##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[X]   |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. 
|      |  | For the quarterly period ended June 30, 2003                                             
|or    |  |                                                                                          
|      |  |                                                                                          
|[   ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
|      |  |                                                                                          
|      |  | For the transition period from ______________to ______________                           
|      |  |                                                                                          
|      |  | Commission file number 000-30586                                                         

IVANHOE ENERGY INC.(Exact name of registrant as specified in its charter)

|                                                                            |  |                                               
|--------------------------------------------------------------------------- |  | ----------------------------------------------
|Yukon, Canada(State or other jurisdiction of
incorporation or organization) |  | 98-0372413(I.R.S. Employer
Identification No.)

Suite 654  999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1(Address of principal executive office)

(604) 688-8323(registrants telephone number, including area code)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

|        |  |         
|------- |  | --------
|Yes [X] |  | No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)

|        |  |         
|------- |  | --------
|Yes [X] |  | No [   ]

The number of shares of the registrants capital stock outstanding as of June
30, 2003 was 146,995,527 Common Shares, no par value.

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TABLE OF CONTENTS



|                                                                                              |                                                                    |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |  |  |  |  |  |  | 
|Part I  Financial Information                                                               
|                                                                                              | Item 1 Financial Statements                                       
|                                                                                              | Consolidated Balance Sheets                                       
|                                                                                              | Unaudited Consolidated Statements of Loss and Deficit             
|                                                                                              | Unaudited Consolidated Statements of Cash Flow                    
|                                                                                              | Notes to the Consolidated Financial Statements                    
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk
|                                                                                              | Item 4. Controls and Procedures                                   
|Part II  Other Information                                                                  
|                                                                                              | Item 1. Legal Proceedings:                                        
|                                                                                              | Item 2. Changes in Securities and Use of Proceeds: None           
|                                                                                              | Item 3. Defaults Upon Senior Securities: None                     
|                                                                                              | Item 4. Submission of Matters To a Vote of Securityholders        
|                                                                                              | Item 5. Other Information: None                                   
|                                                                                              | Item 6. Exhibits and Reports on Form 8-K                          
|INDEX TO EXHIBITS                                                                            
|Certification CEO Internal Disclosure Controls                                               
|Certification CFO Internal Disclosure Controls                                               
|Certification CEO Report of Financial Statements                                             
|Certification CFO Report of Financial Statements                                             



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##### Table of Contents



TABLE OF CONTENTS

|        |  |                                                                                                                              |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                              |  | Page
|        |  |                                                                                                                              |  |     
|PART I  |  | Financial Information                                                                                                        |  |     
|        |  |                                                                                                                              |  |     
|Item 1  |  | Financial Statements                                                                                                         |  |     
|        |  |                                                                                                                              |  |     
|        |  | Consolidated Balance Sheets at June 30, 2003
(unaudited) and December 31, 2002                                               |  | 3   
|        |  |                                                                                                                              |  |     
|        |  | Unaudited Consolidated Statements of Loss and Deficit
for the Three-Month and Six-Month Periods Ended June 30,
2003 and 2002 |  | 4   
|        |  |                                                                                                                              |  |     
|        |  | Unaudited Consolidated Statements of Cash Flow for the
Three-Month and Six-Month Periods Ended June 30,
2003 and 2002        |  | 5   
|        |  |                                                                                                                              |  |     
|        |  | Notes to the Unaudited Consolidated Financial
Statements                                                                     |  | 6   
|        |  |                                                                                                                              |  |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                        |  | 13  
|        |  |                                                                                                                              |  |     
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risks                                                                  |  | 17  
|        |  |                                                                                                                              |  |     
|Item 4. |  | Controls and Procedures                                                                                                      |  | 17  
|        |  |                                                                                                                              |  |     
|PART II |  | Other Information                                                                                                            |  |     
|        |  |                                                                                                                              |  |     
|Item 1. |  | Legal Proceedings                                                                                                            |  | 18  
|        |  |                                                                                                                              |  |     
|Item 2. |  | Changes in Securities and Use of Proceeds                                                                                    |  | 18  
|        |  |                                                                                                                              |  |     
|Item 3. |  | Defaults Upon Senior Securities                                                                                              |  | 18  
|        |  |                                                                                                                              |  |     
|Item 4. |  | Submission of Matters To a Vote of Securityholders                                                                           |  | 18  
|        |  |                                                                                                                              |  |     
|Item 5. |  | Other Information                                                                                                            |  | 18  
|        |  |                                                                                                                              |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                             |  | 18  

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Part I  Financial Information




Item 1 Financial Statements




IVANHOE ENERGY INC.
Consolidated Balance Sheets
(stated in thousands of U.S. Dollars)

|                                                                               |  |               |         |                   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------- | ------- | ----------------- |  | - | ------- | -
|                                                                               |  | June 30, 2003 |         | December 31, 2002
|                                                                               |  |               |         |                  
|                                                                               |  | (unaudited)   |         |                   |  |  
|Assets                                                                         |  |               |         |                   |  |   |         |  
|Current Assets                                                                 |  |               |         |                   |  |   |         |  
|Cash and cash equivalents                                                      |  | $             | 2,845   |                   |  | $ | 3,980   |  
|Accounts receivable                                                            |  |               | 2,139   |                   |  |   | 2,519   |  
|Other                                                                          |  |               | 179     |                   |  |   | 691     |  
|                                                                               |  |               |         |                   |  |   |         |  
|                                                                               |  |               | 5,163   |                   |  |   | 7,190   |  
|Long term assets                                                               |  |               | 603     |                   |  |   | 462     |  
|Oil and gas properties, equipment and GTL investments, net                     |  |               | 99,246  |                   |  |   | 99,436  |  
|                                                                               |  |               |         |                   |  |   |         |  
|                                                                               |  | $             | 105,012 |                   |  | $ | 107,088 |  
|                                                                               |  |               |         |                   |  |   |         |  
|Liabilities and Shareholders Equity                                           |  |               |         |                   |  |   |         |  
|Current Liabilities                                                            |  |               |         |                   |  |   |         |  
|Accounts payable and accrued liabilities                                       |  | $             | 5,791   |                   |  | $ | 4,797   |  
|Notes payable                                                                  |  |               | 2,250   |                   |  |   | 500     |  
|Convertible debenture                                                          |  |               |        |                   |  |   | 1,000   |  
|                                                                               |  |               |         |                   |  |   |         |  
|                                                                               |  |               | 8,041   |                   |  |   | 6,297   |  
|                                                                               |  |               |         |                   |  |   |         |  
|Asset retirement obligation                                                    |  |               | 412     |                   |  |   | 243     |  
|                                                                               |  |               |         |                   |  |   |         |  
|Shareholders Equity                                                           |  |               |         |                   |  |   |         |  
|Share capital, issued 146,996,000 common shares;
December 31, 2002 144,466,000 |  |               | 132,586 |                   |  |   | 131,112 |  
|Deficit                                                                        |  |               | (36,027 | )                 |  |   | (30,564 | )
|                                                                               |  |               |         |                   |  |   |         |  
|                                                                               |  |               | 96,559  |                   |  |   | 100,548 |  
|                                                                               |  |               |         |                   |  |   |         |  
|                                                                               |  | $             | 105,012 |                   |  | $ | 107,088 |  
|                                                                               |  |               |         |                   |  |   |         |  

(see accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
(stated in thousands of U.S. Dollars except share and per share data)

|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------------------------------ |  | -------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                 |  | Three Months   |         | Six Months    
|                                                 |  | Ended June 30, |         | Ended June 30,
|                                                 |  |                |         |               
|                                                 |  | 2003           |         | 2002           |  | 2003 |         | 2002
|                                                 |  |                |         |                |  |      |         |     
|Revenue                                          |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Oil and gas revenue                              |  | $              | 2,332   |                |  | $    | 1,981   |      |  | $ | 4,864   |  |  | $ | 3,644   | 
|Interest income                                  |  |                | 6       |                |  |      | 43      |      |  |   | 42      |  |  |   | 72      | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|                                                 |  |                | 2,338   |                |  |      | 2,024   |      |  |   | 4,906   |  |  |   | 3,716   | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Expenses                                         |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Operating costs                                  |  |                | 948     |                |  |      | 1,012   |      |  |   | 1,845   |  |  |   | 1,868   | 
|General and administrative                       |  |                | 1,783   |                |  |      | 1,401   |      |  |   | 3,532   |  |  |   | 2,988   | 
|Depletion and depreciation                       |  |                | 751     |                |  |      | 718     |      |  |   | 1,671   |  |  |   | 1,488   | 
|Write down of GTL investments                    |  |                | 3,321   |                |  |      |        |      |  |   | 3,321   |  |  |   |        | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|                                                 |  |                | 6,803   |                |  |      | 3,131   |      |  |   | 10,369  |  |  |   | 6,344   | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Net Loss                                         |  |                | 4,465   |                |  |      | 1,107   |      |  |   | 5,463   |  |  |   | 2,628   | 
|Deficit, beginning of period                     |  |                | 31,562  |                |  |      | 25,016  |      |  |   | 30,564  |  |  |   | 23,495  | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Deficit, end of period                           |  | $              | 36,027  |                |  | $    | 26,123  |      |  | $ | 36,027  |  |  | $ | 26,123  | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Net Loss per share                               |  | $              | 0.03    |                |  | $    | 0.01    |      |  | $ | 0.04    |  |  | $ | 0.02    | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Weighted Average Number of Shares (in thousands) |  |                | 145,055 |                |  |      | 140,493 |      |  |   | 144,832 |  |  |   | 139,979 | 
|                                                 |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 

(see accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
(stated in thousands of U.S. Dollars)

|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------- |  | -------------- | ------ | -------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                 |  | Three Months   |        | Six Months    
|                                                                 |  | Ended June 30, |        | Ended June 30,
|                                                                 |  |                |        |               
|                                                                 |  | 2003           |        | 2002           |  | 2003 |        | 2002
|                                                                 |  |                |        |                |  |      |        |     
|Operating Activities                                             |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Net (loss)                                                       |  | $              | (4,465 | )              |  | $    | (1,107 | )    |  | $ | (5,463 | ) |  | $ | (2,628  | )
|Items not requiring use of cash:                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Depletion and depreciation                                       |  |                | 751    |                |  |      | 718    |      |  |   | 1,671  |   |  |   | 1,488   |  
|Write down of GTL investments                                    |  |                | 3,321  |                |  |      |       |      |  |   | 3,321  |   |  |   |        |  
|Changes in non-cash working capital items                        |  |                | 1,811  |                |  |      | (2,252 | )    |  |   | 2,360  |   |  |   | (2,376  | )
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                | 1,418  |                |  |      | (2,641 | )    |  |   | 1,889  |   |  |   | (3,516  | )
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Investing Activities                                             |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Capital spending                                                 |  |                | (2,856 | )              |  |      | (5,144 | )    |  |   | (4,774 | ) |  |   | (11,832 | )
|Proceeds from sale of assets                                     |  |                |       |                |  |      |       |      |  |   |       |   |  |   | 1,200   |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                | (2,856 | )              |  |      | (5,144 | )    |  |   | (4,774 | ) |  |   | (10,632 | )
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Financing Activities                                             |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Shares issued on private placement                               |  |                |       |                |  |      | 9,964  |      |  |   |       |   |  |   | 9,964   |  
|Shares issued on exercise of options                             |  |                |       |                |  |      | 50     |      |  |   |       |   |  |   | 119     |  
|Proceeds from notes                                              |  |                | 1,500  |                |  |      |       |      |  |   | 1,750  |   |  |   |        |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                | 1,500  |                |  |      | 10,014 |      |  |   | 1,750  |   |  |   | 10,083  |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents, for the period |  |                | 62     |                |  |      | 2,229  |      |  |   | (1,135 | ) |  |   | (4,065  | )
|Cash and cash equivalents, beginning of period                   |  |                | 2,783  |                |  |      | 3,403  |      |  |   | 3,980  |   |  |   | 9,697   |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Cash and cash equivalents, end of period                         |  | $              | 2,845  |                |  | $    | 5,632  |      |  | $ | 2,845  |   |  | $ | 5,632   |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Included in the above are the following:                         |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Taxes paid                                                       |  | $              |       |                |  | $    |       |      |  | $ | 6      |   |  | $ |        |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Interest paid                                                    |  | $              | 23     |                |  | $    | 18     |      |  | $ | 42     |   |  | $ | 35      |  
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Decrease (increase) in non-cash working capital items:           |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|Accounts receivable                                              |  | $              | 495    |                |  | $    | (378   | )    |  | $ | 380    |   |  | $ | (107    | )
|Other current assets                                             |  |                | 575    |                |  |      | 141    |      |  |   | 512    |   |  |   | 147     |  
|Accounts payable and accrued liabilities                         |  |                | 741    |                |  |      | (2,015 | )    |  |   | 1,468  |   |  |   | (2,416  | )
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  | $              | 1,811  |                |  | $    | (2,252 | )    |  | $ | 2,360  |   |  | $ | (2,376  | )
|                                                                 |  |                |        |                |  |      |        |      |  |   |        |   |  |   |         |  

(see accompanying notes)

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Notes to the Consolidated Financial Statements
June 30, 2003
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited)

1. GENERAL

The unaudited consolidated financial statements have been prepared on a basis
consistent with the accounting principles and policies reflected in the
December 31, 2002 consolidated financial statements, except for a change in the
policy of accounting for asset retirement obligations, and should be read in
conjunction therewith. The December 31, 2002 consolidated balance sheet was
derived from the audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles
(GAAP) in Canada and the U.S. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the Companys financial
position as at June 30, 2003 and December 31, 2002 and the results of
operations and cash flows for the three-month and six-month periods ended June
30, 2003 and 2002 have been included. The results of operations and cash flows
are not necessarily indicative of the results for a full year.

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts and other disclosures in these
consolidated financial statements. Actual results may differ from those
estimates.

2. SIGNIFICANT ACCOUNTING POLICIES

Asset Retirement

Prior to January 2003, the Company had estimated its future site restoration
and abandonment costs associated with its oil and gas properties and amortized
this estimate to operations using the unit-of-production method based upon
estimated proved reserves. The provision was included with depletion and
depreciation expense.

For fiscal years beginning after January 1, 2004, Canadian GAAP requires that
asset retirement costs and liabilities associated with site restoration and
abandonment of tangible long-lived assets be initially measured at a fair value
which approximates the cost a third party would incur in performing the tasks
necessary to retire such assets. The fair value is recognized in the financial
statements at the present value of expected future cash flows. Subsequent to
the initial measurement, the effect of the passage of time on the liability for
the asset retirement obligation (accretion expense) and the amortization of the
asset retirement cost are recognized in the results of operations.

The Company has elected early implementation of this accounting policy.
Accordingly, effective January 1, 2003, the Company changed its accounting
policy to capitalize asset retirement costs as part of the carrying value of
its oil and gas properties and adjusted the amount of its site restoration
liability to the present value of the liability for the corresponding asset
retirement obligation as of this date. The Company has adopted the policy
without retroactive adjustment of prior years because implementation of this
change had an immaterial effect on the Companys financial position and results
of operations in prior years or in the current period (See notes 3 and 10).

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U.S. GAAP for asset retirement obligations conforms in all material respects to
Canadian GAAP. Implementation for U.S. GAAP is required for fiscal years
beginning after June 2002.

The asset retirement costs are being amortized using the unit of production
method based on estimated proved reserves. The amortization expenses and
accretion of the liability for the asset retirement obligation are included
with depletion and depreciation expense.

3. OIL AND GAS PROPERTIES

Oil and gas properties, equipment and gas-to-liquids (GTL) investments are
net of accumulated depletion and depreciation of $8.4 million and $6.6 million
as well as provision for impairments of oil and gas properties of $14.0
million as at June 30, 2003 and December 31, 2002, respectively.

Effective January 2003, the Company capitalized $0.3 million as a result of
implementation of a new accounting policy on asset retirement obligations. No
additional asset retirement costs were incurred for the three-month and
six-month periods ended June 30, 2003.

In May 2003, discussions were terminated between Qatar Petroleum and the
Company in the negotiation of an agreement to develop a block in Qatars North
Field to produce natural gas liquids and GTL products. As a result, the Company
has taken a charge to income of $3.3 million for the write down of its
investment in Qatar.

4. DERIVATIVE ACTIVITIES

The Companys results of operations are sensitive mainly to fluctuations in oil
and natural gas prices. The Company may periodically use different types of
derivative instruments to manage its exposure to price volatility, thus
mitigating fluctuations in commodity-related cash flows.

The Company entered into a costless collar derivative to hedge its cash flow
from the sale of 500 barrels of oil production per day over two six-month
periods starting October 2002 and June 2003. The derivatives have ceiling
prices of $30.45 and $28.95 per barrel for the June 2003 and October 2002
contracts, respectively, and a floor price of $24.00 per barrel using WTI as
the index traded on the NYMEX. Gains and losses on derivatives are recognized
in earnings as they are realized. For the six-month period ended June 30, 2003,
the Company had realized losses of $0.2 million on derivative transactions. The
Company had no realized derivative losses for the three-month period ended June
30, 2003. The derivative losses are included in oil and gas revenue.

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5. SEGMENT INFORMATION

The following tables present the Companys interim segment information for the
three-month and six-month periods ended June 30:

|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |        | 
|----------------------------------- | -------------- | - | -------------------------------- | ----- | ----- | - | ----- | ----- | ---- | - | ----- | ----- | ----- | - | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                    |                |   | Six Month Periods Ended June 30,
|                                    |                |   |                                 
|                                    |                |   | 2003                             |       | 2002 
|                                    |                |   |                                  |       |      
|                                    |                |   | U.S.                             |       | China |   | Total |       | U.S. |   | China |       | Total
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |      
|Oil and gas revenue                 |                | $ | 2,689                            |       |       | $ | 2,175 |       |      | $ | 4,864 |       |       | $ | 2,305 |       |  | $ | 1,339 |       |  | $ | 3,644  |       
|Interest income                     |                |   | 42                               |       |       |   |      |       |      |   | 42    |       |       |   | 72    |       |  |   |      |       |  |   | 72     |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|                                    |                |   | 2,731                            |       |       |   | 2,175 |       |      |   | 4,906 |       |       |   | 2,377 |       |  |   | 1,339 |       |  |   | 3,716  |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|Operating costs                     |                |   | 1,013                            |       |       |   | 832   |       |      |   | 1,845 |       |       |   | 1,170 |       |  |   | 698   |       |  |   | 1,868  |       
|Depletion and depreciation          |                |   | 988                              |       |       |   | 683   |       |      |   | 1,671 |       |       |   | 897   |       |  |   | 591   |       |  |   | 1,488  |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|                                    |                |   | 2,001                            |       |       |   | 1,515 |       |      |   | 3,516 |       |       |   | 2,067 |       |  |   | 1,289 |       |  |   | 3,356  |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|Segment income before the following |                | $ | 730                              |       |       | $ | 660   |       |      |   | 1,390 |       |       | $ | 310   |       |  | $ | 50    |       |  |   | 360    |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|Write down of GTL investments       |                |   |                                  |       |       |   |       |       |      |   | 3,321 |       |       |   |       |       |  |   |       |       |  |   |       |       
|General and administrative          |                |   |                                  |       |       |   |       |       |      |   | 3,532 |       |       |   |       |       |  |   |       |       |  |   | 2,988  |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|Net loss                            |                |   |                                  |       |       |   |       |       |      | $ | 5,463 |       |       |   |       |       |  |   |       |       |  | $ | 2,628  |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|Capital Expenditures:               |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|                                    | Oil and gas    |   | $                                | 2,670 |       |   | $     | 1,691 |      |   | $     | 4,361 |       |   | $     | 8,755 |  |   | $     | 1,728 |  |   | $      | 10,483 | 
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|                                    | Gas-to-liquids |   |                                  |       |       |   |       |       |      |   |       | 413   |       |   |       |       |  |   |       |       |  |   |        | 1,349  | 
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       
|                                    |                |   |                                  |       |       |   |       |       |      | $ | 4,774 |       |       |   |       |       |  |   |       |       |  | $ | 11,832 |       
|                                    |                |   |                                  |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |       |       |  |   |        |       

|                     |                |  |                     |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |        | 
|-------------------- | -------------- |  | ------------------- | ------ | ----------------------- |  | - | ------ |  | - | ------- | ------ |  |  | - | ------ |  |  | - | ------ |  | - | ------- | ------ | 
|                     |                |  | As at June 30, 2003 |        | As at December 31, 2002
|                     |                |  |                     |        |                        
|Identifiable Assets: |                |  |                     |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     | Oil & gas      |  | $                   | 64,334 |                         |  | $ | 26,409 |  |   | $       | 90,744 |  |  | $ | 64,448 |  |  | $ | 25,281 |  |   | $       | 89,729 | 
|                     |                |  |                     |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     | Gas-to-liquids |  |                     |        |                         |  |   |        |  |   |         | 14,268 |  |  |   |        |  |  |   |        |  |   |         | 17,359 | 
|                     |                |  |                     |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     |                |  |                     |        |                         |  |   |        |  | $ | 105,012 |        |  |  |   |        |  |  |   |        |  | $ | 107,088 |       
|                     |                |  |                     |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       

|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |       | 
|----------------------------------- | -------------- | - | ---------------------------------- | ----- | ----- | - | ----- | ----- | ---- | - | ----- | ----- | ----- | - | ----- | ----- |  | - | --- | --- |  | - | ----- | ----- | 
|                                    |                |   | Three Month Periods Ended June 30,
|                                    |                |   |                                   
|                                    |                |   | 2003                               |       | 2002 
|                                    |                |   |                                    |       |      
|                                    |                |   | U.S.                               |       | China |   | Total |       | U.S. |   | China |       | Total
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |      
|Oil and gas revenue                 |                | $ | 1,247                              |       |       | $ | 1,085 |       |      | $ | 2,332 |       |       | $ | 1,273 |       |  | $ | 708 |     |  | $ | 1,981 |      
|Interest income                     |                |   | 6                                  |       |       |   |      |       |      |   | 6     |       |       |   | 43    |       |  |   |    |     |  |   | 43    |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|                                    |                |   | 1,253                              |       |       |   | 1,085 |       |      |   | 2,338 |       |       |   | 1,316 |       |  |   | 708 |     |  |   | 2,024 |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|Operating costs                     |                |   | 511                                |       |       |   | 437   |       |      |   | 948   |       |       |   | 640   |       |  |   | 372 |     |  |   | 1,012 |      
|Depletion and depreciation          |                |   | 423                                |       |       |   | 328   |       |      |   | 751   |       |       |   | 439   |       |  |   | 279 |     |  |   | 718   |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|                                    |                |   | 934                                |       |       |   | 765   |       |      |   | 1,699 |       |       |   | 1,079 |       |  |   | 651 |     |  |   | 1,730 |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|Segment income before the following |                | $ | 319                                |       |       | $ | 320   |       |      |   | 639   |       |       | $ | 237   |       |  | $ | 57  |     |  |   | 294   |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|Write down of GTL investments       |                |   |                                    |       |       |   |       |       |      |   | 3,321 |       |       |   |       |       |  |   |     |     |  |   |      |      
|General and administrative          |                |   |                                    |       |       |   |       |       |      |   | 1,783 |       |       |   |       |       |  |   |     |     |  |   | 1,401 |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|Net loss                            |                |   |                                    |       |       |   |       |       |      | $ | 4,465 |       |       |   |       |       |  |   |     |     |  | $ | 1,107 |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|Capital Expenditures:               |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|                                    | Oil and gas    |   | $                                  | 1,556 |       |   | $     | 1,097 |      |   | $     | 2,653 |       |   | $     | 3,648 |  |   | $   | 777 |  |   | $     | 4,425 | 
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|                                    | Gas-to-liquids |   |                                    |       |       |   |       |       |      |   |       | 203   |       |   |       |       |  |   |     |     |  |   |       | 719   | 
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      
|                                    |                |   |                                    |       |       |   |       |       |      | $ | 2,856 |       |       |   |       |       |  |   |     |     |  | $ | 5,144 |      
|                                    |                |   |                                    |       |       |   |       |       |      |   |       |       |       |   |       |       |  |   |     |     |  |   |       |      

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6. SHARE CAPITAL

Following is a summary of the changes in share capital and stock options
outstanding for the six-month period ended June 30, 2003:

|                          |                                         |  |               |       |               |   |             |       |        |  |                |      |   |   |                  |      | 
|------------------------- | --------------------------------------- |  | ------------- | ----- | ------------- | - | ----------- | ----- | ------ |  | -------------- | ---- | - | - | ---------------- | ---- | 
|                          |                                         |  | Common Shares |       | Stock Options
|                          |                                         |  |               |       |              
|                          |                                         |  |               |       |               |   |             |       |        |  |                |      |   |   | Weighted Average
|                          |                                         |  | Number        |       |               |   |             |       | Number |  | Exercise Price
|                          |                                         |  | (thousands)   |       | Amount        |   | (thousands) |       | Cdn.$ 
|                          |                                         |  |               |       |               |   |             |       |       
|Balance December 31, 2002 |                                         |  | 144,466       |       |               | $ | 131,112     |       |        |  | 10,265         |      |   | $ | 2.69             |     
|                          | Shares issued for service               |  |               | 530   |               |   |             | 474   |        |  |                |      |   |   |                  |      | 
|                          | Shares issued for convertible debenture |  |               | 2,000 |               |   |             | 1,000 |        |  |                |      |   |   |                  |      | 
|                          | Options issued                          |  |               |       |               |   |             |       |        |  |                | 150  |   |   | $                | 1.42 | 
|                          | Options cancelled/forfeited             |  |               |       |               |   |             |       |        |  |                | (584 | ) |   | $                | 4.48 | 
|                          |                                         |  |               |       |               |   |             |       |        |  |                |      |   |   |                  |     
|Balance June 30, 2003     |                                         |  | 146,996       |       |               | $ | 132,586     |       |        |  | 9,831          |      |   | $ | 2.57             |     
|                          |                                         |  |               |       |               |   |             |       |        |  |                |      |   |   |                  |     

In July 2003, the Company closed a special warrant financing to advance the
Companys operations in Californias San Joaquin Basin and for general working
capital purposes. The financing consisted of 3.0 million special warrants at
US$1.00 per special warrant. Each special warrant entitles the holder to
acquire one common share and one purchase warrant at no additional cost. Two
purchase warrants are exercisable to purchase an additional common share at
U.S.$1.00 until the first anniversary of closing and at U.S.$1.10 until the
second anniversary of closing.

7. STOCK BASED COMPENSATION

The Company accounts for its stock-based compensation plans using the
intrinsic-value of the options. Under this method, compensation costs are not
recognized in the financial statements for share options granted to employees
and directors when issued at market value. Had stock based compensation expense
been determined based on the fair value at the option grant date, the Companys
net loss and net loss per share for the three-month and six-month periods ended
June 30 would have been as follows:

|                             |  |                |       |                |  |      |       |      |  |   |       |  |  |   |       | 
|---------------------------- |  | -------------- | ----- | -------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                             |  | Three Months   |       | Six Months    
|                             |  | Ended June 30, |       | Ended June 30,
|                             |  |                |       |               
|                             |  | 2003           |       | 2002           |  | 2003 |       | 2002
|                             |  |                |       |                |  |      |       |     
|Pro forma net loss           |  | $              | 4,569 |                |  | $    | 1,276 |      |  | $ | 5,683 |  |  | $ | 2,797 | 
|                             |  |                |       |                |  |      |       |      |  |   |       |  |  |   |       | 
|Pro forma net loss per share |  | $              | 0.03  |                |  | $    | 0.01  |      |  | $ | 0.04  |  |  | $ | 0.02  | 
|                             |  |                |       |                |  |      |       |      |  |   |       |  |  |   |       | 

The foregoing is calculated in accordance with the Black-Scholes options
pricing model, using the following data and assumptions: 72% price volatility,
using the prior two years weekly average prices of the Companys common shares;
expected dividend yield of 0%; option terms to expiry of 5 years, as defined by
the option agreements; risk-free rate of return as of

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the date of the grant of 4.4% to 5.6%, based on one and five year Government of
Canada Bond yields.

8. NOTES PAYABLE

As at June 30, 2003 the Company borrowed $1.25 million from a related party to
finance China operations and $1.0 million in bank financing for the southern
expansion of South Midway. The related party loans are unsecured and due 90
days after written demand, on the closing date of obtaining equity financing or
December 31, 2005 whichever occurs earliest. The related party loans bear
interest at U.S. prime plus 3%. Interest only is payable on the secured bank
loan until January 15, 2004 after which the loan is repayable over three years
plus interest at 0.50% above the banks prime rate or 3.0% over the London
Inter-Bank offered rate (LIBOR), at the option of the Company. The $1.0
million secured bank loan has a six-month fixed LIBOR rate of 3.87%.

9. CONVERTIBLE DEBENTURE

In June 2003, the lender elected to convert the $1.0 million unsecured
convertible debenture into 2 million of the Companys common shares at $0.50
per share. All accrued interest on the debenture has been paid as of the
conversion date.

10. ASSET RETIREMENT OBLIGATION

Effective January 2003, the Company changed its policy on accounting for
liabilities associated with site restoration and abandonment of its oil and gas
properties. The undiscounted amount of expected cash flows required to settle
the asset retirement obligations is estimated at $0.8 million to be settled
over a twelve-year period starting in 2010. The liability for the expected cash
flows, as reflected in the financial statements, has been discounted at 7%.
Implementation of the policy resulted in an additional provision for asset
retirement of $0.2 million.

11. CLAIMS AND CONTINGENCIES

The Company and Aera Energy LLC (Aera) are in a dispute concerning certain
costs incurred during the drilling of the Northwest Lost Hills # 1-22 well. The
Companys position is that gross cost overruns, incurred by Aera in its
capacity as the operator of the well, were not previously approved by the
Company under the terms of the joint operating agreement. Aeras position is
that the Company is in breach of the joint operating agreement for failing to
pay its share of the disputed cost overruns in the amount of $2.7 million. The
parties are attempting to negotiate a settlement of the dispute failing which
the matter will be referred to binding arbitration. The amounts owed to Aera
for the cost overruns, which are in dispute, are fully provided for in accounts
payable and accrued liabilities.

12. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP

The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which conforms to U.S. GAAP except as below:

|                                                                    |  |                     |        |                         |  |             |        |               |  |   |        |   |  |   |         |  
|------------------------------------------------------------------- |  | ------------------- | ------ | ----------------------- |  | ----------- | ------ | ------------- |  | - | ------ | - |  | - | ------- | -
|                                                                    |  | As at June 30, 2003 |        | As at December 31, 2002
|                                                                    |  |                     |        |                        
|                                                                    |  | Oil and Gas         |        | Shareholders'           |  | Oil and Gas |        | Shareholders'
|Consolidated Balance Sheets                                         |  | Properties          |        | Equity                  |  | Properties  |        | Equity       
|                                                                    |  |                     |        |                         |  |             |        |              
|Canadian GAAP                                                       |  | $                   | 99,246 |                         |  | $           | 96,559 |               |  | $ | 99,436 |   |  | $ | 100,548 |  
|Adjustment to ascribed value of shares
issued for royalty interests |  |                     | 1,358  |                         |  |             | 1,358  |               |  |   | 1,358  |   |  |   | 1,358   |  
|Impairment provision for China properties, net                      |  |                     | (9,877 | )                       |  |             | (9,877 | )             |  |   | (9,922 | ) |  |   | (9,922  | )
|Write off of GTL development costs                                  |  |                     | (3,695 | )                       |  |             | (3,695 | )             |  |   | (6,603 | ) |  |   | (6,603  | )
|OCI  derivative mark-to-market adjustment                          |  |                     |       |                         |  |             | (59    | )             |  |   |       |   |  |   | (102    | )
|                                                                    |  |                     |        |                         |  |             |        |               |  |   |        |   |  |   |         |  
|U.S. GAAP                                                           |  | $                   | 87,032 |                         |  | $           | 84,286 |               |  | $ | 84,269 |   |  | $ | 85,279  |  
|                                                                    |  |                     |        |                         |  |             |        |               |  |   |        |   |  |   |         |  

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Under U.S. GAAP, changes in the fair value of derivative instruments that meet
specific cash-flow hedge accounting criteria are reported in other
comprehensive income (OCI). The gains and losses on cash-flow derivative
transactions that are reported in OCI are reclassified to
earnings in the period in which earnings are affected by changes in the cash
flow of the underlying hedged item. The Companys derivative contracts qualify
for hedge accounting treatment. The mark-to-market value of these derivatives
as at June 30, 2003 and December 31, 2002 are losses of $0.1 million, which
comprises the balance of OCI for those periods then ended.

Under U.S. GAAP, the transfer of deficit to share capital, which occurred in
1999, would not be recognized and Shareholders Equity would be presented as
follows:

|                                            |  |          |          |              |  |   |          |  
|------------------------------------------- |  | -------- | -------- | ------------ |  | - | -------- | -
|                                            |  | June 30, |          | December 31,
|                                            |  | 2003     |          | 2002        
|                                            |  |          |          |             
|Share capital (including adjustments above) |  | $        | 208,399  |              |  | $ | 206,925  |  
|Deficit (Including adjustments above)       |  |          | (124,054 | )            |  |   | (121,544 | )
|Accumulated other comprehensive income      |  |          | (59      | )            |  |   | (102     | )
|                                            |  |          |          |              |  |   |          |  
|                                            |  | $        | 84,286   |              |  | $ | 85,279   |  
|                                            |  |          |          |              |  |   |          |  

|                                                                 |  |                                 |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|---------------------------------------------------------------- |  | ------------------------------- | ------ | --------- |  | ---- | ------- | --------- |  | - | ----- | - |  | - | ------- | 
|                                                                 |  | Six Month Periods Ended June 30
|                                                                 |  |                                
|                                                                 |  | 2003                            |        | 2002     
|                                                                 |  |                                 |        |          
|                                                                 |  | Net                             |        | Net Loss  |  | Net  |         | Net Loss 
|Consolidated Statements of Loss and Deficit                      |  | Loss                            |        | Per Share |  | Loss |         | Per Share
|                                                                 |  |                                 |        |           |  |      |         |          
|Canadian GAAP                                                    |  | $                               | 5,463  |           |  | $    | 0.04    |           |  | $ | 2,628 |   |  | $ | 0.02    | 
|Depletion adjustment  China                                     |  |                                 | (45    | )         |  |      |        |           |  |   | (38   | ) |  |   |        | 
|GTL development costs written off, net                           |  |                                 | (2,908 | )         |  |      | (0.02   | )         |  |   | 1,349 |   |  |   | 0.01    | 
|                                                                 |  |                                 |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|U.S. GAAP                                                        |  | $                               | 2,510  |           |  | $    | 0.02    |           |  | $ | 3,939 |   |  | $ | 0.03    | 
|                                                                 |  |                                 |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|Weighted Average Number of Shares under
U.S. GAAP (in thousands) |  |                                 |        |           |  |      | 144,832 |           |  |   |       |   |  |   | 139,979 | 
|                                                                 |  |                                 |        |           |  |      |         |           |  |   |       |   |  |   |         | 

|                                                                 |  |                                   |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|---------------------------------------------------------------- |  | --------------------------------- | ------ | --------- |  | ---- | ------- | --------- |  | - | ----- | - |  | - | ------- | 
|                                                                 |  | Three Month Periods Ended June 30
|                                                                 |  |                                  
|                                                                 |  | 2003                              |        | 2002     
|                                                                 |  |                                   |        |          
|                                                                 |  | Net                               |        | Net Loss  |  | Net  |         | Net Loss 
|                                                                 |  | Loss                              |        | Per Share |  | Loss |         | Per Share
|                                                                 |  |                                   |        |           |  |      |         |          
|Canadian GAAP                                                    |  | $                                 | 4,465  |           |  | $    | 0.03    |           |  | $ | 1,107 |   |  | $ | 0.01    | 
|Depletion adjustment  China                                     |  |                                   | (22    | )         |  |      |        |           |  |   | (18   | ) |  |   |        | 
|GTL development costs written off, net                           |  |                                   | (3,118 | )         |  |      | (0.02   | )         |  |   | 719   |   |  |   | 0.01    | 
|                                                                 |  |                                   |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|U.S. GAAP                                                        |  | $                                 | 1,325  |           |  | $    | 0.01    |           |  | $ | 1,808 |   |  | $ | 0.02    | 
|                                                                 |  |                                   |        |           |  |      |         |           |  |   |       |   |  |   |         | 
|Weighted Average Number of Shares under
U.S. GAAP (in thousands) |  |                                   |        |           |  |      | 145,055 |           |  |   |       |   |  |   | 140,493 | 
|                                                                 |  |                                   |        |           |  |      |         |           |  |   |       |   |  |   |         | 

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Stock Based Compensation

Had compensation expense been determined based on fair value of options issued
to employees and directors at the stock option grant date, consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the Companys
net loss and net loss per share would have been as follows:

|                                                                                         |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                                         |  | Three Months   |         | Six Months    
|                                                                                         |  | Ended June 30, |         | Ended June 30,
|                                                                                         |  |                |         |               
|                                                                                         |  | 2003           |         | 2002           |  | 2003 |         | 2002
|                                                                                         |  |                |         |                |  |      |         |     
|Net loss under U.S. GAAP                                                                 |  | $              | 1,325   |                |  | $    | 1,808   |      |  | $ | 2,510   |  |  | $ | 3,939   | 
|Stock -based compensation expense
determined under fair-value method for
employee awards |  |                | 409     |                |  |      | 465     |      |  |   | 807     |  |  |   | 935     | 
|                                                                                         |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Pro forma net loss under U.S. GAAP                                                       |  | $              | 1,734   |                |  | $    | 2,273   |      |  | $ | 3,317   |  |  | $ | 4,874   | 
|                                                                                         |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|Basic loss per common share under U.S. GAAP:                                             |  |                |         |                |  |      |         |      |  |   |         |  |  |   |         | 
|As reported                                                                              |  | $              | 0.01    |                |  | $    | 0.02    |      |  | $ | 0.02    |  |  | $ | 0.03    | 
|Pro forma                                                                                |  | $              | 0.01    |                |  | $    | 0.02    |      |  | $ | 0.02    |  |  | $ | 0.03    | 
|Weighted Average Number of Shares under
U.S. GAAP (in thousands)                         |  |                | 145,055 |                |  |      | 140,493 |      |  |   | 144,832 |  |  |   | 139,979 | 

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

With the exception of historical information, certain matters discussed in this
Form 10-Q are forward looking statements that involve risks and uncertainties.
Certain statements contained in this Form 10-Q, including statements which may
contain words such as could, should, expect, believe, will and
similar expressions and statements relating to matters that are not historical
facts are forward-looking statements. Such statements involve known and unknown
risks and uncertainties which may cause our actual results, performances or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that our expectations are based on reasonable assumptions, we can
give no assurance that our goals will be achieved. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, our ability
to raise capital as and when required, the timing and extent of changes in
prices for oil and gas, competition, environmental risks, drilling and
operating risks, uncertainties about the estimates of reserves and the
potential success of gas-to-liquids development technology, the prices of goods
and services, the availability of drilling rigs and other support services,
legislative and government regulations, political and economic factors in
countries in which we operate and implementation of our capital investment
program.

The following should be read in conjunction with the Companys consolidated
financial statements contained herein and in the Form 10-K for the year ended
December 31, 2002, along with Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in such Form 10-K. Any terms
used but not defined in the following discussion have the same meaning given to
them in the Form 10-K.

Results of Operations

For the three-month period ended June 30, 2003, the net loss was $4.5 million
($0.03 per share) compared to a net loss of $1.1 million ($0.01 per share) for
the same period in 2002. The net loss for the six-month period ended June 30,
2003 was $5.5 million ($0.04 per share) compared to a net loss of $2.6 million
($0.02 per share) for the same period in 2002. The net loss for the three-month
and six-month periods ended June 30, 2003 includes a $3.3 million ($0.02 per
share) write down of our investment in the Qatar gas-to-liquids (GTL) project
as a result of the termination of contract negotiations in May 2003.

Cash from operating activities for the three-month and six-month periods ended
June 30, 2003 was $1.4 million and $1.9 million, respectively, compared to a
cash deficit from operating activities of $2.6 million and $3.5 million for the
same periods in 2002. The cash from operating activities for the three-month
and six-month periods ended June 30, 2003 includes $0.6 million for the return
of funds from a derivative margin account. Our cash position decreased $1.1
million for the first six months of 2003 primarily due to $4.8 million of
capital spending, partially offset by cash from operating activities of $1.9
million and an increase in notes payable of $1.8 million. Cash for the
comparable period in 2002 decreased $4.1 million primarily due to $11.8 million
of capital spending and $3.5 million
cash deficit from operating activities, partially offset by the $1.2 million
proceeds from the sale of our Daqing assets and the proceeds from a private
placement of $10.0 million.

13



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Production and Operations

Oil and gas revenues for the three-month and six-month periods ended June 30,
2003 were $2.3 million and $4.9 million, respectively. This represents an
increase of $0.4 million and $1.2 million from the comparable periods in 2002
primarily as a result of an increase in oil and gas prices. Oil and gas prices
were up $4.47/boe and $7.14/boe for the three-month and six-month periods ended
June 30, 2003, respectively, compared to the same periods in 2002.

For the three-month and six-month periods ended June 30, 2003, net production
from the U.S. was down compared to the same periods in 2002 due to the loss in
production from Spraberry as a result of the sale of certain Spraberry
interests in the second half of 2002. This loss was partially offset by
increased production from South Midway as a result of the success of the cyclic
steaming operations and increased drilling in 2002 and the second quarter of
2003. Production levels in China are up 10% for the quarter ended June 30, 2003
primarily due to an increase in producing wells in the Daqing block, which we
sold in 2002 but retain a royalty interest.

Operating costs per boe in the U.S. are up slightly for the three-month and
six-month periods ended June 30, 2003 compared to the same periods in 2002.
Operating costs per boe in the South Midway increased as a result of additional
costs associated with the full scale cyclic steaming program initiated in May
2002. This increase was mostly offset by a decrease in operating costs per boe
at Spraberry due to a maturing of those operations and continuing cost
controls. U.S. depletion costs per boe increased 17% for the first six months
of 2003 compared to the same period in 2002 primarily due to the partial
impairment of Northwest Lost Hills and other California properties in the
second half of 2002. This increase in depletion costs has been partially offset
as a result of an increase in proved reserves at South Midway.

Operating costs per boe in China increased 29% and 37% for the three-month and
six-month periods ended June 30, 2003, respectively, compared to the same
periods in 2002 as a result of increased workover, routine maintenance and
utility costs in 2003. Depletion per boe in China increased 11% for the first
six months of 2003 primarily due to a downward revision of our proved reserves
at Dagang as a result of increased oil prices.

Production and operating information are detailed below:

|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |         | 
|---------------------------- | -------------------- | - | -------------------------------- | ------- | ----- | ------- | ----- | ------ | ---- | - | ----- | ------- | ----- | - | ----- | ------- |  | - | ----- | ------ |  | - | ----- | ------- | 
|                             |                      |   | Six Month Periods Ended June 30,
|                             |                      |   |                                 
|                             |                      |   | 2003                             |         | 2002 
|                             |                      |   |                                  |         |      
|                             |                      |   | U.S.                             |         | China |         | Total |        | U.S. |   | China |         | Total
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |      
|Net Production:              |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        
|                             | BOE                  |   |                                  | 105,783 |       |         |       | 73,757 |      |   |       | 179,540 |       |   |       | 112,208 |  |   |       | 70,445 |  |   |       | 182,653 | 
|                             | BOE/day for the year |   |                                  | 584     |       |         |       | 407    |      |   |       | 991     |       |   |       | 620     |  |   |       | 389    |  |   |       | 1,009   | 
|                            
|                            
|                            
|                            
|                            
|                            
|                             |                      |   |                                  |         |       | Per BOE |       |        |      |   |       |         |       |   |       | Per BOE |  |   |       |       
|                             |                      |   |                                  |        
|Oil and gas revenue          |                      | $ | 25.42                            |         |       | $       | 29.48 |        |      | $ | 27.09 |         |       | $ | 20.54 |         |  | $ | 19.01 |        |  | $ | 19.95 |        
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        
|Operating costs              |                      |   | 6.75                             |         |       |         | 7.87  |        |      |   | 7.21  |         |       |   | 6.61  |         |  |   | 5.74  |        |  |   | 6.27  |        
|Production taxes             |                      |   | 0.95                             |         |       |         |      |        |      |   | 0.56  |         |       |   | 1.23  |         |  |   |      |        |  |   | 0.76  |        
|Engineering support          |                      |   | 1.87                             |         |       |         | 3.40  |        |      |   | 2.50  |         |       |   | 2.59  |         |  |   | 4.17  |        |  |   | 3.20  |        
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        
|                             |                      |   | 9.57                             |         |       |         | 11.27 |        |      |   | 10.27 |         |       |   | 10.43 |         |  |   | 9.91  |        |  |   | 10.23 |        
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        
|Net Revenue before depletion |                      |   | 15.85                            |         |       |         | 18.21 |        |      |   | 16.82 |         |       |   | 10.11 |         |  |   | 9.10  |        |  |   | 9.72  |        
|Depletion                    |                      |   | 8.89                             |         |       |         | 9.26  |        |      |   | 9.04  |         |       |   | 7.57  |         |  |   | 8.38  |        |  |   | 7.88  |        
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        
|Net Revenue from operations  |                      | $ | 6.96                             |         |       | $       | 8.95  |        |      | $ | 7.78  |         |       | $ | 2.54  |         |  | $ | 0.72  |        |  | $ | 1.84  |        
|                             |                      |   |                                  |         |       |         |       |        |      |   |       |         |       |   |       |         |  |   |       |        |  |   |       |        

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|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |        | 
|---------------------------- | -------------------- | - | ---------------------------------- | ------ | ----- | ------- | ----- | ------ | ---- | - | ----- | ------ | ----- | - | ----- | ------- |  | - | ----- | ------ |  | - | ----- | ------ | 
|                             |                      |   | Three Month Periods Ended June 30,
|                             |                      |   |                                   
|                             |                      |   | 2003                               |        | 2002 
|                             |                      |   |                                    |        |      
|                             |                      |   | U.S.                               |        | China |         | Total |        | U.S. |   | China |        | Total
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |      
|Net Production:              |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|                             | BOE                  |   |                                    | 49,806 |       |         |       | 36,698 |      |   |       | 86,504 |       |   |       | 54,587  |  |   |       | 33,487 |  |   |       | 88,074 | 
|                             | BOE/day for the year |   |                                    | 547    |       |         |       | 403    |      |   |       | 950    |       |   |       | 600     |  |   |       | 368    |  |   |       | 968    | 
|                            
|                            
|                            
|                            
|                            
|                            
|                             |                      |   |                                    |        |       | Per BOE |       |        |      |   |       |        |       |   |       | Per BOE |  |   |       |       
|                             |                      |   |                                    |       
|Oil and gas revenue          |                      | $ | 25.04                              |        |       | $       | 29.55 |        |      | $ | 26.96 |        |       | $ | 23.32 |         |  | $ | 21.14 |        |  | $ | 22.49 |       
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|Operating costs              |                      |   | 7.40                               |        |       |         | 8.68  |        |      |   | 7.94  |        |       |   | 7.30  |         |  |   | 6.72  |        |  |   | 7.08  |       
|Production taxes             |                      |   | 0.98                               |        |       |         |      |        |      |   | 0.57  |        |       |   | 1.81  |         |  |   |      |        |  |   | 1.12  |       
|Engineering support          |                      |   | 1.87                               |        |       |         | 3.22  |        |      |   | 2.44  |        |       |   | 2.62  |         |  |   | 4.39  |        |  |   | 3.29  |       
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|                             |                      |   | 10.25                              |        |       |         | 11.90 |        |      |   | 10.95 |        |       |   | 11.73 |         |  |   | 11.11 |        |  |   | 11.49 |       
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|Net Revenue before depletion |                      |   | 14.79                              |        |       |         | 17.65 |        |      |   | 16.01 |        |       |   | 11.59 |         |  |   | 10.03 |        |  |   | 11.00 |       
|Depletion                    |                      |   | 7.99                               |        |       |         | 8.94  |        |      |   | 8.39  |        |       |   | 7.60  |         |  |   | 8.34  |        |  |   | 7.88  |       
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|Net Revenue from operations  |                      | $ | 6.80                               |        |       | $       | 8.71  |        |      | $ | 7.62  |        |       | $ | 3.99  |         |  | $ | 1.69  |        |  | $ | 3.12  |       
|                             |                      |   |                                    |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       

General and Administrative

For the three-month and six-month periods ended June 30, 2003 general and
administrative costs declined by $0.1 million and $0.5 million, respectively,
compared to the same periods in 2002 due to staff reductions and cost cutting
measures implemented in 2002. However, such costs allocated to our exploration
and development activities declined by $0.5 million and $1.0 million for the
same periods primarily due to a reduction in those activities in 2003. As a
result we expensed a net of $0.4 million and $0.5 million more in general and
administrative costs for the three-month and six-month periods ended June 30,
2003 compared to the same periods in 2002.

Exploration and Development Activities

Spending on these activities for the three-month and six-month periods ended
June 30, 2003 was $2.7 million and $4.4 million a decrease of $1.8 million and
$6.1 million, respectively, over the amounts spent during the comparable
periods in 2002. These decreases are primarily due to the completion of our
exploration drilling at Northwest Lost Hills #1-22 and a cessation of our
Spraberry drilling program.

In the South Midway expansion project, drilling of the first five wells, which
included three wells in new pools, commenced in late April 2003. The reserve
limits have been extended based on the new well information and the development
program will include a total of 30 wells versus the originally planned 20 well
program. By the end of the first quarter of 2004, it is anticipated that all
thirty wells will be drilled and completed. Peak production for the expansion
project is expected to occur in the second quarter of 2004.

A contract has been signed with Ensyn Petroleum International (Ensyn), to
test their Rapid Thermal Processing (RPT) technology to upgrade the quality of
heavy oil by producing lighter, more valuable crude oil. The process has the
potential of supplying heat to generate steam for the cyclic process being used
in South Midway. We have the rights to test our crude oil in a 250 barrel per
day demonstration plant, which is currently under construction and the test
should be completed before the end of the year. The contract also gives us
exclusive rights to apply this technology in two prospective foreign countries
where heavy oil fields have been proven but not fully developed.

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Northwest Lost Hills # 1-22 continues to be suspended until we can identify one
or more partners to share the costs of the testing program. Aera and Ivanhoe
have elected to temporarily abandon the well, which would permit reentering the
well at a later date for testing. Until it is tested, the wells commercial
potential, if any, cannot be determined.

In the Bossier trend, testing of the shallow zones at Creslenn Ranch has begun.
We continue our search for farm-out partners in our other Bossier prospects in
return for an exploration drilling commitment.

Final approval of our Overall Development Program in Dagang was received in the
second quarter 2003. Commencement of activities to implement the development
of the Dagang project has begun. At our Zitong project we continue seismic
reprocessing activities as part of the first three-year exploration period.
These activities and commencement of a new geophysical survey will continue
through year-end 2003.

Gas-to-Liquids Activities

Spending on GTL projects for the three-month and six-month periods ended June
30, 2003 was $0.2 million and $0.4 million a decrease of $0.5 million and $0.9
million, respectively, over the amounts spent during the comparable periods in
2002. These decreases are due to the completion of technical and commercial
feasibility studies for both the Qatar and Egypt projects.

In May 2003, advanced negotiations with Qatar Petroleum and the Qatari
government to construct and operate a major GTL production facility in Qatar
terminated without an agreement being reached. During the quarter ended June
30, 2003 we wrote down $3.3 million of our GTL investments for expenditures
incurred in connection with these negotiations.

With our master license to use Syntroleums proprietary GTL technology, we are
currently pursuing several opportunities throughout the world to obtain rights
to stranded natural gas deposits to use as feedstock for GTL projects. We have
agreed with Syntroleum to cooperate more closely on the identification and
development of GTL project opportunities. Certain territorial restrictions to
our master license are to be removed, which will enable us to pursue GTL
project opportunities worldwide, particularly in China. Syntroleum has also
agreed that, in respect of GTL projects in which both companies participate, no
additional license fees or royalties will be payable and that Syntroleum will
also contribute to any such project the right to manufacture specialty and
lubricant products. Both companies have the right to pursue GTL projects
independently, but we would be required to pay the normal license fees and
royalties in such projects.

In July 2003, we signed an agreement with Repsol-YPF Bolivia S.A. (Repsol)
and Syntroleum that brings us into a study to build a 90,000-barrel-per-day GTL
plant in Bolivia. The commercialization study will include an analysis of
alternative plant sites, transportation logistics and screening economics
conducted by representatives from Ivanhoe, Repsol and Syntroleum. Upon
determination that the project is economically feasible and meets financing
requirements, the three parties will enter into discussions regarding a
joint-venture agreement prior to undertaking definitive engineering and design
work.

16



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##### Table of Contents



Liquidity and Capital Resources:

We continue to achieve progress towards key objectives to improve our liquidity
and provide access to capital resources needed to further our short and medium
term goals.

As at June 30, 2003 our cash position increased slightly from March 30, 2003 as
we drew down $1.0 million in bank financing to fund our development of the
southern expansion in South Midway and $0.5 million from a related party to
fund our exploration activities in China. In addition, maintaining oil and gas
prices at 2003 levels and the benefits realized from the cost reductions
initiated in 2002 should continue to generate sufficient cash in the near term
to fund our operating activities. To partially protect our cash flow from
operations from a significant decline in oil prices, we have hedged
approximately half of our current production by entering into a six-month
costless collar contract for 500 barrels of oil per day with a ceiling price of
$30.45 per barrel and a floor price of $24.00 per barrel.

In June 2003, the $1.0 million unsecured convertible debenture, which had been
extended to December 2003, was converted to 2 million of our common shares at
$0.50/share thus freeing up cash for capital programs and operations.

In July 2003, we closed a $3.0 million special warrant financing to advance the
Companys operations in Californias San Joaquin Basin and for general working
capital purposes. We will continue to take the necessary measures to meet our
goals and improve our liquidity including the sale of non-core assets,
additional equity financings and loans from related and third parties. However,
additional funding will be required to complete future capital programs through
a combination of equity, debt, mezzanine financing and joint venture partner
participation. We cannot assure you that we will be successful in raising the
additional funds necessary or securing joint venture partners to complete our
capital programs. If we are unsuccessful, we will have to prioritize our
capital programs, which may result in delaying and potentially losing some
valuable business opportunities.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the quarter ended June 30, 2003 we took steps to mitigate fluctuations
in our cash flows as a result of changes in oil prices by entering into a
costless collar hedge with a ceiling price of $30.45 per barrel and a floor
price of $24.00 per barrel using WTI as the index traded on the NYMEX. The
hedge is on the first 500 barrels of oil produced per day for a six-month
period starting June 2003.




Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys CEO and CFO,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to the 1934 Securities Exchange Act. Based
upon that evaluation, the CEO and CFO concluded that, as of June 30, 2003, the
Companys disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the Companys periodic
SEC filings relating to the Company (including its consolidated subsidiaries).
There were no significant changes in the Companys internal control over
financial reporting or in other factors that could significantly affect its
internal controls during the period ended June 30, 2003, nor any significant
deficiencies or material weaknesses in such internal controls requiring
corrective actions. As a result, no corrective actions were taken.

17



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##### Table of Contents






Part II  Other Information




Item 1. Legal Proceedings:

This item incorporates by reference the information regarding legal proceedings
in Note 11 to the consolidated financial statements in Part I of this Form
10-Q.




Item 2. Changes in Securities and Use of Proceeds: None




Item 3. Defaults Upon Senior Securities: None




Item 4. Submission of Matters To a Vote of Securityholders

The Annual General Meeting of the shareholders of the Company was held in
Vancouver, British Columbia on June 19, 2003.

An election of directors was held with the following individuals being
re-elected to the Companys board of directors:

|                    |  |                                                   
|------------------- |  | --------------------------------------------------
|David R. Martin     |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|Robert M. Friedland |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|E. Leon Daniel      |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|John A. Carver      |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|R. Edward Flood     |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|Shun-ichi Shimizu   |  | (106,308,379 votes for and 176,315 votes withheld)
|                    |  |                                                   
|Howard Balloch      |  | (106,308,379 votes for and 176,315 votes withheld)

A resolution on amendments to the Employees and Directors Equity Incentive
Plan (the Plan) was voted on by disinterested shareholders of the Company as
follows:



| |  |  | to increase the maximum number of common shares, which may be
allocated for issuance pursuant to the terms and conditions of the Plan
from 15,000,000 to 20,000,000 common shares. (24,834,676 votes for,
4,293,097 votes against and 52,065 votes withheld)                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to increase the maximum number of common shares that may be issued,
from time to time, to eligible employees and directors of the Company
and its affiliates as a discretionary bonus in accordance with the
terms of the Share Bonus Plan set out in Part 3 of the Plan from
1,000,000 to 2,000,000 common shares. (24,784,971 votes for, 4,292,802
votes against, 57,065 votes withheld)

The only other matter voted upon at the annual meeting was the re-appointment
of Deloitte & Touche LLP as the Companys independent auditors at a
remuneration to be fixed by the Companys board of directors (106,328,527 votes
for and 12,265 votes withheld).




Item 5. Other Information: None




Item 6. Exhibits and Reports on Form 8-K

18



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##### Table of Contents





|(a) |  | Exhibits
|--- |  | --------

|        |  |                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                           
|NUMBER  |  | DESCRIPTION                                                                                               
|        |  |                                                                                                           
|31.1    |  | Certification by the Chief Executive Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|31.2    |  | Certification by the Chief Financial Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|32.1    |  | Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements
|        |  |                                                                                                           
|32.2    |  | Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements



|(b) |  | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the quarter ended June 30, 2003, the Company filed a Current
Report on Form 8-K dated May 28, 2003 (date of earliest event reported),
filed on May 29, 2003, for the purpose of reporting, under Item 5,
termination of negotiations with Qatar Petroleum to develop a block in
Qatars North Field to produce natural gas liquids and GTL products.

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.

|                    |  |                                                                  
|------------------- |  | -----------------------------------------------------------------
|IVANHOE ENERGY INC.
|                    |  |                                                                  
|By:                 |  | /s/ John OKeefe                                                 
|                    |  |                                                                  
|Name:
Title:        |  | John OKeefe
Executive Vice-President and
Chief Financial Officer

Dated: August 5, 2003

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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                           
|Number  |  | Description                                                                                               
|        |  |                                                                                                           
|31.1    |  | Certification by the Chief Executive Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|31.2    |  | Certification by the Chief Financial Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|32.1    |  | Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements
|        |  |                                                                                                           
|32.2    |  | Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements

20