.85 36.34 Depletion, Depreciation and Accretion 22,816 23,406 22,322 17,537 6,539 2,137 2,868 669

Per boe ($) 26.09 27.98 31.01 27.97 42.45 51.13 116.66 61.65 Stock-based Compensation 830 778 918 958 563 520 687 1,744 Interest Expense 708 1,247 1,240 399 116 - - - Change in Fair Market Value of Gas Pricing Contracts - - - 488 48 - - - Foreign Currency Exchange Loss 61 119 97 172 54 22 133 85 Write-down of goodwill 172,921 - - - - 25 - - Loss (gain) on sale of assets 8,984 - (13,270) - - - 3 - Income taxes (16,959) (3,961) 3,463 3,808 (1,283) (1,596) - - Net loss (183,407) (13,683) (7,225) (17,628) (5,263) (1,990) (3,742) (2,486) Net loss per share basic and diluted

(1.01) (0.09) (0.05) (0.13) (0.08) (0.04) (0.09) (0.07)

Total assets 575,865 654,543 620,792 586,276 640,195 129,067 97,982 26,068

The increase in revenue for the quarter ended December 31, 2007 is mainly due to an increase in oil production volumes compared to the prior quarter. Development drilling activities at Onion Lake and Mooney fields are the main reason for the increase in production volumes as well as the increase in production due to the acquisition of Mooney lands from Ravenwood. The increase in production costs during the quarter are due to wells being added from the Watch acquisition and new wells drilled in the quarter only adding limited production. General and administrative costs for the quarter were higher due to several specific items; year-end bonus, accruals relating to audit, tax and reserve report, fee paid to a marketing company and a $700K writedown of accounts receivable. During the quarter the Company assessed goodwill for impairment and determined that the fair value of the reporting unit had declined as a result of declining market factors, principally the market price of the Company’s stock and thus, recorded a write-down of $172.9 million. The remaining 5.0 million shares of Bayou Bend were sold for loss of $8.9 million, which triggered a recovery of income taxes from the previously recorded gain resulting from the sale of the Gulf of Mexico assets in exchange for 10.0 million Bayou Bend shares. During the quarter there was a large future tax recovery as the Company continues to have a high

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depletion rate, which lowers the carrying value of the oil and gas assets at a faster rate then the utilization of tax pools to offset income. The significant increase in revenue, production, royalties, production costs, transportation costs, depletion and total assets for the quarter ended December 31, 2006 is a result of the Company’s acquisition of Atlas Energy Ltd. (“Atlas”) in December, 2006. The Atlas acquisition was completed on December 22, and although the Company only recorded nine days of production in December it was still significant to the Company’s operations. The significant increase in revenue, production, royalties, production costs, transportation costs and depletion for the quarter ended March 31, 2007 is a result of the Company reflecting the a full quarter of operations from the Atlas assets which were acquired in December 2006. The Atlas acquisition added approximately 5,300 boepd to the Company’s production for the quarter ended March 31, 2007. The decrease in total assets for the March quarter was due to a purchase price adjustment relating to the Atlas acquisition as a result of the Company receiving an updated reserve report in April, 2008. Operations Update Onion Lake Heavy Oil Project – Saskatchewan During 2007, the Company continued its successful multi-well development drilling program of the heavy oil trend at Onion Lake. A total of 70 new wells were drilled and placed on production. This increased net production at Onion Lake by over 6 times, raising it from approximately 350 boepd at the beginning of 2007 to approximately 2,300 boepd at year end. A 3-D seismic survey was completed in the third quarter and is currently being evaluated to assess the Company’s southern acreage and prioritize further development drilling locations. The Company also completed the engineering design of centralized sand handling facilities and is presently completing the design of centralized emulsion treating facilities. Going forward, construction of these facilities, as well as construction of a fuel gas system, are expected to reduce overall operating costs at Onion Lake. During 2007, planning and procurement for a thermal recovery pilot were completed and regulatory approvals received. The necessary wells were drilled in December and construction began on pilot facilities in late 2007. Commissioning of facilities will begin in the first quarter of 2008 in order that the pilot will be fully operational in the first half of 2008. Mooney Heavy Oil Project – Alberta The Company had continued success at its Mooney field with the drilling of 27 horizontal development wells and 12 vertical stratigraphic wells. Production at Mooney increased by over 300% during 2007 with the property exiting 2007 producing approximately 2,700 boepd net to the Company. Increased volumes and operational efficiencies also led to a reduction of overall operating costs at Mooney of approximately $2.00 per boe over the year. In 2008, the Company plans on drilling a total of 7 horizontal and 4 delineation wells at Mooney. The 7 horizontal wells will be brought on as producing oil wells and a number of previously drilled horizontal wells will be converted over to water injection in preparation of the water flood. Additionally the Company will also construct water handling and related facilities at Mooney in preparation of converting to a water flood. The 4 delineation wells will also be drilled in 2008 to test the western extent of the reservoir. The Company also plans to commission a study regarding the feasibility of introducing polymer flood techniques at Mooney in 2008.

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Blackrod Heavy Oil Project – Alberta During 2007 the Company acquired, in two separate Crown land sales, a 35% working interest in 15 contiguous Sections (8,960 acres) of oil sands leases located northcentral Alberta between Townships 76 – 77, Ranges 17 – 18, west of the 4th Meridian. The Company also has an additional indirect ownership of roughly 13% in this project through its ownership in Serrano Energy Ltd., who have a 35% working interest in the same acreage.

The Company has plans to drill one appraisal well this winter and is in the process of preparing an application for required governmental approvals of a thermal pilot project utilizing Steam-Assisted Gravity Drainage (SAGD) technology. Upon confirmation of positive results from this appraisal well, and receipt of the required regulatory approvals, a SAGD pilot comprised of single well pair and related facilities will be initiated.

San Miguel Heavy Oil Project – Maverick Basin, South Texas During 2007 the Company continued with steam injection pilot operations at the San Miguel Heavy Oil Project to determine the technical and economic feasibility of cyclic steam injection to enhance oil recovery. The pilot has demonstrated that cyclic steam may not be the optimal development option. Based on these results and continuing reservoir simulation studies that incorporated the third cycle of injection and production, the existing pilot will now be converted to evaluate a Steam-Assisted Gravity Drainage (SAGD) process. This will involve doubling its current steam capacity and drilling two horizontal wells; both of which have been drilled in the first quarter of 2008. This will enable the pilot to continue operations in the first half of 2008. Additionally in 2008 a new, larger production pilot is being initiated approximately eight miles north of the existing pilot. Planning and procurement of long-lead items necessary for facility modifications and construction were underway prior to the end of 2007. The production pilot will have four times the steam capacity of the original pilot and is projected to be operational in the second half of 2008. This production pilot will be capable of evaluating more than one recovery method (e.g., horizontal steam drive patterns, vertical well patterns and potentially a combination thereof) and will include the drilling of between 6 and 8 new horizontal and vertical wells. Palo Duro Shale Gas Exploration Project – North Texas The Company continued to participate in its non-operated Palo Duro Shale Gas Project in 2007. Following the drilling of the MacIntosh #1-76 appraisal well in the first quarter, no additional drilling occurred in 2007. Additional long-term testing of the five wells drilled will be required to establish the economic viability of the project. Discussions with our partners have focused on the building of a required pipeline and facilities to tie-in and test the long term performance of the two existing MacIntosh wells. Fiddler Creek – Montana During 2007, the Company acquired a 100% working interest in a large heavy oil opportunity with significant resource upside potential in the Fiddler Creek area of Montana. Pearl initiated the assessment and development of this area in December 2007 by drilling an appraisal well, Beartooth Federal 43-33, into the Fiddler Creek field of Stillwater County, in southern Montana. The well was drilled into the main structure of the property, the Fiddler Creek Dome, in order to extend the known limits of the southwestern portion of the field, and it will be further evaluated during the first half of 2008 to validate reservoir continuity and potential reserve additions. In addition to this well, an existing well, Mowell #1, was re-completed for evaluation. Both wells are connected to tank facilities to gather reservoir and production data that will be used to confirm and complete a field development study. The Company expects to drill an additional appraisal well following regulatory approvals in the second half of 2008. This work is in preparation of future field development which, beginning in 2009, is anticipated to include horizontal development drilling in order to establish commercial production rates,

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installation of production facilities, acquisition and analysis of additional geophysical data, and examination of enhanced recovery methods. Other Area Properties – Alberta, Saskatchewan During 2007, drilling and other production enhancement projects continued on the Company’s non-core heavy oil and natural gas producing properties in Alberta and Saskatchewan with a total of 54 wells drilled. This drilling activity increased production in the short term but was insufficient to cover the overall decline in production from these non-core properties in 2007. Production exited the year at approximately 5,500 boepd net to the Company. In order to dedicate more capital and intellectual resources to its core properties, the Company has initiated a sales process to divest certain non-core assets situated in Saskatchewan and Alberta. The outcome of this process is unknown at this time. Other Area Properties – U.S. The Company also holds interests in several other areas in the United States, including Texas City, West Rozel, Gunnison Wedge and Promised Land; however, there is limited or no production from these areas and there are no significant plans contemplated for these lands in 2008. However, the Company believes certain of these lands, namely Gunnison Wedge, West Rozel and Promised Land, contain large resource potential and may, based upon further evaluation, be developed in the future. Results of Operations $ Thousands, except where noted Fifteen months ended Twelve months ended Dec 31, 2007 Sep 30, 2006Net loss (227,506) (8,953)Per share ($) (1.73) (0.23)

The Company incurred a net loss of approximately $227.2 million or $1.73 per share for the fifteen months ended December 31, 2007 compared to a loss of $9.0 million or 0.23 per share for the twelve months ended September 30, 2006. The net loss for the year is principally a result of the write-down of goodwill ($172.9 million), the provision for depletion, depreciation and accretion ($92.6 million) as well as high general and administrative costs and operating expenses, with an offsetting tax recovery ($14.9 million) The Company believes that as further production volumes are added and reserves increase from the Company’s development activities in 2007, depletion expense will decrease and profitability from oil and gas activities will increase. Oil and Gas Sales and Production Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Oil & gas sales ($) 128,524 3,635Oil (net bopd) 5,295 96Natural gas (net mcf/d) 10,309 626NGLs (net bbls/d) 15 -Total (net boe/d)* 7,029 201Oil – average selling price per bbl ($) 40.31 50.21Gas – average selling price per mcf ($) 6.39 5.97

* gas production converted at 6:1 The Company’s oil and gas sales and production have increased substantially over the prior twelve-month period. In 2007, the Company grew its revenue significantly due to the many acquisitions and its drilling program with total revenue from oil and gas sales of $128.5 million and average daily production of 7,029 boe per day.

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Oil and gas sales and production were much lower in the prior twelve-month period. The Company acquired Pan-Global in late April 2006 and Nevarro Energy Ltd. (“Nevarro”) in September, 2006; therefore, production from these properties is reflected only from the dates of acquisition. Royalties Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Royalties 28,494 583As a percent of sales 22% 16%

Royalties have increased significantly from $0.6 million in the prior twelve-month period to $28.5 million in the fifteen months ended December 31, 2007. This increase is consistent with the increase in production and revenues during the 15 month period due to acquisitions and the large drilling program that was completed in 2007. Royalties as a percentage of revenue increased from 16% in the prior twelve-month period to 22% in the fifteen months ended December 31, 2007. The current 22% is consistent with industry averages and the 16% in the prior year periods was due to lower royalties on the production from Pearl’s Texas Queen City wells which made up a much larger portion of production during that period. Production Costs Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Production costs 50,531 847Per boe ($) 15.73 11.57

Operating costs on a per boe basis averaged $15.73 for the fifteen months ended December 31, 2007 in comparison to $11.57 per boe for the twelve months ended September 30, 2006. For the prior year periods, operating costs relate only to Onion Lake and the Texas Queen City gas wells. The Texas gas wells have a very low operating cost on a per boe basis and, due to the lower volumes in the prior year, had a more pronounced impact on reducing the total operating cost per boe. The significant increase in operating costs from the prior period is consistent with the large increases in production due to acquisitions and the significant amount of wells drilled in 2007. The Company is focused on increasing its efficiency and as production increases from drilling and development activities, per barrel operating costs are expected to decline. Transportation Costs Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Transportation costs 3,567 -Per boe ($) 1.11 -

Transportation costs are incurred to move marketable crude oil and natural gas to their selling points. Transportation costs are currently averaging $1.11 per boe for the Company. For the prior twelve-month period ended September 30, 2006, the Company had minimal transportation costs that were netted against revenue by the operator.

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Interest Income Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Interest income 1,120 746

Interest income represents bank interest earned on excess cash and due to the large drilling program and the acquisitions that were completed during 2007 the Company had limited cash. General and Administrative Expenses Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 General and administrative expenses

19,142 3,987

Per boe ($) 5.96 54.45 General and administrative expenses have decreased on a per boe basis compared to the prior twelve-month period due to increased production. General and administrative expenses for the fifteen months ended December 31, 2007 include (i) $6.2 million for wages and salaries and related benefits associated with the increased staffing level required for the Company’s significant growth in 2007; (ii) $5.5 million of consulting services, which includes engineering, geological, land and other consultants; (iii) $3.2 million in bad debt expense resulting from uncollectible accounts acquired in corporate acquisitions; (iv) $1.2 million in office rent; (v) $1.2 million in costs associated with stock exchange fees and investor relations; and (vi) $1.8 million in insurance, computer services and professional fees. The Company expects general and administrative costs on a per boe basis to decrease as production volumes increase, certain costs are reduced and efficiencies realized. During 2007 the Company capitalized $nil of general and administrative expenses. Depletion, Depreciation and Accretion (“DD&A”) Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Depletion, depreciation and accretion 92,620 5,674Per boe ($) 28.83 77.49 DD&A expense was $92.6 million or $28.83 per boe for the fifteen months ended December 31, 2007 in comparison to $5.7 million or $77.49 for the twelve months ended September 30, 2006. The higher DD&A expense reflects the impact of the Company’s 2007 capital spending, the impact of the numerous acquisitions that were completed during the period and significantly higher production. The Company’s independent reserve evaluation as of December 31, 2006 allocated a small amount of proved reserves, due to the minimal amount of capital activity in 2006. The low amount of proved reserves coupled with increased production contributed to the higher DD&A expense in 2007. The Company expects to see a significant increase in proved reserves as part of the December 31, 2007 reserve report reflecting the numerous acquisitions and significant drilling completed in 2007. The December 31, 2007 reserve report contains a significant increase in proved reserves reflecting the acquisitions and drilling program completed in 2007. As such, a lower depletion rate was utilized for the last quarter of 2007. As a result, the DD&A rate per boe is expected to decrease in 2008. Stock-Based Compensation Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Stock-based compensation 4,047 3,412

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The Company uses the fair value method of accounting for stock options granted to directors, officers, employees and consultants whereby the fair value of all stock options granted is recorded as a charge to operations. The fair value of common share options granted is estimated on the date of grant using the Black-Scholes option pricing model. For the fifteen months ended September 30, 2007, the Company issued 6.9 million options at prices ranging from $2.25 to $5.64. Interest Expense Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Interest expense

3,709 114

Per boe ($) 1.15 1.55 Included in interest expense is $0.6 million of interest accrued on the Company’s unspent flow-through share obligation. The remaining $3.1 million of interest expense relates to the Company’s bank debt. The Company had an average debt level of $43.5 million and an effective interest rate of 5.71% for the fifteen months ended December 31, 2007. Write-downs Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Write-down 172,921 25

The Company assessed goodwill for impairment at December 31, 2007 and determined that the fair value of the reporting unit had declined as a result of declining market factors, principally the market value of the Company’s stock and thus, recorded a write-down of $172.9 million (2006 - $nil). Loss (gain) on sale of assets Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Loss (gain) on sale of assets (4,286) -

On May 8, 2007 the Company sold its Gulf of Mexico assets to Bayou Bend Petroleum Ltd. (“Bayou Bend”) in exchange for ten million common shares of Bayou Bend. The disposition of the Gulf of Mexico assets resulted in a gain of $14.3 million, the realization of which was required as the depletion rate changed by more than 20 percent upon disposition. The Bayou Bend shares were subsequently sold in two separate tranches resulting in net cash proceeds of $12.0 million and a loss on sale of $10.0 million. Income taxes (recovery) Fifteen months ended Twelve months ended December 31, 2007 September 30, 2006 Income taxes (14,933) (1,596)

During the fifteen months ended December 31, 2007 there was a large future tax recovery as the Company continues to have a high depletion rate, which lowers the carrying value of the oil and gas assets at a faster rate then the utilization of tax pools to offset income. In addition, the significantly higher reserves, and associated future cash flows, obtained in the new reserve report provided support for management to recognize the future income tax benefit on certain previously unrecognized tax pools.

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Financial Condition As at December 31, 2007, the Company had total assets of $575.9 million compared to $129.1 million at September 30, 2006. Accounts receivable were $25.1 million at December 31, 2007 compared to $4.4 million at September 30, 2006. The December 31, 2007 accounts receivable balance includes approximately $12.8 million relating to oil and gas revenue receivables and accruals for the period, and approximately $6.9 million for joint interest receivables relating to capital and operating costs owed by partners and $5.4 million relating to GST receivable from the Canada Revenue Agency. Investments at December 31, 2007 were $9.4 million compared to $3.0 million at September 30, 2006. The Company holds $5.5 million of common shares of Serrano Energy Ltd. (“Serrano”), a private oil and gas exploration and development company, which is in the initial stages of acquiring and drilling oil and gas exploration and development prospects. These shares represent an ownership interest in Serrano of approximately 37%. Initially, the Company subscribed for six million shares in Serrano in conjunction with the acquisition of Nevarro Energy Ltd. in September 2006. In June 2007, the Company subscribed for an additional 2,074,689 shares of Serrano. In July, 2007 Serrano consolidated the shares on a 2:1 basis. The remaining $3.9 million in investments relates to an asset-backed commercial paper acquired (“ABCP”) as part of the Watch acquisition. The acquired ABCP is a $5.0 million term deposit. The liquidity and settlement of the ABCP has been suspended pending the restructuring of the notes as determined by the Montreal Accord. At this time the plan for such restructuring and eventual liquidity of the ABCP are unknown. As a result the Company has classified its ABCP as long-term investments. The valuation technique used by the Company to estimate the fair value of its investments in ABCP incorporates probability – weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. This evaluation resulted in a reduction of $1.1 million to the estimated fair value of the ABCP upon the Company’s acquisition of Watch. Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company’s investment in ABCP which would impact the Company’s earnings. Long-term accounts receivable were $nil at December 31, 2007 compared to $1.1 million at September 30, 2006. Prior to the Company’s acquisition of Pan-Global in April 2006, Pan-Global had advanced $3 million to the Onion Lake First Nation (“OLFN”). The total receivable amount was being set-off against the OLFN’s share of net revenue from production from the pre-existing Onion Lake oil and gas producing wells. As a result of the new joint venture operating agreement entered into with OLFN in 2007, the Company assumed the remaining receivable balance and reclassified the capital and operating portions accordingly. Prepaid expenses and deposits were $3.2 million at December 31, 2007 compared to $0.8 million at September 30, 2006. Approximately $1.9 million of the balance relates to deposits for office space, equipment and Crown royalties. The remaining $1.3 million includes lease rentals and other prepayments. Accounts payable and accruals were $69.9 million at December 31, 2007 compared to $12.6 million at September 30, 2006. Included in the balance is $19.7 million of trade payables (operating and capital), $8.4 million for joint venture payables and cash call payables and $41.8 million for operating and capital accruals. The Company has a credit facility with a Canadian chartered bank in the amount of $60 million which had no outstanding balance at December 31, 2007. Share capital totaled $723.1 million at December 31, 2007 compared to $112.6 million at September 30, 2006. The increase from September 30, 2006 relates to funds raised through equity financings ($273.9 million, net of issuance costs and not including the $3.1 million tax effect from the flow thru shares) and

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shares issued for acquisitions ($339.6 million). Liquidity and Capital Resources At December 31, 2007, the Company had $60.0 million of remaining credit capacity available under its $50.0 million extendible term credit facility and $10.0 million demand revolving credit facility. At December 31, 2007, the Company had a working capital deficit of $34.2 million compared to a working capital deficit of $3.8 million at September 30, 2006. Funds from operations were $21.6 million for the fifteen months ended December 31, 2007 compared to funds used in operations of $1.2 million for the year ended September 30, 2006. The improvement in funds from operations is consistent with the growth of the Company in 2007. Net cash from financing activities for the fifteen months ended December 31, 2007 was $188.8 million compared to net cash from financing activities of $55.7 million for the year ended September 30, 2006. Financing activities during the fifteen months ended December 31, 2007 included (i) receipt of $270.8 million, net of issue costs, from equity financings that were used to fund the Company’s acquisitions and its capital program and repay debt; (ii) net repayment of the Company’s credit facility of $93.1 million; (iii) the sale of the 10.0 million Bayou Bend shares for $12.0 million, and (iv) the exercise of $0.7 million in stock options. Significant financing activities that occurred in the twelve months ended September 30, 2006 included (i) receipt of $57.2 million, net of issue costs, from equity financings; (ii) net repayment of $14.1 million of debt assumed in the Pan-Global acquisition; and (iii) receipt of $12.3 million from early expiration of warrants issued in 2005. Net cash used in investing activities was $187.8 million for the fifteen months ended December 31, 2007 compared to $47.6 million for the year ended September 30, 2006. The Company’s investing activities included exploration, development and lease acquisition expenditures of $217.3 million (2006 - $20.6 million) and corporate acquisition costs of $11.9 million (2006 - $24.0 million). The Company also used $2.5 million of cash (2006 - $3.0 million) to acquire additional shares in Serrano, a privately held oil and gas exploration and development company, in which the Company has an ownership interest of approximately 37%. To date, the Company has not generated sufficient cash flow from its oil and gas operations to fund its entire oil and gas exploration, development and acquisition activities. The Company has relied upon the issuance of common shares and debt financing to provide additional funding. The 2008 capital program and budget of $61.0 million has been established based on the Company’s projected cash flow for the year. In 2008, the Company intends to focus its efforts chiefly on converting resources to reserves and increasing operational efficiencies in core areas. In addition, the Company is currently seeking to dispose of its non-core non-resource focused properties. The Company may consider additional issuances of common shares or debt instruments to assist with financing its ongoing oil and gas exploration, development and acquisition activities to the extent that sufficient cash flow from operations is unavailable in the future. In addition, the Company may consider divesting of non-core oil and gas assets or farming out interests in oil and gas properties to finance its operations. Accordingly, the Company’s consolidated financial statements are presented on a going-concern basis. Financial Instruments The carrying amounts of financial instruments comprising cash, accounts receivable, accounts payable and income and capital taxes receivable approximate their fair value due to the immediate or short-term nature of these financial instruments.

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Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Outstanding Share Data As at February 27, 2008, the Company had 189,241,716 common shares outstanding and 6,673,473 stock options outstanding under its stock-based compensation plan. Related Party Transactions Tanganyika Oil Company Ltd. (“Tanganyika”) provides administrative and technical services to the Company from time to time based upon time and expenses incurred by Tanganyika. For the fifteen months ended December 31, 2007, Tanganyika charged the Company $271,465 (2006 - $141,800). Tanganyika and Pearl have certain directors and officers in common. In 2008, the Company expects these transactions to be minimal. The Company borrowed $3,000,000 on October 27, 2006 from Tanganyika which was repayable on or before November 30, 2006. Interest was charged at a rate equal to prime plus 2% per annum. The Company repaid the loan in full on November 22, 2006 plus accrued interest of $18,195. Namdo Management Services Ltd. (“Namdo”) provides executive and support services to the Company. For the fifteen months ended December 31, 2007, the Company paid Namdo $117,000 (2006 - $nil). Namdo is a private corporation owned by Lukas H. Lundin, a director of the Company. Up to September 30, 2006, Proprietary Industries Inc. (“PPI”) provided administrative and other services to the Company. PPI charged a fee to the Company based upon time and expenses incurred by PPI. For the year ended September 30, 2006, PPI charged the Company fees in the amount of $105,000. PPI and Pearl had certain directors and officers in common. This arrangement is no longer in place. In January 2006 the Company acquired oil and gas assets from Valkyries Petroleum Corp. (“Valkyries”) for cash consideration of $6.7 million and a potential deferred bonus payment (see note 18 in 2007 Consolidated Financial Statements). A director appointed to Pearl’s Board of Directors in January 2006 was also a Valkyries director and officer. In addition, Pearl’s largest individual shareholder was also a director, a shareholder and a previous officer of Valkyries. The acquisition of assets from Valkyries was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. In May 2007 the Company closed the sale of its Gulf of Mexico assets to Bayou Bend. An officer and director of the Company is also a Bayou Bend director. In addition, Pearl’s largest individual shareholder is a director and shareholder of Bayou Bend. The disposal of assets in exchange for common shares of Bayou Bend was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. In June 2007 the Company closed the sale of 5.0 million shares of Bayou Bend to a company that is controlled by a shareholder and an officer of Pearl. The loss was recorded on the sale of the shares due to a decline in the market price of the Bayou Bend shares. The share price was valued at $2.00 which was the weighted-average trading price of the Bayou Bend shares shortly before and after the date of the sale. The disposal of the shares of Bayou Bend was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. Critical Accounting Estimates The preparation of the Company’s financial statements requires management to adopt accounting policies that involve the use of significant estimates and assumptions. These estimates and assumptions are developed based on the best available information and are believed by management to be

15

reasonable under the circumstances. New events or additional information may result in the revision of these estimates over time. Depletion, Depreciation and Accretion Pearl follows CICA accounting guideline AcG-16 on full cost accounting in the oil and natural gas industry to account for oil and natural gas properties. Under this method, all costs associated with the acquisition of, exploration for, and the development of crude oil and natural gas reserves are capitalized and costs associated with production are expensed. The capitalized costs are depleted using the unit-of-production method based on estimated proved reserves using management’s best estimate of future prices. Reserves estimates can have a significant impact on earnings, as they are a key component in the calculation of depletion. Asset Impairment Producing properties and unproved properties are assessed for impairment annually or as economic events dictate. The cash flows used in the impairment assessment require management to make estimates and assumptions as to recoverable reserves, future commodity prices and operating costs. Changes in any of the estimates or assumptions could result in an impairment of the carrying value of producing properties and unproved properties. Asset Retirement Obligations Asset retirement obligations require that management make estimates and assumptions regarding future liabilities and cash flows involving environmental reclamation and remediation. Estimates of future liabilities and cash flows are subject to uncertainty associated with the method of reclamation and remediation, environmental legislation, the timing of reclamation and remediation activities and the cost of reclamation and remediation activities. Purchase Price Allocation Business acquisitions are accounted for by the purchase method of accounting. Under this method, the purchase price is allocated to the assets acquired and the liabilities assumed based on the fair value at the time of acquisition. The excess purchase price over the fair value of identifiable assets and liabilities acquired is goodwill. The determination of fair value often requires management to make assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair value of petroleum and natural gas properties acquired generally require the most judgment and include estimates of reserves acquired, future commodity prices and discount rates. Future net earnings can be affected as a result of changes in future depletion and depreciation, asset impairment or goodwill impairment. Goodwill Impairment Goodwill is subject to impairment tests annually, or as economic events dictate, by comparing the fair value of the reporting entity to its carrying value, including goodwill. If the fair value of the reporting entity is less than its carrying value, a goodwill impairment loss is recognized as the excess of the carrying value of the goodwill over the implied value of the goodwill. The determination of fair value requires management to make assumptions and estimates about recoverable reserves, future commodity prices, operating costs, production profiles and discount rates. Changes in any of these assumptions, such as a downward revision in reserves, a decrease in future commodity prices, an increase in operating costs or an increase in discount rates could result in an impairment of all or a portion of the goodwill carrying values in future periods. Accounting for Stock Options The Company recognizes compensation expense on options granted pursuant to its stock option plan. Compensation expense is based on the theoretical fair value of each option at its grant date, the estimation of which requires management to make assumptions about the future volatility of the Company’s stock price, future interest rates and the timing of optionee’s decisions to exercise the options. The effects of a change in one or more of these variables could result in a materially different fair value.

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Risks and Uncertainties The Company is exposed to a number of risks and uncertainties inherent in exploring for, developing and producing crude oil and natural gas. These risks and uncertainties include, but are not limited to, the following:

• risk of finding and producing reserves economically; • uncertainty associated with obtaining drilling licenses and other consents and approvals; • production risks associated with sour hydrocarbons; • marketing reserves at acceptable prices; • cost of capital risk associated with securing the needed capital to carry out the Company’s

operations; • risk of fluctuating foreign currency exchange rates; • risk of governmental policies, social instability or other political, economic or diplomatic

developments in its operations; • market risks associated with investing the Company’s cash reserves in interest bearing

depository instruments; and • environmental risks related to its oil and gas properties.

Many of the previously mentioned risks are beyond the Company’s control, and it is impossible to ensure that any exploration drilling program will result in commercial operations. The Company does not currently utilize derivative instruments to hedge its commodity price, foreign currency exchange or interest rate risks. Pearl strives to minimize and manage these risks in a number of ways, including:

• Employing qualified professional and technical staff; • Communicating openly with members of the public regarding its activities; • Concentrating in a limited number of areas; • Utilizing the latest technology for finding and developing reserves; • Constructing high-quality, environmentally sensitive, safe production facilities; • Maximizing operational control of drilling and producing operations; and

Environmental Risks All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the “Protocol”), which calls for Canada to reduce its greenhouse gas emissions to specified levels. There has been much public debate with respect to Canada’s ability to meet these targets and the government’s strategy or alternative strategies with respect to climate change and the control of greenhouse gases. Implementation of strategies for reducing greenhouse gases, whether to meet the limits required by the Protocol or as otherwise determined, could have a material impact on the nature of oil and natural gas operations, including those of the Company. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict either the nature of those requirements or the impact on the Company and its operations and financial condition. NEW ACCOUNTING PRONOUNCEMENTS As disclosed in the September 30, 2006 annual audited consolidated financial statements, on October 1, 2006, the Company adopted the new CICA Handbook Sections 1530 “Comprehensive Income”, 3855 “Financial Instruments – Recognition and Measurement”, and 3865 “Hedges”. The adoption of these standards has had no material impact on the Company’s net income or cash flows. The other effects of the new standards are discussed below.

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Comprehensive Income The new standards introduce comprehensive income, which consists of net income and other comprehensive income (“OCI”). The Company’s consolidated financial statements now include a Consolidated Statement of Comprehensive Loss, which includes the components of comprehensive income, and a Consolidated Statement of Cumulative Other Comprehensive Income, which provides the continuity of cumulative other comprehensive income (“COCI”). The cumulative changes in OCI are included in COCI, which is also presented as a new category within shareholders’ equity on the Consolidated Balance Sheet. The adoption of comprehensive income has been made prospectively in accordance with its transitional provisions. Financial Instruments The financial instruments standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as “held-for-trading”, “available-for-sale”, “held-to-maturity”, “loans and receivables”, or “other financial liabilities” as defined by the standard. Financial assets and financial liabilities “held-for-trading” are measured at fair value with changes in those fair values recognized in net income. Financial assets “available-for-sale” are measured at fair value, with changes in those fair values recognized in OCI. Financial assets “held-to-maturity”, “loans and receivables” and “other financial liabilities” are measured at amortized cost using the effective interest method of amortization. The methods used by the Company in determining fair value of financial instruments are unchanged as a result of implementing the new standard. The Company has assessed new and revised accounting pronouncements that have been issued and are not yet effective and determined that the following may have a significant impact on the Company: Financial Instruments As of January 1, 2008, Pearl will be required to adopt two new CICA standards, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation,” which will replace Section 3861 “Financial Instruments – Disclosure and Presentation.” The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. Capital Disclosures As of January 1, 2008, Pearl will be required to adopt Section 1535 “Capital Disclosures,” which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements. International Financial Reporting Standards In January 2006, the CICA Accounting Standards Board (“AcSB”) adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards (“IFRS”) for fiscal periods commencing on or after January 1, 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS. General Standards of Financial Statements Presentation In June 2007, the CICA amended Section 1400, “General Standards of Financial Statement Presentation,” to require an assessment and potential disclosure of an entity’s ability to continue as a going concern. The new requirements are effective for interim and annual periods beginning on or after January 1, 2008. The Company continually assesses the impact on its consolidated financial statements.

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Internal Controls over Financial Reporting The Company has, under the supervision of its chief financial officer, designed a process for internal control over financial reporting, which process has been effected by the Company’s board of directors and management. The process was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Company’s GAAP and incorporates policies and procedures as described above. The Company’s operations have expanded significantly in the fifteen months ended December 31, 2007 and in the previous fiscal year ended September 30, 2006. This expansion necessitated the development and implementation of processes to ensure that the internal controls over financial reporting could meet the requirements of MI 52-109. New policies have been implemented over the course of the last fiscal year and the initial evaluation indicates that the processes are effective in ensuring that the Company is able to provide reliable financial reporting and prepare satisfactory financial statements. There have been no changes to the Company’s internal controls over financial reporting since the processes have been implemented, other than changes in scope and magnitude of the processes, required to adapt to the expansion of the Company’s operations. None of these changes have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. It should be noted that a control system, including the Company’s disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud. Outlook The Company plans to continue pursuing large resource North American heavy oil opportunities to add to its portfolio, to seek to rationalize non-core assets, and to focus on conversion of resources to reserves and development of its existing interests in the USA and Canada. BOEs Throughout this report, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. BOEs may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead. Forward-Looking Statements Certain information regarding the Company contained herein may constitute forward-looking statements. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact. By their nature, forward-looking statements and information involve assumptions, inherent risks and uncertainties, many of which are difficult to predict, and are usually beyond the control of management, that could cause actual results to be materially different from those expressed by these forward-looking statements and information. The Company does not undertake to update or re-issue the forward-looking statements and information that may be contained herein, whether as a result of new information, future events or otherwise. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement. Non-GAAP Measures Included in this report are references to terms commonly used in the oil and gas industry, such as, cash flow and funds from operations which represent cash flow from operating activities expressed before changes in non-cash working capital, long-term receivable and asset retirement costs incurred and are

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used by the Company to analyze operating performance, leverage and liquidity. These terms do not have standardized meanings prescribed by Generally Accepted Accounting Principles (“GAAP”) and therefore may not be comparable with the calculations of similar measures for other entities. Consequently, these are referred to as non-GAAP measures. Trading on First North, Stockholm On June 20, 2007, the Company commenced trading Swedish depository receipts (“SDRs”) on the First North list of the OMX Nordic Exchange. Each SDR represents one issued common share of the Company on deposit with a designated depository and is exchangeable into common shares on a one-for-one basis subject to the payment of an exchange fee.

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PEARL EXPLORATION AND PRODUCTION LTD.

Consolidated Balance Sheet (unaudited) December 31, 2007 September 30, 2006 Assets Current assets

Cash $ 4,799,186

$ 8,717,568

Accounts receivable 25,134,435 4,417,816 Income taxes and capital taxes receivable 2,618,015 - Prepaid expenses and deposits 3,195,770 788,394

35,747,406 13,923,778

Investments (note 8) 9,362,895 3,000,000 Long-term accounts receivable (note 9) - 1,144,136 Petroleum and natural gas properties (note 10) 528,352,540 92,069,058 Future income tax (note 16) 2,402,532 - Goodwill (note 7) - 18,930,509

$ 575,865,373

$ 129,067,481

Liabilities Current liabilities

Accounts payable and accrued liabilities $ 69,899,310

$ 12,559,545

Bank loan (note 11) - 4,976,200 Income taxes and capital taxes payable - 145,372

69,899,310 17,681,117 Long-term liabilities

Asset retirement obligation (note 12) 16,586,030 3,772,479 Future income tax (note 16) - 5,523,339

86,485,340 26,976,935 Shareholders' equity

Share capital (note 14) 723,121,821 112,613,584 Contributed surplus (note 15) 8,778,124 4,791,060 Cumulative other comprehensive income - - Deficit (242,519,912) (15,314,097)

489,380,033 102,090,546

$ 575,865,373

$ 129,067,481

Commitments (note 17) Contingencies (note 20)

See accompanying notes to financial statements

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Consolidated Statement of Operations and Deficit(unaudited)

For the fifteen months ended For the year endedDecember 31 September 30

2007 2006 2007 2006Revenue

Oil and gas sales $ 35,249,561 $ 6,222,853 $ 128,523,931 $ 3,634,821 Interest income 551,393 265,966 1,119,701 746,240 Royalties (7,827,730) (1,171,261) (28,494,293) (582,550)

27,973,224 5,317,558 101,149,339 3,798,511 Expenses

Production costs 14,834,714 2,369,658 50,531,155 846,946 Transportation costs 828,769 167,568 3,567,211 - General and administrative 6,356,490 2,006,143 19,142,176 3,987,234 Depletion, depreciation and accretion 22,815,656 6,538,740 92,619,784 5,673,989 Stock-based compensation 830,159 563,347 4,046,779 3,411,784 Interest 707,918 115,734 3,708,831 113,817 Change in unrealized loss of gas pricing contracts - 48,240 536,000 - Foreign currency exchange loss 60,777 53,930 501,463 292,201

46,434,483 11,863,360 174,653,399 14,325,971

Other itemsWrite-downs (note 7) 172,921,210 - 172,921,210 21,626 Loss (gain) on sale of assets 8,983,675 - (4,286,369) -

181,904,885 - 168,634,841 21,626

Loss before income taxes (200,366,144) (6,545,802) (242,138,901) (10,549,086)

Income taxes Future income taxes (recovery) (13,138,023) (1,372,049) (19,518,014) (1,693,611) Income taxes and capital taxes (3,821,328) 89,318 4,584,928 97,398

(16,959,351) (1,282,731) (14,933,086) (1,596,213)

Net loss for the period (183,406,793) (5,263,071) (227,205,815) (8,952,873)

Deficit, beginning of period (59,113,119) (15,314,097) (15,314,097) (6,361,224)

Deficit, end of period $ (242,519,912) $ (20,577,168) $ (242,519,912) $ (15,314,097)

Basic and diluted loss per share $ (1.01) $ (0.08) $ (1.73) $ (0.23) Weighted average number of common shares used in computing earnings per share:

basic 181,212,075 62,939,284 131,223,521 38,648,736 diluted 181,577,030 62,939,284 132,525,404 38,992,416



For the three months endedDecember 31

Consolidated Statement of Comprehensive Loss and Cumulative Other Comprehensive Income(unaudited)


2007 2006 2007 2006

Net loss (183,406,793)$ (5,263,071)$ (227,205,815)$ (8,952,873)$ Other comprehensive income, net of tax Mark-to-market loss on available-for-sale financial asset 4,550,000 - - -

Comprehensive loss (178,856,793)$ (5,263,071)$ (227,205,815)$ (8,952,873)$

Cumulative other comprehensive income, beginning of period (4,550,000)$ -$ -$ -$ Other comprehensive income, net of taxes 4,550,000 - - -

Cumulative other comprehensive income, end of period -$ -$ -$ -$


December 31For the three months ended

22

Consolidated Statements of Cash Flows(unaudited)


2007 2006 2007 2006Operating activitiesComprehensive loss $ (178,856,793) $ (5,263,071) $ (227,205,815) $ (8,952,873) Items not involving cash:

Mark to market loss on available-for-sale financial asset (4,550,000) - - - Depletion,depreciation and accretion 22,815,656 6,538,740 92,619,784 5,673,989 Writedown of accounts receivable 658,719 - 3,195,817 - Loss (gain) on sale of assets 8,983,675 - (4,286,369) - Write-downs 172,921,210 - 172,921,210 21,626 Stock-based compensation 830,159 563,347 4,046,779 3,411,784 Future income tax (recovery) (13,138,023) (1,372,049) (19,518,014) (1,693,611) Change in unrealized loss of gas pricing contracts - 48,240 536,000 - Foreign exchange loss 60,777 53,930 501,463 292,201

Abandonment costs (116,871) - (1,164,821) - 9,608,509 569,137 21,646,034 (1,246,884)

Changes in non-cash working capital balances related to operations (11,901,792) (10,625,551) (27,774,336) 1,428,573 Long term accounts receivable - 77,378 1,144,136 (1,144,136)

(2,293,283) (9,979,036) (4,984,166) (962,447)

Financing activitiesAdvances of bank loan - 1,532,316 66,532,316 2,037,566 Advance of bridge loan - - 10,000,000 - Repayments of bank loan (61,544,232) - (171,214,951) (16,160,999) Proceeds from equity financings, net of issue costs 105,792,520 106,630,075 270,787,465 57,173,576 Proceeds from sale of investments 2,016,325 - 12,016,325 - Exercise of stock options 102,298 - 707,623 337,251 Exercise of warrants - - - 12,316,008

46,366,911 108,162,391 188,828,778 55,703,402

Investing activitiesAcquisition of Watch Resources Ltd. (191,800) - (191,800) - Acquisition of Atlas Energy Ltd. - (2,926,017) (2,926,017) - Acquisition of Cipher Exploration Inc. - - (8,809,049) - Acquisition of Pan-Global Energy Ltd. - - - 238,929 Acquisition of Nevarro Energy Ltd. - - - (24,251,745) Acquisition of Serrano shares - - (2,500,000) (3,000,000) Additions to petroleum and natural gas properties (61,778,779) (14,753,832) (217,319,693) (20,618,883) Changes in non-cash working capital from investing 13,436,836 1,837,129 43,983,566 -

(48,533,743) (15,842,720) (187,762,993) (47,631,699)

Net increase (decrease) in cash (4,460,115) 82,340,635 (3,918,382) 7,109,256 Cash, beginning of period 9,259,301 8,717,568 8,717,568 1,608,312 Cash, end of period $ 4,799,186 $ 91,058,203 $ 4,799,186 $ 8,717,568

Supplementary Information Interest paid $ 707,917 $ 97,758 $ 3,653,631 $ 2,945,714 Capital taxes paid $ 288,137 $ 80,460 $ 368,597 $ 80,460



For the three months endedDecember

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PEARL EXPLORATION AND PRODUCTION LTD. Notes to the Consolidated Financial Statements

1. NATURE OF OPERATIONS Pearl Exploration and Production Ltd. (collectively with its subsidiaries, the “Company” or “Pearl”) is listed and traded on the TSX Venture Exchange under the trading symbol “PXX”. The Company is engaged in the business of oil and gas exploration and development in North America. 2. BASIS OF PRESENTATION AND CHANGE OF FINANCIAL YEAR-END The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Pearl E&P Canada Ltd., Pearl Exploration and Production USA Ltd., Pearl Exploration and Production Montana Ltd., Newmex Energy (USA) Inc., Valkyries Texas Corp., Valkyries Texas Gas Ltd., Cipher Exploration Inc. and Watch Resources Ltd. The Company changed its financial year end from September 30 to December 31 effective October 1, 2006. The Company made this change in order that its financial results would be more comparable to its peers in the oil and gas industry. As a result of this change, the Company has a transitional 15-month financial year ended December 31, 2007. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). The significant accounting policies used in these consolidated financial statements are as follows: (a) Measurement Uncertainty The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. These estimates are subject to measurement uncertainty. Actual results could differ from and affect the results reported in these consolidated financial statements. Significant estimates used in the preparation of the consolidated financial statements include asset retirement obligations, future income taxes, stock-based compensation, the estimate of oil and gas reserves and the related depletion, depreciation and accretion, asset impairment and the valuation of goodwill. (b) Foreign Currency Translation The Company’s reporting currency is Canadian dollars. The Company’s U.S. operations are considered integrated. Accordingly, the Company uses the temporal method of accounting for the foreign currency transactions of its U.S. subsidiaries. Under the temporal method, monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at the historical exchange rates. Revenues and expenses are translated at the average rate for the period, except for charges related to non-monetary assets which are translated at the historical rate for the assets to which the charge relates, and material items where a specific date can be identified for the transaction which is translated at the rate on that specific date. Exchange gains or losses are included in the determination of net income.

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(c) Joint Interests A substantial portion all of the Company’s activities are conducted jointly with others through joint ventures. These consolidated financial statements reflect only the Company’s proportionate interest in such activities. (d) Petroleum & Natural Gas Properties The Company follows the full cost method of accounting for its petroleum and natural gas properties. In accordance with Accounting Guideline 16 (AcG 16) issued by the CICA, all costs relating to the exploration for and development of oil and gas reserves are capitalized in country-by-country cost centres and charged against income as set out below. Capitalized costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling exploration and development wells, gathering and production facilities and other development expenditures. Gains and losses are not recognized upon disposition of petroleum and natural gas properties unless such a disposition would alter the rate of depletion by 20 percent or more. Depreciation, Depletion and Amortization Capitalized costs, along with estimated future costs to develop proved reserves, are depleted on a unit-of-production basis using estimated proved oil and gas reserves before royalties, as determined by independent engineers. Natural gas reserves and production are converted to equivalent barrels of oil based upon the relevant energy content (6:1). Costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion until it is determined whether proved reserves are attributable to the properties or impairment occurs. Unproved properties are evaluated for impairment on at least an annual basis. If an unproved property is considered to be impaired, the amount of the impairment is added to costs subject to depletion. Office furniture and equipment is depreciated on the declining balance basis at rates ranging from 10 to 30 percent per year. Ceiling Test The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the “ceiling test”). The ceiling test is an impairment test whereby the carrying amount of petroleum and natural gas properties, excluding the cost of unproved properties, is compared to the undiscounted cash flows from proved reserves using management’s best estimate of future prices, adjusted for the Company’s contract prices and quality differentials. If the carrying value exceeds the undiscounted cash flows, an impairment loss would be recorded against income. The impairment is measured as the amount by which the carrying amount of petroleum and natural gas properties exceeds the discounted cash flows from proved and probable reserves. The Company’s risk-free interest rate is used to arrive at the net present value of future cash flows. (e) Revenue Recognition Revenue from the sale of petroleum and natural gas is recorded when title passes to an external party. (f) Investments Long-term investments are accounted for using the cost method. (g) Stock-based Compensation The Company has a stock option plan as described in note 15. Stock options granted are accounted for using the fair value method. Fair values are determined, at the grant date, using the Black-Scholes option-pricing model. The compensation expense associated with these options is charged to earnings over the vesting period with a corresponding increase in contributed surplus. On the exercise of stock options, consideration paid and the associated contributed surplus is credited to common shares. (h) Asset Retirement Obligations The fair values of estimated asset retirement obligations are recorded as liabilities when incurred and the associated cost is capitalized as part of the cost of the related asset. Over time, the liabilities are accreted for the change in their present value and the initial capitalized costs are depleted on a unit-of-production

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basis over the life of the reserves. The associated accretion is charged to earnings in the period. Actual expenditures incurred are charged against the accumulated obligation. Revisions to the estimated timing of cash flows or the original estimated undiscounted cost would also result in an increase or decrease to the obligation and related asset. (i) Earnings per Share Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated based upon the treasury stock method which assumes that any proceeds from the exercise of in-the-money stock options or warrants would be used to purchase the Company’s common shares at the average market price during the year (or period if applicable). Diluted earnings per share do not include any anti-dilutive conversions, nor is diluted earnings per share presented where the total effect would be anti-dilutive. (j) Flow-through Shares The resource expenditure deductions for income tax purposes related to exploratory activities funded by flow-through share arrangements are renounced to investors in accordance with tax legislation. A future tax liability is recognized upon the filing of the renunciation with the tax authorities and share capital is reduced by the estimated costs of the renounced tax deductions. (k) Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, future income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax liabilities and assets are measured using enacted or substantially enacted tax rates. The effect on future tax liabilities and assets of a change in tax rates is recognized in income in the period that the change occurs. (l) Goodwill Goodwill represents the excess purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill is not amortized but is assessed for impairment annually at year-end or more frequently if economic events dictate. The test for impairment is conducted by the comparing the book value of the entity to the fair value. If the fair value is less than the book value, impairment is deemed to have occurred. The extent of the impairment is measured by allocation of the fair value of the entity to the identifiable assets and liabilities at their fair values. Any remainder of this allocation is the implied value of goodwill. Any excess of the book value of goodwill over this implied value is the impairment amount. Impairment is charged to earnings in the period in which it occurs. (m) Financial Instruments All financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on whether the financial instrument has been classified as “held-for-trading”, “available-for-sale”, “held-to- maturity”, “loans and receivables”, or “other financial liabilities” as defined by the standard. Financial assets and financial liabilities “held-for-trading” are measured at fair value with changes in those fair values recognized in net income. Financial assets “available-for-sale” are measured at fair value, with changes in those fair values recognized in OCI. Financial assets “held-to-maturity”, “loans and receivables” and “other financial liabilities” are measured at amortized cost using the effective interest method of amortization. 4. CHANGES IN ACCOUNTING POLICIES As disclosed in the September 30, 2006 annual audited Consolidated Financial Statements, on October 1, 2006, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1530 “Comprehensive Income”, Section 3251 “Equity”, Section 3855 “Financial Instruments – Recognition and Measurement”, and Section 3865 “Hedges”. As required by the new standards, prior periods have not been restated.

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The adoption of these standards has had no material impact on the Company's net earnings or cash flows. The other effects of the implementation of the new standards are discussed below. Comprehensive Income The new standards introduce comprehensive income, which consists of net loss and other comprehensive income (“OCI”). The Company's Consolidated Financial Statements now include a Statement of Comprehensive Loss, which includes the components of comprehensive income. For Pearl, OCI is currently comprised of the mark-to-market on available-for-sale financial assets . The cumulative changes in OCI are included in cumulative other comprehensive income (“COCI”), which is presented as a new category within shareholders’ equity on the Consolidated Balance Sheet. The Company's Consolidated Financial Statements now include a Statement of Cumulative Other Comprehensive Income, which provides the continuity of the COCI balance. The adoption of comprehensive income has been made in accordance with the applicable transitional provisions. Accordingly, the change in the mark-to-market loss on available-for-sale financial assets is now included in OCI in the Statement of Comprehensive Loss (2006 - $nil). Financial Instruments The financial instruments standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities" as defined by the standard. Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization. The methods used by the Company in determining fair value of financial instruments are unchanged as a result of implementing the new standard. Cash and cash equivalents are designated as "held-for-trading" and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Accounts receivable are designated as "loans and receivables". Accounts payable and accrued liabilities, income and capital taxes payable and bank loan are designated as "other financial liabilities". The adoption of the financial instruments standard has been made in accordance with its transitional provisions. The adoption of this policy has no effect on opening retained earnings. 5. RECENT ACCOUNTING PRONOUNCEMENTS The Company has assessed new and revised accounting pronouncements that have been issued and are not yet effective and determined that the following may have a significant impact on the Company: As of January 1, 2008, Pearl will be required to adopt two new CICA standards, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation,” which will replace Section 3861 “Financial Instruments – Disclosure and Presentation.” The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.

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As of January 1, 2008, Pearl will be required to adopt Section 1535 “Capital Disclosures,” which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements. In January 2006, the CICA Accounting Standards Board (“AcSB”) adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards (“IFRS”) for fiscal periods commencing on or after January 1, 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS. In June 2007, the CICA amended Section 1400, “General Standards of Financial Statement Presentation,” to require an assessment and potential disclosure of an entity’s ability to continue as a going concern. The new requirements are effective for interim and annual periods beginning on or after January 1, 2008. The Company is assessing the impact on its consolidated financial statements. 6. ACQUISITIONS (i) Atlas Acquisition – On December 22, 2006 the Company acquired all of the issued and outstanding shares of Atlas Energy Ltd. (“Atlas”), a publicly traded junior oil and gas company with producing and development assets in Western Canada, on the basis of 0.82 of a Pearl share for each Atlas share. The Company issued 55,670,226 common shares at a deemed price of $4.74 per common share, determined based on the weighted average trading price of the Company’s common shares shortly before and after the announcement of the acquisition. On January 1, 2007 Atlas was amalgamated with Pearl E&P Canada Ltd. The deemed consideration, including transaction costs, for the Atlas acquisition totaled $267.0 million. The allocation of the purchase price is as follows: Net assets acquired Petroleum and natural gas properties $243,001,173 Working capital deficiency (92,046,077)Asset retirement obligation (9,389,295)Future income tax (12,745,082)Goodwill 138,190,453Total net assets acquired $267,011,172

Consideration Shares 264,085,155Acquisition costs, net of interest earned on escrowed funds 2,926,017Total purchase price $267,011,172

(ii) Cipher Acquisition – On March 1, 2007, the Company acquired all the issued and outstanding shares of Cipher Exploration Inc. (“Cipher”), a privately-held oil and gas company with heavy oil assets in western Canada, for a gross purchase price of $18.6 million, including an amount equal to the aggregate of all outstanding long and short term debt of Cipher. At closing, the Company issued 2,047,502 common shares to the Cipher shareholders at a deemed price of approximately $4.78 per share, based on the weighted average trading price of Pearl’s shares shortly before and after the announcement of the acquisition, and assumed $8.3 million of debt. The deemed consideration, including transaction costs, for the Cipher acquisition totaled $18.6 million. The allocation of the purchase price is as follows:

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Net assets acquired Petroleum and natural gas properties $20,000,000 Working capital deficiency (2,381,820)Asset retirement obligation (1,578,543)Future income tax (181,030)Goodwill 2,742,616Total net assets acquired $18,601,223

Consideration Shares 9,792,174Repayment of Cipher debt 8,293,904Acquisition costs 515,145Total purchase price 18,601,223

(iii) Watch Acquisition – On October 19th, 2007, the Company acquired all of the issued and outstanding shares of Watch Resources Ltd. (“Watch”), a junior oil and gas company with conventional heavy oil interests in north-central Alberta, in an all-share transaction at an exchange ratio of 0.23 common shares of Pearl for each common share of Watch. At closing, the Company issued 10,542,927 common shares of Pearl to former Watch shareholders at a deemed price of $4.76 per share, based on the weighted average trading price of Pearl’s shares shortly before and after the announcement of the acquisition. The deemed consideration, including transaction costs, for the Watch acquisition totaled $51.0 million. The allocation of the purchase price is as follows: Net assets acquired Petroleum and natural gas properties $34,919,135 Investment 3,862,895Working capital deficiency (1,393,517)Asset retirement obligation (759,588)Future income tax 1,265,023Goodwill 13,057,632Total net assets acquired $50,951,580

Consideration Shares 50,184,333Stock options 575,447Transaction costs 191,800Total purchase price $50,951,580

Included in the assets of Watch is a $5.0 million term deposit which is part of the non-bank-sponsored Asset Backed Commercial Paper (“ABCP”). The liquidity and settlement of the ABCP has been suspended pending the restructuring of the notes as determined by the Montreal Accord. At this time the plan for such restructuring and eventual liquidity of the ABCP are unknown. As a result the Company has classified its ABCP as long-term investments. The valuation technique used by the Company to estimate the fair value of its investments in ABCP incorporates probability – weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. This evaluation resulted in a reduction of $1.1 million to the estimated fair value of the ABCP upon the Company’s acquisition of Watch. Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company’s investment in ABCP which would impact the Company’s earnings.

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(iv) Property Acquisitions and Dispositions On August 2nd, 2007, the Company purchased a 24% working interest in the Mooney oil field from Ravenwood Energy Corp. (“Ravenwood”) for $20 million. After standard industry adjustments, the net purchase price was paid $7.5 million in cash and $7.5 million by the issuance of 1,475,108 Pearl common shares at a price of $5.12 per share. The remaining $5.0 million in consideration was by way of settlement of certain accounts receivables. The price per share was determined based on the weighted average trading price of the shares shortly before and after the announcement of the acquisition. On November 6th, 2007, the Company acquired heavy oil assets in the states of Montana and Utah from PetroHunter Energy Corporation (“PetroHunter”). The purchase price is a maximum of US $30 million, payable as follows: (a) US $7.5 million in cash at closing; (b) the issuance of up to 2.5 million common shares of Pearl, the equivalent of up to US $10 million based on US $4.00 per share; and (c) a performance payment of US $12.5 million in cash at such time as either: (i) production from the assets reaches 5,000 bopd; or (ii) proven reserves from the assets is greater than 50 million barrels of oil. Of the 2.5 million common shares potentially issuable, 947,153 of these shares were issued on closing, 592,822 shares, are held in escrow, and are to be issued upon settlement of certain closing conditions related to title, and 960,025 of these shares are contingently issuable based on the outcome of negotiations with a third party (see note 20). In addition, 294,117 common shares were issued to a third party as a finder’s fee. The outcome of the contingent shares and the performance payment could not be determined beyond a reasonable doubt and therefore no value was assigned to them. In May 2007, the Company sold its Gulf of Mexico leases to Bayou Bend Petroleum Ltd. (“Bayou Bend”) in exchange for ten million shares of Bayou Bend having a deemed value of $2.20 per share for total consideration of $22.0 million. The share price was determined based on the trading price of the Bayou Bend shares shortly before and after the acquisition was announced. The disposition of the Gulf of Mexico assets resulted in a gain of $14.3 million, the realization of which was required as the depletion rate changed by more than 20 percent upon disposition. The Bayou Bend shares were subsequently sold in two transactions for cash proceeds of $12.0 million, resulting in a loss on sale of $10.0 million. (v) Pan-Global Acquisition – On April 28, 2006 the Company acquired all of the issued and outstanding shares of Pan-Global Energy Ltd. (“Pan-Global”) in exchange for the issuance of one-sixth of a Pearl common share for each Pan-Global share. Pan-Global engaged in the business of exploration and development of oil and gas properties with operations in the Onion Lake area. The Company issued 6,277,232 common shares to the Pan-Global shareholders upon closing at a price of $3.30 per share, based on the weighted-average trading price of Pearl’s shares shortly before and after the announcement of the acquisition. In addition to the common shares issued to the existing Pan-Global shareholders, the Company also (i) forgave a $1.2 million loan that was advanced to Pan-Global prior to the closing of the Pan-Global Arrangement; (ii) issued 150,000 common shares as part of a negotiated early repayment of Pan-Global’s outstanding convertible debenture; and (iii) issued Pearl stock options to Pan-Global stock option holders at the time of closing at a ratio of one Pearl stock option for six Pan-Global stock options. The deemed consideration for the Pan-Global acquisition totaled $23.2 million. The allocation of the purchase price was as follows:

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Net assets acquired Petroleum and natural gas properties $ 39,116,407Working capital deficiency (a) (13,839,162)Asset retirement obligation (744,905)Future income tax (1,321,517)Total net assets acquired $ 23,210,823

Consideration Common shares 21,209,866Forgiveness of debt 1,200,000Stock options 800,957Total purchase price 23,210,823

(a) Included in the working capital deficiency was a cash balance of $238,929. (vi) Nevarro Acquisition and Serrano Investment – On September 19, 2006 the Company acquired all of the issued and outstanding shares of Nevarro Energy Ltd. (“Nevarro”), a junior oil and gas company focused on exploration in Western Canada, for total consideration of $33.5 million. The purchase was paid for with $23.7 million in cash and the issuance of 1,637,126 common shares at a price of $5.12 per share. The deemed share price was determined based on the weighted-average trading price of the Company’s shares shortly before and after the announcement of the acquisition. In addition, the Company also subscribed for 6.0 million shares of Serrano Energy Ltd. (“Serrano”), a privately-owned oil and gas company whose management is the former management of Nevarro, at a price of $0.50 per share and entered into a joint venture agreement with Serrano that committed the Company to spend up to $10.0 million in each calendar year, ending on December 31, 2011. This joint venture agreement was terminated effective December 31, 2007 for no additional consideration. The net assets acquired and consideration was as follows: Net assets acquired Petroleum and natural gas properties $33,114,082Working capital deficiency (a) (9,869,624)Asset retirement obligation (2,745,319)Future income tax (5,895,433)Goodwill 18,930,509Total net assets acquired $33,534,215

Consideration Cash 23,764,556Common shares 8,382,085Acquisition costs 1,387,574Total purchase price $33,534,215

(a) Included in the working capital deficiency was a cash balance of $900,385. (vii) Property Acquisitions in 2006 – The Company completed three acquisitions of working interests in certain petroleum leases and related facilities in 2006: In the first transaction, the San Miguel transaction, the Company paid an aggregate of $0.5 million cash and $3.7 million through the issuance of 4,000,000 common shares valued at $0.92 per share. The share price was determined based on the trading price of the Company’s shares shortly before and after the acquisition was announced. Included in the consideration were 4,000,000 warrants which entitled the holder thereof to purchase an additional common share of the Company at a price of $1.00 exercisable from the date that the San Miguel project achieves an average daily producing rate of 5,000 barrels of oil per day, averaged 30 consecutive days until November 18, 2008. As these share purchase warrants

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were contingent upon certain production targets being attained within a specified time period they were considered contingent consideration. Given that at the time of the transaction there was no production in San Miguel the outcome of the contingency could not be determined beyond a reasonable doubt. Therefore, no value was assigned to the warrants. In the second transaction, the Palo Duro transaction, the Company paid an aggregate of $2.3 million cash and $0.7 million through the issuance of 270,000 common shares valued at $2.76 per share. The share price was determined based on the trading price of the Company’s shares shortly before and after the acquisition was announced. Included in the consideration were 270,000 warrants which entitled the holder to receive an additional 270,000 common shares of the Company, within 75 days of the third anniversary of the memorandum of understanding, which is September 15, 2008 for no additional consideration if the average production rate per well drilled in the Palo Duro project is at least 1.5 million cubic feet equivalent per day on the initial 60 days of production. The number of warrants issued will be reduced pro rata to the actual average production rate if the actual average production rate per well drilled by September 15, 2008 is less than 1.5 million cubic feet equivalent per day. As these share purchase warrants were contingent upon certain production targets being attained within a specified time period they were considered contingent consideration. Given that at the time of the transaction there was no production in Palo Duro the outcome of the contingency could not be determined beyond a reasonable doubt. Therefore, no value was assigned to the warrants. In the third transaction, the Valkyries transaction, the Company paid an aggregate of $6.7 million cash. The fair value of these assets was determined based on a third party reserve evaluation (note 20). 7. GOODWILL The Company assessed goodwill for impairment at December 31, 2007 and determined that the fair value of the reporting unit had declined as a result of declining market factors, principally the market value of the Company’s stock and, thus, recorded a write-down of $172.9 million (2006 - $nil). The following table details the changes in goodwill for the fifteen months ended December 31, 2007: Goodwill Continuity Balance, October 1, 2005 $- Nevarro acquisition 18,930,509Balance, September 30, 2006 18,930,509Atlas acquisition 138,190,453Cipher acquisition 2,742,616Watch acquisition 13,057,632Write-down of goodwill (172,921,210)Balance, December 31, 2007 $ - 8. INVESTMENTS December 31, 2007 September 30, 2006

Investment in Serrano Energy Ltd. $5,500,000

$3,000,000 Asset-backed commercial paper 3,862,895 - $9,362,895 $3,000,000

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n connection with the Nevarro acquisition in September 2006, the Company acquired 6.0 million shares of Serrano at a price of $0.50 per share (see note 6(vi) above). On June 13, 2007 the Company acquired an additional 2,074,689 shares of Serrano at a price of $1.205 per share. In July, 2007 Serrano consolidated its shares on a 2:1 basis. These shares represent an ownership interest of approximately 37% in Serrano. The Company holds an investment in asset-backed commercial paper as part of the Watch acquisition ((note 6 (iii)). 9. LONG TERM ACCOUNTS RECEIVABLES In 2006, the Company had a long-term receivable from an industry partner for the costs of drilling and completions as well as recovery of the pre-advance of royalties. The amounts were unsecured and non-interest bearing. This amount was settled in 2007. 10. PETROLEUM AND NATURAL GAS PROPERTIES December 31, 2007

Cost

Accumulated depreciation and

depletion Net book valuePetroleum and natural gas properties $623,916,051 $96,763,951 $527,152,100Office equipment 1,520,287 319,847 1,200,440 $625,436,338 $97,083,798 $528,352,540 September 30, 2006

Cost

Accumulated depreciation and

depletion Net book valuePetroleum and natural gas properties $97,669,414 $5,626,440 $92,042,974Office equipment 31,840 5,756 26,084 $97,701,254 $5,632,196 $92,069,058

The depletion and ceiling test calculations have excluded the cost of unproved properties of $61.0 million (September 30, 2006 – $6.9 million) and included the cost of future development costs of $145.0 million (September 30, 2006 – $1.6 million). The Company performed the ceiling test calculations at December 31, 2007 and 2006 to assess whether the carrying value of petroleum and natural gas properties is recoverable. The following represent the prices that were used in the December 31, 2007 ceiling test:

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Average Price Forecast (1) 2008 2009 2010 2011 2012 2013+(2)

WTI ($Cdn/bbl) 90.00 86.52 84.87 83.32 82.78 2%AECO ($Cdn/mcf) 6.69 7.29 7.18 7.13 7.19 2% (1) The benchmark prices listed above are adjusted for quality differentials, heat content, distance to market and other factors in performing our ceiling test. (2) Percentage change represents the change in each year after 2012 to the end of the reserve life.

11. BANK CREDIT FACILITY The Company has a credit facility with a Canadian chartered bank which is comprised of a $50 million revolving 364-day extendible term facility, and a $10 million demand revolving operating facility. The Company may borrow, repay and re-borrow advances with the aggregated outstanding not to exceed the total credit facility. The facility bears interest at the bank prime rate payable monthly and is secured by a general security agreement. The facility is subject to semi-annual reviews. The next scheduled review will take place on May 30, 2008. During the fifteen months ended December 31, 2007 the Company repaid and cancelled two credit facilities that were acquired through the Nevarro and the Atlas acquisitions. In addition, on September 25, 2007 the Company received a $10.0 million bridge loan which was repaid on October 17, 2007. 12. ASSET RETIREMENT OBLIGATION The total future asset retirement obligation was estimated based on the Company’s net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligations is approximately $32.4 million which will be incurred over the next 48 years with the majority of costs incurred between 2008 and 2025. A credit adjusted risk-free rate of 8 percent and an inflation factor of 1.5 percent was used to calculate the fair value of the asset retirement obligation. Changes to asset retirement obligation were as follows: Balance October 1, 2005 -Liabilities acquired through acquisitions, net of dispositions 3,490,224Liabilities incurred during the period 240,462Actual remediation expenses -Accretion 41,793Balance September 30, 2006 3,772,479Liabilities acquired through acquisitions, net of dispositions 9,822,642Liabilities incurred during the period 2,987,539Actual remediation expenses (1,164,822)Accretion 1,168,192Balance December 31, 2007 16,586,030

13. RELATED PARTY TRANSACTIONS The Company entered into the following transactions with related parties in the normal course of business, which are recorded at the exchange amount established and agreed to by the related parties:

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(a) the Company paid $271,465 (2006 - $141,800) to Tanganyika Oil Company Ltd. (“Tanganyika”) for administrative and other services. The Company and Tanganyika have certain officers and directors in common. (b) the Company borrowed $3,000,000 on October 27, 2006 from Tanganyika which was repayable on or before November 30, 2006. Interest was charged at a rate equal to prime plus 2% per annum. The Company repaid the loan in full on November 22, 2006 plus accrued interest of $18,195.

(c) the Company paid $117,000 (2006 - $nil) to Namdo Management Services Ltd. (“Namdo”) for executive and support services pursuant to a services agreement. Namdo is a private corporation owned by Lukas H. Lundin, a director of the Company. (d) During the year ended September 30, 2006, the Company paid $105,100 to Proprietary Industries Inc. (“Proprietary”) for administrative and other services. The Company and Proprietary had certain directors and officers in common. The Company had no dealings with Proprietary in the fifteen months ended December 31, 2007. (e) In January 2006 the Company acquired oil and gas assets from Valkyries Petroleum Corp. (“Valkyries”) for cash consideration of $6.7 million and a potential deferred bonus payment (see note 20). A director appointed to Pearl’s Board of Directors in January 2006 was also a Valkyries director and officer. In addition, Pearl’s largest individual shareholder was also a director, a shareholder and a previous officer of Valkyries. The acquisition of assets from Valkyries was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. (f) In May 2007 the Company closed the sale of its Gulf of Mexico assets to Bayou Bend (note 6 (iv)). An officer and director of the Company is also a Bayou Bend director. In addition, Pearl’s largest individual shareholder is a director and shareholder of Bayou Bend. The disposal of assets in exchange for common shares of Bayou Bend was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. (g) In June 2007 the Company closed the sale of 5.0 million shares of Bayou Bend to a company that is controlled by a shareholder and an officer of Pearl. The loss was recorded on the sale of the shares due to a decline in the market price of the Bayou Bend shares. The share price was valued at $2.00 which was the weighted-average trading price of the Bayou Bend shares shortly before and after the date of the sale. The disposal of the shares of Bayou Bend was transacted at fair market value, had commercial substance and was consistent with the Company’s normal course of operations. 14. SHARE CAPITAL (a) Authorized: The Company is authorized to issue an unlimited number of common shares. (b) Common Shares Issued:

Number of Shares Attributed

Value ($)Balance at September 30, 2005 23,745,822 8,530,798Shares issued for property acquisitions 4,270,000 4,425,875Shares issued through private placements 12,158,000 58,763,445Shares issued for Pan-Global acquisition (note 6(v)) 6,277,232 20,714,866Shares issued upon exercise of options 95,834 575,377Shares issued upon exercise of warrants 3,579,002 12,316,008Shares issued upon repayment of debt 150,000 495,000Shares issued for the Nevarro acquisition (note 6(vi)) 1,637,126 8,382,085Share issue costs (1,589,870)Balance as at September 30, 2006 51,913,016 112,613,584

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Shares issued through equity financings (i) 65,553,845 281,849,994Shares issued for Atlas acquisition (note 6(i)) 55,670,226 264,085,155Shares issued for Cipher acquisition (note 6(ii)) 2,047,502 9,792,174Shares issued for Watch acquisition (note 6(iii)) 10,542,927 50,184,333Shares issued for property acquisitions (note 6(iv)) 3,309,200 14,247,378Shares issued upon exercise of options 205,000 1,342,788Tax effect of flow-through (i) - (3,106,000)Share issue costs, net of tax of $3,174,946 - (7,887,585)Balance as at December 31, 2007 189,241,716 723,121,821

(i) On November 15, 2006, the Company completed an equity financing of common shares and flow-through shares for gross proceeds of $111 million. 22,444,444 common shares were issued at a price of $4.50 each and 1,709,401 of flow-through common shares were issued at a price of $5.85 each. A 3.9 percent underwriter’s fee was paid to qualified persons in respect of a portion of the equity financing. Effective December 31, 2006 the Company renounced $10.0 million of qualifying oil and natural gas expenditures and is required to incur those qualifying exploration expenditures before December 31, 2007. The Company has incurred the $10.0 million of qualifying expenditures as of December 31, 2007. The future income tax effect and reduction to share capital are disclosed above. On July 10, 2007 the Company sold on a non-brokered, private placement basis an aggregate of 12 million common shares at a price of $5.05 per share for gross proceeds of $60.6 million. A four percent finder's fee was paid on the gross proceeds of the private placement. On October 17th, 2007, the Company sold, on a bought-deal, private placement basis, an aggregate of 29.4 million common shares at a price of $3.75 per share for gross proceeds of $110.3 million. An underwriting fee of four percent was paid on the gross proceeds of the financing. (c) Warrants Outstanding:

Number of whole

warrantsWeighted average exercise

price per share ($)Balance as at December 31, 2007 and September 30, 2006 4,091,800 0.98

(i) Four million warrants were issued pursuant to the San Miguel property acquisition in November 2005. Each warrant entitles the holder thereof to purchase an additional common share of the Company at a price of $1.00, exercisable from the date the San Miguel heavy oil project achieves an average daily producing rate of 5,000 barrels of oil per day, averaged over 30 consecutive days, until November 18, 2008. (ii) In connection with the December, 2005 Palo Duro property acquisition, the Company issued 270,000 warrants. This number was subsequently reduced by 66% to 91,800 when the vendor exercised a back-in right on March 3, 2006. Each remaining warrant provides the warrant holder with the right to receive an additional common share of the Company, within 75 days of September 15, 2008, for no additional consideration, if the average production rate per well drilled in the Palo Duro shale gas project is at least 1.5 million cubic feet equivalent per day, based on the initial 60 days of production. The number of warrants ultimately issued will be reduced pro rata to the actual average production rate if the actual average production rate per well drilled by September 15, 2008 is less than 1.5 million cubic feet equivalent per day. 15. STOCK-BASED COMPENSATION The Company has a stock option plan (the “plan”) for directors, officers, consultants and employees of the Company and its subsidiaries. A total of 18,924,172 stock options are authorized to be issued under the

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plan. Stock options have terms of two to five years, vest over periods of up to three years and are exercisable at the market prices of the shares on the dates that the options were granted. All of the options are subject to a four-month “hold” period. The continuity of stock options issued and outstanding is as follows:

Number of OptionsWeighted Average Exercise Price ($)

Outstanding October 1, 2005 - -Granted 1,848,334 4.08Exercised (95,834) 3.52Outstanding September 30, 2006 1,752,500 4.11Granted 6,902,690 4.04Exercised (205,000) 3.45Cancelled (723,833) 5.04Outstanding at December 31, 2007 7,726,357 3.98

The following stock options were outstanding at December 31, 2007:

Options Outstanding Options Exercisable

Range of Exercise

Prices ($) Number

Weighted-Average Exercise Price ($)

Weighted-Average Life

(Years) Number

Weighted-Average

Exercise Price ($)

2.25 - 4.00 3,842,333 2.95 3.77 928,333 3.41 4.01 - 5.00 1,249,190 4.48 2.90 901,190 4.39 5.01 - 6.00 2,583,167 5.20 3.28 1,874,500 5.21 6.01 - 8.94 51,667 7.02 0.33 51,667 7.02

2.25 – 8.94 7,726,357 3.98 3.44 3,755,690 4.59 Compensation expense for the fifteen-month period ended December 31, 2007 of $4,046,779 (2006 - $3,411,784) net of recovery of $590,137 (2006 - $nil) for cancelled stock options, has been recorded in the Consolidated Statements of Operations and Deficit. The fair value of common share options granted is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair value of options granted during 2007 and the assumptions used in their determination are as noted below:

Weighted average fair value of stock options granted (per option) $1.652Expected life of stock options (years) 3.44Volatility (weighted average) 62%Risk free rate of return (weighted average) 4.00%Expected dividend yield 0%

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Contributed surplus continuity

Balance October 1, 2005 816,444Stock-based compensation 3,411,784Stock-based compensation allocated to contributed surplus as part of Pan-Global acquisition 800,957Transfer to share capital on exercise of options (238,125)

Balance September 30, 2006 4,791,060Stock-based compensation 4,636,916Stock-based compensation allocated to contributed surplus as part of Watch acquisition 575,448Recovery of expense on cancelled stock options (590,137)Transfer to share capital on exercise of options (635,163)Balance December 31, 2007 8,778,124

16. INCOME TAXES (a) Future income tax expense:

The provision for income taxes reflects an effective income tax rate which differs from Federal and Provincial statutory tax rates. The main differences are as follows:

December 31, 2007 September 30, 2006 Income (loss) before income taxes (242,138,901) (10,549,086)Corporate income tax rate 34.03% 35.72%Computed income tax recovery (82,399,868) (3,768,134)Increase (decrease) resulting from: Change in valuation allowance (1,398,439) 13,115Goodwill Write-off 58,845,088 Gain on sale of USA properties 1,654,273 Non-deductible crown charges 94,908 71,654 Non-deductible compensation expense 1,377,119 1,218,689 Resource allowance (119,574) (65,719) Foreign exchange 170,398 104,374 Change in enacted tax rates 3,009,074 520,018 Capital tax and Saskatchewan Resource Surcharge 1,837,500 97,398 Other 1,996,435 212,392 Income tax expense (recovery) (14,933,086) (1,596,213)

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(b) The components of the future income tax liability are as follows: December 31, 2007 September 30, 2006 Future Income Tax Assets: Mineral properties and deferred costs - -Non-capital losses 12,818,396 5,195,757 Capital loss - -Share issue costs 3,561,591 1,046,549 Asset retirement obligation 4,342,626 1,105,251 Other 290,343 -Valuation allowance (1,240,556) (2,575,621) 19,772,400 4,771,936 Future Income Tax Liabilities: Property, plant and equipment (17,369,868) (10,295,275)Net future tax liability 2,402,532 (5,523,339)

The Company has $48.0 million of non-capital losses that expire each year from 2008 to 2017. 17. COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The Company enters into commitments and contractual obligations in the normal course of business, including the purchase of services, farm-in agreements, royalty agreements, operating agreements, transportation agreements, processing agreements, right of way agreements and lease agreements for vehicles. The Company has a 10-year operating lease for office space which it renegotiated with the provision that the terms could be cancelled with a 30 day notice. This back-out provision allowed the Company to enter into a nine-year operating lease for a new larger office space.

2008 2009 2010 2011

2012 Subsequent

to 2012 Office rent $1,039,394 $1,084,760 $1,084,0760 $1,152,557 $1,220,355 $4,576,331

18. FINANCIAL INSTRUMENTS The Company does not utilize derivative instruments to manage risks. The Company is exposed to the following risks related to financial assets and liabilities: (a) Commodity price risk The Company is exposed to risks associated with fluctuating commodity prices. At this time, the Company does not use derivative financial instruments to manage its exposure to this risk. (b) Foreign currency exchange risk The Company is exposed to risks arising from fluctuations in foreign currency exchange rates and the volatility of those rates. This exposure primarily relates to: (i) certain expenditure commitments, deposits, accounts receivable, and accounts payable which are denominated in US dollars, and (ii) its operations in the United States.

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(c) Fair values The carrying amounts of financial instruments comprising cash, accounts receivable and accounts payable approximate their fair value due to the immediate or short-term nature of these financial instruments. (d) Credit Risk The Company’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal credit risks. Management believes that there is no unusual exposure associated with the collection of the receivables due to the size and reputation of the companies and to the continuing joint venture relationship. (e) Interest Rate Risk The Company is exposed to interest rate risk in relation to interest expense on its revolving credit facility. 19. SEGMENTED INFORMATION The Company presently has one reportable business segment, that being oil and gas exploration and development. The Company’s operations are carried on in the following geographic locations:

Fifteen Months Ended December 31, 2007 Canada USA Consolidated

Total revenues, net of royalties 99,306,665 1,842,674 101,149,339 Expenses 171,522,370 2,629,565 174,151,935Foreign currency loss 586,417 (84,954) 501,463Gain on sale of assets - (4,286,369) (4,286,369)Write-downs 172,921,210 - 172,921,210Net income (loss) before income taxes (245,723,332) 3,584,432 (242,138,901)Income taxes (recovery) (17,789,988) 2,856,902 (14,933,086)Net income (loss) (227,933,344) 727,530 (227,205,815)

Segment assets 522,074,972 53,790,403 575,865,375Segment petroleum and natural gas properties 482,505,954 45,846,586 528,352,540Capital additions 502,604,530 25,130,554 527,735,084

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Twelve Months Ended September 30, 2006 Canada USA Consolidated

Total revenues, net of royalties 2,269,625 1,528,886 3,798,511 Expenses 11,627,053 2,406,717 14,033,770Foreign currency loss 292,201 - 292,201Write-downs 21,626 - 21,626Loss before income taxes (9,671,255) (877,831) (10,549,086)Income taxes (recovery) (1,592,288) (3,925) (1,596,213)Net loss (8,078,967) (873,906) (8,952,873)

Segment assets 106,150,258 22,917,223 129,067,481Goodwill 18,930,509 - 18,930,509Segment petroleum and natural

gas properties 70,177,774 21,891,284 92,069,058Capital additions 72,877,549 23,795,716 96,673,265

20. CONTINGENCIES (a) In connection with the property acquisition from PetroHunter (see note 6(iv)), the Company may be required to pay a performance payment of US $12.5 million in cash at such time as either: (i) production from the assets reaches 5,000 bopd; or (ii) proven reserves from the assets is greater than 50 million barrels of oil, if either condition is met prior to November 6th, 2010. In addition, additional consideration of 960,025 Pearl common shares will be payable if the Company and certain third party owners agree to terms acceptable to Pearl for the acquisition of leases included in the deal. In the event that the Company fails to reach an agreement with the third party by May, 2008 the performance payment will be reduced to $9.8 million and the contingent shares will remain unissued. (b) Four million warrants were issued pursuant to the San Miguel property acquisition in November 2005. Each warrant entitles the holder thereof to purchase an additional common share of the Company at a price of $1.00, exercisable from the date the San Miguel heavy oil project achieves an average daily producing rate of 5,000 barrels of oil per day, averaged over 30 consecutive days, until November 18, 2008. (c) In connection with the December, 2005 Palo Duro property acquisition, the Company has 91,800 warrants outstanding, entitling the holder to receive an additional Pearl common share within 75 days of September 15, 2008, for no additional consideration, if the average production rate per well drilled in the Palo Duro shale gas project is at least 1.5 million cubic feet equivalent per day, based on the initial 60 days of production. The number of warrants ultimately issued will be reduced pro rata to the actual average production rate if the actual average production rate per well drilled by September 15, 2008 is less than 1.5 million cubic feet equivalent per day. (d) Pursuant to the January, 2006 property acquisition agreement between the Company and Valkyries, the Company may be required to pay additional consideration to Valkyries if specified properties have additional net proved reserves within two years of the closing of the transaction. The additional consideration would be calculated as US $1.00 per barrel of additional reserves. The only remaining contingency for the Company is related to the Topanga prospect.

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21. SUBSEQUENT EVENTS (a) On January 8, 2008 the Company announced that it would seek to dispose of certain non-core properties, principally located in west central Saskatchewan (heavy oil assets) and in southern Alberta (natural gas assets). These assets were selected for disposal due to their lack of resource and production scale. The outcome of this process is uncertain. (b) On February 4, 2008 Canadian Phoenix Resources Corp, formerly Arapahoe Energy Corporation, announced it had executed a term sheet dated February 1, 2008 with Serrano Energy which would provide Canadian Phoenix with a 50.1% controlling interest in Serrano for total consideration of $55 million. This financing announcement may have a significant effect on the Company’s ownership in Serrano Energy.

22. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the presentation adopted in 2007.

For further information, please contact: Keith Hill - President and Chief Executive Officer Tel.: (604) 689-7842 E-mail: [email protected] Randy Neely – Chief Financial Officer Tel: (403) 716-4054 E-mail: [email protected] Sophia Shane – Corporate Development Tel: (604) 806-3575 E-mail: [email protected] Pearl’s Certified Advisor on First North is E. Öhman J:or Fondkommission AB. Company Registration Number: 409596-1

pearl exploration and production ltd

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