##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    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
    
    98-0372413(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)Suite 654  999 Canada Place 
Vancouver, British Columbia, Canada(Address of principal executive office)
    
    V6C 3E1(zip code)
 (604) 688-8323  (registrants telephone number, including area code)
 No Changes  (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
  o þ




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##### 



TABLE OF CONTENTS
 PagePART IFinancial InformationItem 1 Financial StatementsUnaudited Condensed Consolidated Balance Sheets as at September 30, 2007 and December 31, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Accumulated
    Deficit for the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flow for the
    Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006
    
    
    5Notes to the Unaudited Condensed Consolidated Financial
      Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
     and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35PART II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters To a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits
    
    
    36Facility Agreement Dated September 14, 2007Section 302 Certification - CEOSection 302 Certification - CFOSection 906 Certification - CEOSection 906 Certification - CFO
  2




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##### Table of Contents



Part I  Financial Information
 
 Item 1 Financial Statements
 IVANHOE
ENERGY INC.
 
 Unaudited Condensed Consolidated Balance Sheets
 September 30, 2007
    
    
    December 31, 2006AssetsCurrent AssetsCash and cash equivalents
    
    $
    14,779
    
    
    $
    13,879Accounts receivable
    
    
    8,027
    
    
    
    7,435Advance
    
    
    925
    
    
    
    Prepaid and other current assets
    
    
    287
    
    
    
    77324,018
    
    
    
    22,087Oil and gas properties and investments, net
    
    
    116,150
    
    
    
    121,918Intangible assets  technology
    
    
    102,153
    
    
    
    102,153Long term assets
    
    
    893
    
    
    
    2,386$
    243,214
    
    
    $
    248,544Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    10,417
    
    
    $
    9,428Notes payable  current portion
    
    
    6,188
    
    
    
    2,147Asset retirement obligations  current portion
    
    
    748
    
    
    
    Derivative instruments
    
    
    3,175
    
    
    
    49320,528
    
    
    
    12,068Long term debt
    
    
    7,937
    
    
    
    4,237Asset retirement obligations
    
    
    1,930
    
    
    
    1,953Long term obligation
    
    
    1,900
    
    
    
    1,900Commitments and contingenciesShareholders EquityShare capital, issued 242,809,513 common
shares;December 31, 2006 241,215,798 common shares
    
    
    319,817
    
    
    
    318,725Purchase warrants
    
    
    23,422
    
    
    
    23,955Contributed surplus
    
    
    8,821
    
    
    
    6,489Accumulated deficit
    
    
    (141,141
    )
    
    
    (120,783
    )210,919
    
    
    
    228,386$
    243,214
    
    
    $
    248,544
  3




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##### Table of Contents



IVANHOE
ENERGY INC.
 
 Unaudited
Condensed Consolidated Statements of Operations and Accumulated
Deficit
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenueOil and gas revenue
    
    $
    10,864
    
    
    $
    13,745
    
    
    $
    30,249
    
    
    $
    36,385Loss on derivative instruments
    
    
    (2,153
    )
    
    
    
    
    
    
    (2,928
    )
    
    
    Interest income
    
    
    112
    
    
    
    270
    
    
    
    348
    
    
    
    5788,823
    
    
    
    14,015
    
    
    
    27,669
    
    
    
    36,963ExpensesOperating costs
    
    
    4,266
    
    
    
    4,724
    
    
    
    12,174
    
    
    
    11,298General and administrative
    
    
    2,725
    
    
    
    2,921
    
    
    
    8,981
    
    
    
    7,648Business and technology development
    
    
    2,831
    
    
    
    2,043
    
    
    
    7,341
    
    
    
    5,159Depletion and depreciation
    
    
    6,044
    
    
    
    7,772
    
    
    
    18,960
    
    
    
    24,808Interest expense and financing costs
    
    
    189
    
    
    
    211
    
    
    
    571
    
    
    
    737Write off of deferred acquisition costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    732Provision for impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75016,055
    
    
    
    18,403
    
    
    
    48,027
    
    
    
    51,132Net Loss
    
    
    (7,232
    )
    
    
    (4,388
    )
    
    
    (20,358
    )
    
    
    (14,169
    )Accumulated Deficit, beginning of
period
    
    
    (133,909
    )
    
    
    (105,072
    )
    
    
    (120,783
    )
    
    
    (95,291
    )Accumulated Deficit, end of period
    
    $
    (141,141
    )
    
    $
    (109,460
    )
    
    $
    (141,141
    )
    
    $
    (109,460
    )Net Loss per share  Basic and Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.06
    )Weighted Average Number of Shares
(in thousands)
    
    
    242,747
    
    
    
    241,181
    
    
    
    241,812
    
    
    
    233,766
  4




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IVANHOE
ENERGY INC.
 
 Unaudited Condensed Consolidated Statements of Cash Flow
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating ActivitiesNet loss
    
    $
    (7,232
    )
    
    $
    (4,388
    )
    
    $
    (20,358
    )
    
    $
    (14,169
    )Items not requiring use of cash:Depletion and depreciation
    
    
    6,044
    
    
    
    7,772
    
    
    
    18,960
    
    
    
    24,808Provision for impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Stock based compensation
    
    
    758
    
    
    
    1,105
    
    
    
    2,613
    
    
    
    2,174Write off of deferred acquisition costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    732Unrealized loss on derivative instruments
    
    
    1,730
    
    
    
    
    
    
    
    2,682
    
    
    
    Other
    
    
    151
    
    
    
    (147
    )
    
    
    481
    
    
    
    360Changes in non-cash working capital items
    
    
    315
    
    
    
    279
    
    
    
    188
    
    
    
    (3,600
    )1,766
    
    
    
    5,353
    
    
    
    4,566
    
    
    
    11,055Investing ActivitiesCapital investments
    
    
    (9,100
    )
    
    
    (5,019
    )
    
    
    (22,557
    )
    
    
    (13,622
    )Merger and acquisition related costs
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    (732
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    5,350Recovery of
HTL TM investments
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    Advance repayments (payments)
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    (125
    )Other
    
    
    (47
    )
    
    
    (45
    )
    
    
    28
    
    
    
    (114
    )Changes in non-cash working capital items
    
    
    2,189
    
    
    
    (5,306
    )
    
    
    695
    
    
    
    (8,085
    )(6,958
    )
    
    
    (10,600
    )
    
    
    (11,434
    )
    
    
    (17,328
    )Financing ActivitiesShares issued on private placements, net of share issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,298Proceeds from exercise of options
    
    
    113
    
    
    
    22
    
    
    
    278
    
    
    
    471Proceeds from debt obligations, net of financing costs
    
    
    9,335
    
    
    
    
    
    
    
    9,335
    
    
    
    Payments of debt obligations
    
    
    (615
    )
    
    
    (1,031
    )
    
    
    (1,845
    )
    
    
    (6,685
    )Other
    
    
    62
    
    
    
    (17
    )
    
    
    
    
    
    
    8,895
    
    
    
    (1,026
    )
    
    
    7,768
    
    
    
    19,084Increase (decrease) in cash and cash equivalents, for the period
    
    
    3,703
    
    
    
    (6,273
    )
    
    
    900
    
    
    
    12,811Cash and cash equivalents, beginning of period
    
    
    11,076
    
    
    
    25,808
    
    
    
    13,879
    
    
    
    6,724Cash and cash equivalents, end of period
    
    $
    14,779
    
    
    $
    19,535
    
    
    $
    14,779
    
    
    $
    19,535
  5




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Notes to the Condensed Consolidated Financial Statements
September 30, 2007
 1. GOING CONCERN AND BASIS OF PRESENTATION
 GAAP
  2. CHANGES IN ACCOUNTING POLICIES
 2007 Accounting Changes
 CICA S.1506 S.1530 S.3251 S.3855 S.3861 S.3865
    6




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Financial assets
     Financial liabilities
       Derivative Financial Instruments
   7




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##### Table of Contents



Impact of New and Pending Canadian GAAP Accounting Standards
 IFRS
 S.1535 S.3862 S.3863
 8




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##### Table of Contents



3. OIL AND GAS PROPERTIES AND INVESTMENTS
  As at September 30, 2007Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    TotalOil and Gas Properties:Proved
    
    $
    106,348
    
    
    $
    114,758
    
    
    $
    
    
    
    $
    
    
    
    $
    221,106Unproved
    
    
    4,369
    
    
    
    17,751
    
    
    
    
    
    
    
    
    
    
    
    22,120110,717
    
    
    
    132,509
    
    
    
    
    
    
    
    
    
    
    
    243,226Accumulated depletion
    
    
    (25,618
    )
    
    
    (52,954
    )
    
    
    
    
    
    
    
    
    
    
    (78,572
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (10,420
    )
    
    
    
    
    
    
    
    
    
    
    (60,770
    )34,749
    
    
    
    69,135
    
    
    
    
    
    
    
    
    
    
    
    103,884HTL TM and GTL Investments:Feasibility studies and other deferred costs
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    5,054
    
    
    
    5,355Feedstock test facility
    
    
    
    
    
    
    
    
    
    
    1,784
    
    
    
    
    
    
    
    1,784Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    9,671
    
    
    
    
    
    
    
    9,671Accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    (4,723
    )
    
    
    
    
    
    
    (4,723
    )
    
    
    
    
    
    
    
    7,033
    
    
    
    5,054
    
    
    
    12,087Furniture and equipment
    
    
    526
    
    
    
    116
    
    
    
    108
    
    
    
    
    
    
    
    750Accumulated depreciation
    
    
    (438
    )
    
    
    (72
    )
    
    
    (61
    )
    
    
    
    
    
    
    (571
    )88
    
    
    
    44
    
    
    
    47
    
    
    
    
    
    
    
    179$
    34,837
    
    
    $
    69,179
    
    
    $
    7,080
    
    
    $
    5,054
    
    
    $
    116,150
 As at December 31, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    TotalOil and Gas Properties:Proved
    
    $
    102,884
    
    
    $
    106,171
    
    
    $
    
    
    
    $
    
    
    
    $
    209,055Unproved
    
    
    5,765
    
    
    
    8,279
    
    
    
    
    
    
    
    
    
    
    
    14,044108,649
    
    
    
    114,450
    
    
    
    
    
    
    
    
    
    
    
    223,099Accumulated depletion
    
    
    (21,249
    )
    
    
    (39,372
    )
    
    
    
    
    
    
    
    
    
    
    (60,621
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (10,420
    )
    
    
    
    
    
    
    
    
    
    
    (60,770
    )37,050
    
    
    
    64,658
    
    
    
    
    
    
    
    
    
    
    
    101,708HTL TM and GTL Investments:Feasibility studies and other deferred costs
    
    
    
    
    
    
    
    
    
    
    6,615
    
    
    
    5,054
    
    
    
    11,669Feedstock test facility
    
    
    
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    405Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    11,700
    
    
    
    
    
    
    
    11,700Accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    (3,789
    )
    
    
    
    
    
    
    (3,789
    )
    
    
    
    
    
    
    
    14,931
    
    
    
    5,054
    
    
    
    19,985Furniture and equipment
    
    
    530
    
    
    
    115
    
    
    
    80
    
    
    
    
    
    
    
    725Accumulated depreciation
    
    
    (414
    )
    
    
    (56
    )
    
    
    (30
    )
    
    
    
    
    
    
    (500
    )116
    
    
    
    59
    
    
    
    50
    
    
    
    
    
    
    
    225$
    37,166
    
    
    $
    64,717
    
    
    $
    14,981
    
    
    $
    5,054
    
    
    $
    121,918
 TM TM
 INPEX TM TM
  9




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##### Table of Contents



TM
    4. INTANGIBLE ASSETS  TECHNOLOGY
  HTL TM Technology
 Ensyn RTP TM Process TM TM HTL TM Technology HTL TM
 Syntroleum Master License
 Syntroleum GTL Technology GTL
  5. NOTES PAYABLE
  September 30,
    
    
    December 31,2007
    
    
    2006Non-interest bearing promissory note, due 2006 through 2009
    
    $
    3,491
    
    
    $
    5,336Variable rate bank note, 8.36% - 8.48%, due 2008
    
    
    4,500
    
    
    
    1,500Variable rate bank note, 9.337% due 2010
    
    
    7,000
    
    
    
    14,991
    
    
    
    6,836Less:Unamortized discount
    
    
    (201
    )
    
    
    (452
    )Unamortized deferred financing costs
    
    
    (665
    )
    
    
    Current maturities
    
    
    (6,188
    )
    
    
    (2,147
    )(7,054
    )
    
    
    (2,599
    )$
    7,937
    
    
    $
    4,237
 Promissory Notes
  10




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##### Table of Contents



Bank Notes
 LIBOR
   2007
    
    $
    6152008
    
    
    6,9602009
    
    
    4162010
    
    
    7,000$
    14,991
 6. ASSET RETIREMENT OBLIGATIONS
 TM CDF
 Carrying balance, beginning of period
    
    $
    1,953Liabilities incurred
    
    
    20Liabilities transferred
    
    
    (3
    )Accretion expense
    
    
    99Revisions in estimated cash flows
    
    
    6092,678Less: current portion
    
    
    748Carrying balance, end of period
    
    $
    1,930
 7. COMMITMENTS AND CONTINGENCIES
 Zitong Block Exploration Commitment
 Phase 1
 11




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##### Table of Contents



Mitsubishi
 Zitong Partners Phase 2 CNPC
  Income Taxes
  Long Term Obligation
 TM
 Other Commitments
 FTF
 Former Ensyn Affiliate
 12




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##### Table of Contents



8. SHARE CAPITAL
  Common Shares
    
    
    
    
    
    
    Stock OptionsWeightedAverageNumber
    
    
    
    
    
    
    Contributed
    
    
    Number
    
    
    Exercise Price(thousands)
    
    
    Amount
    
    
    Surplus
    
    
    (thousands)
    
    
    Cdn.$Balance December 31, 2006
    
    
    241,216
    
    
    $
    318,725
    
    
    $
    6,489
    
    
    
    12,370
    
    
    $
    2.34Shares issued for:Services
    
        
    427
    
    
    
    794
    
    
    
    Exercise of options
    
    
    1,167
    
    
    
    298
    
    
    
    (20
    )
    
    
    (1,413
    )
    
    $
    0.57Options:Granted
    
    
    
    
    
    
    
    
    
    
    1,819
    
    
    
    1,987
    
    
    $
    2.03Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,552
    )
    
    $
    3.05Purchase warrants expired
    
    

    
    
    
    
    
    
    
    
    533Balance September 30, 2007
    
    
    242,810
    
    
    $
    319,817
    
    
    $
    8,821
    
    
    
    11,392
    
    
    $
    2.43
 Purchase Warrants
   Purchase WarrantsPrice per
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    Exercise
    
    
    Value onYear of
    
    Special
    
    
    
    
    
    
    
    
    
    
    Shares
    
    
    
    
    
    
    
    
    
    
    Price per
    
    
    ExerciseIssue
    
    Warrant
    
    
    Issued
    
    
    Exercisable
    
    
    Issuable
    
    
    Value
    
    
    Expiry Date
    
    
    Share
    
    
    ($U.S. 000)(thousands)
    
    
    ($U.S. 000)2005
    
    Cdn. $3.10
    
    
    4,100
    
    
    
    4,100
    
    
    
    4,100
    
    
    $
    2,412
    
    
    
    (1)
    
    
    Cdn.$3.50
    
    $
    14,3992005
    
    
    U.S.$1.63
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    1,891
    
    
    
    (3)
    
    
    
    U.S.$2.50
    
    
    
    27,9902005
    
    
    n/a
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    314
    
    
    
    (4)
    
    
    
    U.S.$2.00
    
    
    
    4,0002006
    
    
    U.S.$2.23
    
    
    
    11,400
    
    
    
    11,400
    
    
    
    11,400
    
    
    
    18,805
    
    
    May 2011
    
    Cdn. $2.93(2)
    
    
    33,51628,696
    
    
    
    28,696
    
    
    
    28,696
    
    
    $
    23,422
    
    
    
    
    
    
    
    
    
    
    $
    79,905
 
      13




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9. SEGMENT INFORMATION
 TM
 Oil and Gas
  HTL TM
 TM TM TM
 GTL
  Corporate
 .
  Three-Month Period Ended September 30, 2007Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    2,870
    
    
    $
    7,994
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,864Loss on derivative instruments
    
    
    (1,433
    )
    
    
    (720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,153
    )Interest income
    
    
    32
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    1121,469
    
    
    
    7,286
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    8,823Operating costs
    
    
    1,046
    
    
    
    3,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,266General and administrative
    
    
    381
    
    
    
    416
    
    
    
    
    
    
    
    
    
    
    
    1,928
    
    
    
    2,725Business and technology development
    
    
    
    
    
    
    
    
    
    
    2,528
    
    
    
    303
    
    
    
    
    
    
    
    2,831Depletion and depreciation
    
    
    1,306
    
    
    
    4,537
    
    
    
    196
    
    
    
    3
    
    
    
    2
    
    
    
    6,044Interest expense and financing costs
    
    
    110
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    72
    
    
    
    1892,843
    
    
    
    8,173
    
    
    
    2,731
    
    
    
    306
    
    
    
    2,002
    
    
    
    16,055Net Loss
    
    $
    (1,374
    )
    
    $
    (887
    )
    
    $
    (2,731
    )
    
    $
    (306
    )
    
    $
    (1,934
    )
    
    $
    (7,232
    )Capital Investments
    
    $
    645
    
    
    $
    7,735
    
    
    $
    720
    
    
    $
    
    
    
    $
    
    
    
    $
    9,100
 14




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##### Table of Contents



Nine-Month Period Ended September 30, 2007Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    8,380
    
    
    $
    21,869
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30,249Loss on derivative instruments
    
    
    (2,208
    )
    
    
    (720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,928
    )Interest income
    
    
    93
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    224
    
    
    
    3486,265
    
    
    
    21,180
    
    
    
    
    
    
    
    
    
    
    
    224
    
    
    
    27,669Operating costs
    
    
    3,183
    
    
    
    8,991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,174General and administrative
    
    
    1,564
    
    
    
    1,446
    
    
    
    
    
    
    
    
    
    
    
    5,971
    
    
    
    8,981Business and technology development
    
    
    
    
    
    
    
    
    
    
    6,680
    
    
    
    661
    
    
    
    
    
    
    
    7,341Depletion and depreciation
    
    
    4,402
    
    
    
    13,591
    
    
    
    955
    
    
    
    8
    
    
    
    4
    
    
    
    18,960Interest expense and financing costs
    
    
    295
    
    
    
    5
    
    
    
    20
    
    
    
    
    
    
    
    251
    
    
    
    5719,444
    
    
    
    24,033
    
    
    
    7,655
    
    
    
    669
    
    
    
    6,226
    
    
    
    48,027Net Loss
    
    $
    (3,179
    )
    
    $
    (2,853
    )
    
    $
    (7,655
    )
    
    $
    (669
    )
    
    $
    (6,002
    )
    
    $
    (20,358
    )Capital Investments
    
    $
    2,438
    
    
    $
    18,053
    
    
    $
    2,066
    
    
    $
    
    
    
    $
    
    
    
    $
    22,557Identifiable Assets (As at September 30, 2007)
    
    $
    42,328
    
    
    $
    82,384
    
    
    $
    99,402
    
    
    $
    15,071
    
    
    $
    4,029
    
    
    $
    243,214Identifiable Assets (As at December 31, 2006)
    
    $
    42,158
    
    
    $
    72,970
    
    
    $
    107,186
    
    
    $
    15,081
    
    
    $
    11,149
    
    
    $
    248,544
 Three-Month Period Ended September 30, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    3,396
    
    
    $
    10,349
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,745Interest income
    
    
    46
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    2703,442
    
    
    
    10,376
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    14,015Operating costs
    
    
    976
    
    
    
    3,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,724General and administrative
    
    
    431
    
    
    
    359
    
    
    
    
    
    
    
    
    
    
    
    2,131
    
    
    
    2,921Business and technology development
    
    
    
    
    
    
    
    
    
    
    1,661
    
    
    
    382
    
    
    
    
    
    
    
    2,043Depletion and depreciation
    
    
    1,445
    
    
    
    5,910
    
    
    
    413
    
    
    
    3
    
    
    
    1
    
    
    
    7,772Interest expense and financing costs
    
    
    60
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    211Write off of deferred acquisition costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7322,912
    
    
    
    10,784
    
    
    
    2,074
    
    
    
    385
    
    
    
    2,248
    
    
    
    18,403Net Income (Loss)
    
    $
    530
    
    
    $
    (408
    )
    
    $
    (2,074
    )
    
    $
    (385
    )
    
    $
    (2,051
    )
    
    $
    (4,388
    )Capital Investments
    
    $
    2,929
    
    
    $
    1,630
    
    
    $
    393
    
    
    $
    67
    
    
    $
    
    
    
    $
    5,019
 15




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##### Table of Contents



Nine-Month Period Ended September 30, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    9,455
    
    
    $
    26,930
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    36,385Interest income
    
    
    112
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    5789,567
    
    
    
    26,972
    
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    36,963Operating costs
    
    
    3,092
    
    
    
    8,206
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,298General and administrative
    
    
    1,353
    
    
    
    1,038
    
    
    
    
    
    
    
    
    
    
    
    5,257
    
    
    
    7,648Business and technology development
    
    
    
    
    
    
    
    
    
    
    4,008
    
    
    
    1,151
    
    
    
    
    
    
    
    5,159Depletion and depreciation
    
    
    3,906
    
    
    
    17,573
    
    
    
    3,317
    
    
    
    8
    
    
    
    4
    
    
    
    24,808Interest expense and financing costs
    
    
    189
    
    
    
    141
    
    
    
    3
    
    
    
    
    
    
    
    404
    
    
    
    737Write off of deferred acquisition costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    732Provision for impairment
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7508,540
    
    
    
    28,440
    
    
    
    7,328
    
    
    
    1,159
    
    
    
    5,665
    
    
    
    51,132Net Income (Loss)
    
    $
    1,027
    
    
    $
    (1,468
    )
    
    $
    (7,328
    )
    
    $
    (1,159
    )
    
    $
    (5,241
    )
    
    $
    (14,169
    )Capital Investments
    
    $
    4,982
    
    
    $
    6,292
    
    
    $
    1,909
    
    
    $
    439
    
    
    $
    
    
    
    $
    13,622
 10. DERIVATIVE INSTRUMENTS
     16




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##### Table of Contents



11. SUPPLEMENTAL CASH FLOW INFORMATION
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Supplemental Cash Flow Information:Cash paid during the period for:Income taxes
    
    $
    1
    
    
    $
    
    
    
    $
    6
    
    
    $
    6Interest
    
    $
    22
    
    
    $
    73
    
    
    $
    108
    
    
    $
    371Investing and Financing activities, non-cash:Acquisition of oil and gas assetsShares issued
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,000Debt issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,547Receivable applied to acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,746$
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,293Changes in non-cash working capital itemsOperating Activities:Accounts receivable
    
    $
    (921
    )
    
    $
    (1,130
    )
    
    $
    (453
    )
    
    $
    (2,986
    )Prepaid and other current assets
    
    
    155
    
    
    
    26
    
    
    
    407
    
    
    
    (71
    )Accounts payable and accrued liabilities
    
    
    1,081
    
    
    
    1,383
    
    
    
    234
    
    
    
    (543
    )315
    
    
    
    279
    
    
    
    188
    
    
    
    (3,600
    )Investing ActivitiesAccounts receivable
    
    
    (5
    )
    
    
    (49
    )
    
    
    (139
    )
    
    
    2,163Prepaid and other current assets
    
    
    19
    
    
    
    (16
    )
    
    
    79
    
    
    
    28Accounts payable and accrued liabilities
    
    
    2,175
    
    
    
    (4,177
    )
    
    
    755
    
    
    
    (12,462
    )Project advance from partner
    
    
    
    
    
    
    (1,064
    )
    
    
    
    
    
    
    2,1862,189
    
    
    
    (5,306
    )
    
    
    695
    
    
    
    (8,085
    )$
    2,504
    
    
    $
    (5,027
    )
    
    $
    883
    
    
    $
    (11,685
    )
 12. MERGER AND ACQUISITIONS
 Richfirst Sunwing"
 CMA
 17




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##### Table of Contents



13. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP
  Condensed Consolidated Balance Sheets
 Shareholders Equity and Oil and Gas Properties and Investments
 As at September 30, 2007Oil and Gas
    
    
    
    
    
    

Shareholders EquityProperties and
    
    
    Derivative
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    Instruments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    116,150
    
    
    $
    3,175
    
    
    $
    343,239
    
    
    $
    8,821
    
    
    $
    (141,141
    )
    
    $
    210,919Adjustments for:Reduction in stated capital (i)
    
    
    
    
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation (ii)
    
    
    
    
    
    
    
    
    
    
    (397
    )
    
    
    (3,351
    )
    
    
    3,748
    
    
    
    Fair value adjustment of derivative
instruments (iii)
    
    
    
    
    
    
    6,903
    
    
    
    (8,019
    )
    
    
    (533
    )
    
    
    1,649
    
    
    
    (6,903
    )Ascribed value of shares issued for U.S.
royalty interests, net (iv)
    
    
    1,358
    
    
    
    
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment (v)
    
    
    (26,270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,270
    )
    
    
    (26,270
    )Depletion adjustments due to differences
in provision for impairment (vi)
    
    
    8,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,019
    
    
    
    8,019HTL TM and GTL development costs
expensed, net (vii)
    
    
    (5,570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,570
    )
    
    
    (5,570
    )U.S. GAAP
    
    $
    93,687
    
    
    $
    10,078
    
    
    $
    410,636
    
    
    $
    4,937
    
    
    $
    (234,020
    )
    
    $
    181,553
 As at December 31, 2006Oil and Gas
    
    
    
    
    
    

Shareholders EquityProperties and
    
    
    Derivative
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    Instruments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    121,918
    
    
    $
    493
    
    
    $
    342,680
    
    
    $
    6,489
    
    
    $
    (120,783
    )
    
    $
    228,386Adjustments for:Reduction in stated capital (i)
    
    
    
    
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation (ii)
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    (3,361
    )
    
    
    3,748
    
    
    
    Fair value adjustment of derivative
instruments (iii)
    
    
    
    
    
    
    6,378
    
    
    
    (8,552
    )
    
    
    
    
    
    
    2,174
    
    
    
    (6,378
    )Ascribed value of shares issued for U.S.
royalty interests, net (iv)
    
    
    1,358
    
    
    
    
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment (v)
    
    
    (26,270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,270
    )
    
    
    (26,270
    )Depletion adjustments due to differences
in provision for impairment (vi)
    
    
    4,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,402
    
    
    
    4,402HTL TM and GTL development costs
expensed, net (vii)
    
    
    (11,669
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,669
    )
    
    
    (11,669
    )U.S. GAAP
    
    $
    89,739
    
    
    $
    6,871
    
    
    $
    409,554
    
    
    $
    3,128
    
    
    $
    (222,853
    )
    
    $
    189,829
 18




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##### Table of Contents



Shareholders Equity
   FASB SFAS No. 123(R)
 SFAS No. 133
 Oil and Gas Properties and Investments
   19




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##### Table of Contents



Ceiling Test Impairments
    
    
    (Increase)U.S. GAAP
    
    
    Canadian GAAP
    
    
    DecreaseU.S. PropertiesPrior to 2004
    
    $
    34,000
    
    
    $
    34,000
    
    
    $
    2004
    
    
    15,000
    
    
    
    16,350
    
    
    
    1,3502005
    
    
    2,800
    
    
    
    
    
    
    
    (2,800
    )2006
    
    
    7,600
    
    
    
    
    
    
    
    (7,600
    )2007
    
    
    
    
    
    
    
    
    
    
    59,400
    
    
    
    50,350
    
    
    
    (9,050
    )China PropertiesPrior to 2004
    
    
    10,000
    
    
    
    
    
    
    
    (10,000
    )2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    1,700
    
    
    
    5,000
    
    
    
    3,3002006
    
    
    15,940
    
    
    
    5,420
    
    
    
    (10,520
    )2007
    
    
    
    
    
    
    
    
    
    
    27,640
    
    
    
    10,420
    
    
    
    (17,220
    )$
    87,040
    
    
    $
    60,770
    
    
    $
    (26,270
    )
  TM TM TM
 20




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##### Table of Contents



Condensed Consolidated Statements of Operations
  Three-Month Periods Ended September 30,2007
    
    
    2006Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    (7,232
    )
    
    $
    (0.03
    )
    
    $
    (4,388
    )
    
    $
    (0.02
    )Fair value adjustment of derivative instruments (iii)
    
    
    3,571
    
    
    
    0.01
    
    
    
    1,695
    
    
    
    0.01Provision for impairment (v and viii)
    
    
    
    
    
    
    
    
    
    
    (3,570
    )
    
    
    (0.01
    )Depletion adjustments due to differences in
provision for impairment (viii)
    
    
    1,172
    
    
    
    0.01
    
    
    
    887
    
    
    
    HTL TM and GTL development costs expensed (ix)
    
    
    (62
    )
    
    
    
    
    
    
    (46
    )
    
    
    U.S. GAAP
    
    $
    (2,551
    )
    
    $
    (0.01
    )
    
    $
    (5,422
    )
    
    $
    (0.02
    )Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    
    
    
    
    242,747
    
    
    
    
    
    
    
    241,181
 Nine-Month Periods Ended September 30,2007
    
    
    2006Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    (20,358
    )
    
    $
    (0.08
    )
    
    $
    (14,169
    )
    
    $
    (0.06
    )Fair value adjustment of derivative instruments (iii)
    
    
    (525
    )
    
    
    
    
    
    
    (956
    )
    
    
    Provision for impairment (v and viii)
    
    
    
    
    
    
    
    
    
    
    (10,020
    )
    
    
    (0.04
    )Depletion adjustments due to differences in
provision for impairment (viii)
    
    
    3,617
    
    
    
    0.01
    
    
    
    1,909
    
    
    
    HTL TM and GTL development costs expensed (ix)
    
    
    (180
    )
    
    
    
    
    
    
    (931
    )
    
    
    Recovery of
HTL TM investments (ix)
    
    
    6,279
    
    
    
    0.02
    
    
    
    
    
    
    
    U.S. GAAP
    
    $
    (11,167
    )
    
    $
    (0.05
    )
    
    $
    (24,167
    )
    
    $
    (0.10
    )Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    
    
    
    
    241,812
    
    
    
    
    
    
    
    233,766
  TM
 TM TM
 21




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##### Table of Contents



Pro Forma Effect of Merger and Acquisition
  Three-Months Ended September 30, 2006
    
    
    Nine-Months Ended September 30, 2006Net
    
    
    Net Loss
    
    
    
    
    
    
    Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per Share
    
    
    Revenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    14,015
    
    
    $
    (5,422
    )
    
    $
    (0.02
    )
    
    $
    36,963
    
    
    $
    (24,167
    )
    
    $
    (0.10
    )Pro forma adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,051
    
    
    
    809
    
    
    
    $
    14,015
    
    
    $
    (5,422
    )
    
    $
    (0.02
    )
    
    $
    38,014
    
    
    $
    (23,358
    )
    
    $
    (0.10
    )Weighted Average Number
of Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    241,181
    
    
    
    
    
    
    
    
    
    
    
    235,371
 Income Taxes
 FIN 48
    Condensed Consolidated Statements of Cash Flow
 TM
 22




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##### Table of Contents



Impact of New and Pending U.S. GAAP Accounting Standards
 FASB SFAS No. 159
 SFAS No. 157
 23




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 TM
   SPECIAL NOTE TO CANADIAN INVESTORS
 SEC CSA National Instrument 51-101  Standards of Disclosure for
Oil and Gas Activities Special Note to Canadian Investors
   Boe
    
    = barrel of oil equivalentBbl
    
    = barrelMBbl
    
    = thousand barrelsMMBbl
    
    = million barrelsMboe
    
    = thousands of barrels of oil equivalentBopd
    
    = barrels of oil per dayBbls/d
    
    = barrels per dayBoe/d
    
    = barrels of oil equivalent per dayMboe/d
    
    = thousands of barrels of oil equivalent per dayMBbls/d
    
    = thousand barrels per dayMMBls/d
    
    = million barrels per dayMMBtu
    
    = million British thermal unitsMcf
    
    = thousand cubic feetMMcf
    
    = million cubic feetMcf/d
    
    = thousand cubic feet per dayMMcf/d
    
    = million cubic feet per day
 equivalents
 24




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##### Table of Contents



www.ivanhoeenergy.com
 Ivanhoe Energys Business
 RTP TM Process HTL TM Technology HTL TM EOR E&P GTL
Technology GTL
 TM TM
 TM TM TM .
 Corporate Strategy
 Importance of the Heavy Oil Segment of the Oil and Gas Industry
      25




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##### Table of Contents



Ivanhoes Value Proposition
 TM
 TM TM
 TM TM TM
 TM
 TM
 Implementation Strategies
 TM
 1.
    
    Build a portfolio of major HTLTMprojects.We will continue to deploy our
personnel and our financial resources in support of our goal to capture opportunities for
development projects utilizing our HTLTM Technology. We recently signed an
agreement with a Western Canadian oil sands producer for a joint feasibility and testing
program using our HTLTM Technology for the processing of a unique heavy oil
stream from the producers operations in the Athabasca oil sands. The application
contemplated by this test program complements our main strategy of deploying our
HTLTM Technology as a strategic tool to acquire and develop heavy oil reserves.2.
    
    Advance the technology.Additional development work will continue as we advance the
technology through the first commercial application and beyond. To optimize the technology
development process, the Company has recently commenced design and construction of a
Feedstock Test Facility (FTF) that has been designed to process small quantities of heavy
oil and will allow us to:
 
    
    Screen and test heavy oil and bitumen feedstocks in cost-effective
quantities for current and potential partners,
    
    Produce, assess and evaluate physical liquid products from partner heavy
oil and bitumen feedstocks,
    
    Conduct ongoing research and development in order to add to our portfolio
of patents through the development and testing of improvements and optimizations,
and
    
    Have an HTLTM showcase that possesses all of the key elements
of a commercial facility.
 3.
    
    Enhance our financial position in anticipation of major projects.Implementation of
large projects requires significant capital outlays. We are refining our financing plans
and establishing the relationships required for the development activities that we see
ahead. In the second quarter, the Company concluded an agreement with INPEX Corporation,
Japans largest oil and gas exploration and production company, to jointly pursue the
opportunity to develop a heavy oil field in Iraq. This agreement complements a number of other initiatives
that the Company has underway that focus on heavy oil basins around the world.4.
    
    Build internal capabilities in advance of major projects.The HTLTM
technical team, which includes our own staff and specialized consultants, including the
inventors of the technology, has been expanded by adding additional expertise in areas such
as technical development, project management, heavy oil development and human resources.
 26




---



##### Table of Contents



5.
    
    Build the relationships that we will need for the future.Commercialization of our
technologies demands close alignment with partners, suppliers, host governments and
financiers. The Company recently successfully completed a key Athabasca bitumen test run at
its CDF. This test was an important step for our business development activities, as well
as for the design of full-scale HTLTM facilities. This run represents the
culmination of the CDF testing program carried out over the last two years. This test run
was carried out pursuant to a technology development agreement entered into in August 2000
between subsidiaries of Ivanhoe Energy and ConocoPhillips Canada Resources Corp.
(ConocoPhillips Canada). ConocoPhillips Canada provided the Company with the Athabasca
bitumen. ConocoPhillips Canada has certain non-exclusive, capacity and time-specific rights
to use the HTLTM Technology in Canada. The test run was witnessed by a third
party engineering firm in preparation for the formalization of key investment banking
relationships for the Company.6.
    
    Capture value from other company assets as we complete the transition to a heavy oil
focused company.Revenue from existing operations in California and China will be utilized
to fund growth of the business. Non-heavy oil related investment opportunities in our
portfolio will be leveraged to capture value and provide maximum return for the Company. In
the third quarter, the Company closed a three year, $30 million Revolving/Term Credit
Facility with an initial borrowing base of $10 million with an international bank. The
facility is secured principally by operating cash flow from our China operations.
 Executive Overview of 2007 Results
  Three-Month Periods Ended September 30,
    
    Nine-Month Periods Ended September 30,2007
    
    2006
    
    2007
    
    2006Oil and gas revenue
    
    $
    10,864
    
    
    $
    13,745
    
    
    $
    30,249
    
    
    $
    36,385Net loss
    
    $
    (7,232
    )
    
    $
    (4,388
    )
    
    $
    (20,358
    )
    
    $
    (14,169
    )Net loss per share
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.06
    )Average production (Boe/d)
    
    
    1,734
    
    
    
    2,306
    
    
    
    1,863
    
    
    
    2,192Net operating revenue per Boe
    
    $
    41.36
    
    
    $
    42.99
    
    
    $
    35.53
    
    
    $
    41.91Capital investments
    
    $
    9,100
    
    
    $
    5,019
    
    
    $
    22,557
    
    
    $
    13,622Cash flow from operating activities
    
    $
    1,766
    
    
    $
    5,353
    
    
    $
    4,566
    
    
    $
    11,055
 27




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##### Table of Contents



Financial Results  Change in Net Loss
  Three-Month Periods Ended September 30,:
    
    
    Nine-Month Periods Ended September 30,:Favorable
    
    
    
    
    
    
    
    
    
    
    
    
    Favorable(Unfavorable)
    
    
    
    
    
    
    
    
    
    
    
    
    (Unfavorable)2007
    
    
    
    Variances
    
    
    
    2006
    
    
    2007
    
    
    
    Variances
    
    
    
    2006Summary of Net Loss
by Significant Components:Oil and Gas Revenues:
    
    $
    10,864
    
    
    
    
    
    
    
    
    $
    13,745
    
    
    $
    30,249
    
    
    
    
    
    
    
    
    $
    36,385Production volumes
    
    
    
    
    
    
    $
    (3,263
    )
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,415
    )Oil and gas prices
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    
    
    (721
    )Realized loss on derivative instruments
     
    
    (423
    )
    
    
    
    (423
    )
    
    
    
    
    
    
    
    (246
    )
    
    
    
    (246
    )
    
    
    
    Operating costs
    
    
    (4,266
    )
    
    
    
    458
    
    
    
    
    (4,724
    )
    
    
    (12,174
    )
    
    
    
    (876
    )
    
    
    
    (11,298
    )General and administrative, less
stock based compensation
    
    
    (2,233
    )
    
    
    
    (305
    )
    
    
    
    (1,928
    )
    
    
    (6,981
    )
    
    
    
    (1,234
    )
    
    
    
    (5,747
    )Business and technology development,
less stock based compensation
    
    
    (2,565
    )
    
    
    
    (634
    )
    
    
    
    (1,931
    )
    
    
    (6,728
    )
    
    
    
    (1,842
    )
    
    
    
    (4,886
    )Acquisition costs
    
    
    
    
    
    
    
    732
    
    
    
    
    (732
    )
    
    
    
    
    
    
    
    732
    
    
    
    
    (732
    )Net interest
    
    
    (14
    )
    
    
    
    (98
    )
    
    
    
    84
    
    
    
    (42
    )
    
    
    
    18
    
    
    
    
    (60
    )Unrealized loss on derivative instruments
    
    
    (1,730
    )
    
    
    
    (1,730
    )
    
    
    
    
    
    
    
    (2,682
    )
    
    
    
    (2,682
    )
    
    
    
    Depletion and depreciation
    
    
    (6,044
    )
    
    
    
    1,728
    
    
    
    
    (7,772
    )
    
    
    (18,960
    )
    
    
    
    5,848
    
    
    
    
    (24,808
    )Stock based compensation
    
    
    (758
    )
    
    
    
    347
    
    
    
    
    (1,105
    )
    
    
    (2,613
    )
    
    
    
    (439
    )
    
    
    
    (2,174
    )Impairment of oil and gas properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    
    (750
    )Other
    
    
    (63
    )
    
    
    
    (38
    )
    
    
    
    (25
    )
    
    
    (181
    )
    
    
    
    (82
    )
    
    
    
    (99
    )Net Loss
    
    $
    (7,233
    )
    
    
    $
    (2,844
    )
    
    
    $
    (4,388
    )
    
    $
    (20,358
    )
    
    
    $
    (6,189
    )
    
    
    $
    (14,169
    )
    28




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##### Table of Contents



Revenues and Operating Costs
  Three-Month Periods Ended September 30,
    
    Nine-Month Periods Ended September 30,Net
Boes
    
    Percentage
    

Net
Boes
    
    Percentage2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeChina:Dagang
    
    
    111,012
    
    
    
    147,571
    
    
    
    -25
    %
    
    
    342,368
    
    
    
    414,660
    
    
    
    -17
    %Daqing
    
    
    5,172
    
    
    
    5,196
    
    
    
    0
    %
    
    
    16,069
    
    
    
    17,189
    
    
    
    -7
    %116,184
    
    
    
    152,767
    
    
    
    -24
    %
    
    
    358,437
    
    
    
    431,849
    
    
    
    -17
    %U.S.:South Midway
    
    
    38,297
    
    
    
    49,901
    
    
    
    -23
    %
    
    
    134,265
    
    
    
    141,113
    
    
    
    -5
    %Spraberry
    
    
    4,837
    
    
    
    6,201
    
    
    
    -22
    %
    
    
    14,876
    
    
    
    18,167
    
    
    
    -18
    %Others
    
    
    240
    
    
    
    956
    
    
    
    -75
    %
    
    
    1,092
    
    
    
    7,376
    
    
    
    -85
    %43,374
    
    
    
    57,058
    
    
    
    -24
    %
    
    
    150,233
    
    
    
    166,656
    
    
    
    -10
    %159,558
    
    
    
    209,825
    
    
    
    -24
    %
    
    
    508,670
    
    
    
    598,505
    
    
    
    -15
    %
    China
  PRC Windfall Levy Measures Windfall Levy
 29




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##### Table of Contents



U.S.
     Three-Month Periods Ended September 30,2007
    
    
    2006China
    
    
    U.S.
    
    
    Total
    
    
    China
    
    
    U.S.
    
    
    TotalNet Production:Boe
    
    
    116,184
    
    
    
    43,374
    
    
    
    159,558
    
    
    
    152,767
    
    
    
    57,058
    
    
    
    209,825Boe/day for the period
    
    
    1,263
    
    
    
    471
    
    
    
    1,734
    
    
    
    1,679
    
    
    
    627
    
    
    
    2,306Per Boe
    
    
    
    
    
    
    
    
    
    Per BoeOil and gas revenue
    
    $
    68.81
    
    
    $
    66.16
    
    
    $
    68.09
    
    
    $
    67.74
    
    
    $
    59.51
    
    
    $
    65.50Field operating costs
    
    
    17.20
    
    
    
    18.06
    
    
    
    17.43
    
    
    
    15.02
    
    
    
    12.66
    
    
    
    14.38Production tax (U.S.) and Windfall Levy (China)
    
    
    9.20
    
    
    
    1.46
    
    
    
    7.09
    
    
    
    8.84
    
    
    
    0.97
    
    
    
    6.70Engineering and support costs
    
    
    1.32
    
    
    
    4.59
    
    
    
    2.21
    
    
    
    0.67
    
    
    
    3.47
    
    
    
    1.4327.72
    
    
    
    24.11
    
    
    
    26.73
    
    
    
    24.53
    
    
    
    17.10
    
    
    
    22.51Net operating revenue
    
    
    41.09
    
    
    
    42.05
    
    
    
    41.36
    
    
    
    43.21
    
    
    
    42.41
    
    
    
    42.99Depletion
    
    
    39.02
    
    
    
    29.91
    
    
    
    36.55
    
    
    
    38.68
    
    
    
    25.11
    
    
    
    34.99Net revenue from operations
    
    $
    2.07
    
    
    $
    12.14
    
    
    $
    4.81
    
    
    $
    4.53
    
    
    $
    17.30
    
    
    $
    8.00
 Nine-Month Periods Ended September 30,2007
    
    
    2006China
    
    
    U.S.
    
    
    Total
    
    
    China
    
    
    U.S.
    
    
    TotalNet Production:Boe
    
    
    358,437
    
    
    
    150,233
    
    
    
    508,670
    
    
    
    431,849
    
    
    
    166,656
    
    
    
    598,505Boe/day for the period
    
    
    1,313
    
    
    
    550
    
    
    
    1,863
    
    
    
    1,582
    
    
    
    610
    
    
    
    2,192Per Boe
    
    
    
    
    
    
    
    
    
    Per BoeOil and gas revenue
    
    $
    61.01
    
    
    $
    55.78
    
    
    $
    59.47
    
    
    $
    62.36
    
    
    $
    56.74
    
    
    $
    60.79Field operating costs
    
    
    17.65
    
    
    
    14.86
    
    
    
    16.83
    
    
    
    12.81
    
    
    
    13.63
    
    
    
    13.04Production tax (U.S.) and Windfall Levy (China)
    
    
    6.18
    
    
    
    1.27
    
    
    
    4.73
    
    
    
    5.49
    
    
    
    1.24
    
    
    
    4.31Engineering and support costs
    
    
    1.26
    
    
    
    5.06
    
    
    
    2.38
    
    
    
    0.70
    
    
    
    3.68
    
    
    
    1.5325.09
    
    
    
    21.19
    
    
    
    23.94
    
    
    
    19.00
    
    
    
    18.55
    
    
    
    18.88Net operating revenue
    
    
    35.92
    
    
    
    34.59
    
    
    
    35.53
    
    
    
    43.36
    
    
    
    38.19
    
    
    
    41.91Depletion
    
    
    37.89
    
    
    
    29.08
    
    
    
    35.29
    
    
    
    40.69
    
    
    
    23.21
    
    
    
    35.82Net revenue (loss) from operations
    
    $
    (1.97
    )
    
    $
    5.51
    
    
    $
    0.24
    
    
    $
    2.67
    
    
    $
    14.98
    
    
    $
    6.09
 30




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##### Table of Contents



General and Administrative
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSept 30,
    
    
    Sept 30,2007 vs.
    
    
    2007 vs.2006
    
    
    2006Favorable (unfavorable) variances:Oil and Gas Activities:China
    
    $
    (57
    )
    
    $
    (408
    )U.S.
    
    
    50
    
    
    
    (211
    )Corporate
    
    
    203
    
    
    
    (714
    )196
    
    
    
    (1,333
    )Less: stock based compensation
    
    
    (501
    )
    
    
    99$
    (305
    )
    
    $
    (1,234
    )
 TM
 Business and Technology Development
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSept 30,
    
    
    Sept 30,2007 vs.
    
    
    2007 vs.2006
    
    
    2006Favorable (unfavorable) variances:HTL TM
    
    $
    (867
    )
    
    $
    (2,672
    )GTL
    
    
    79
    
    
    
    490(788
    )
    
    
    (2,182
    )Less: stock based compensation
    
    
    154
    
    
    
    340$
    (634
    )
    
    $
    (1,842
    )
 TM TM
 31




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##### Table of Contents



TM
 Depletion and Depreciation
  China
   U.S.
  HTL TM
  Financial Condition, Liquidity and Capital Resources
 Sources and Uses of Cash
  Operating Activities
  Investing Activities
  32




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##### Table of Contents



TM
 TM TM
 Financing Activities
   Outlook for balance of 2007
 TM TM
 33




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##### Table of Contents



Contractual Obligations
  Payments Due by Year(stated in thousands of U.S. dollars)Total
    
    2007
    
    2008
    
    2009
    
    2010
    
    After 2010Consolidated Balance Sheets:Note payable  current portion
    
    
    6,188
    
    
    
    553
    
    
    
    5,635
    
    
    
    
    
    
    
    
    
    
    
    Long term debt
    
    
    7,937
    
    
    
    
    
    
    
    1,190
    
    
    
    412
    
    
    
    6,335
    
    
    
    Asset retirement obligation
    
    
    2,678
    
    
    
    147
    
    
    
    601
    
    
    
    503
    
    
    
    
    
    
    
    1,427Long term obligation
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    1,900
    
    
    
    
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payable
    
    
    3,022
    
    
    
    349
    
    
    
    1,141
    
    
    
    856
    
    
    
    676
    
    
    
    Lease commitments
    
    
    3,652
    
    
    
    286
    
    
    
    1,061
    
    
    
    863
    
    
    
    738
    
    
    
    704Zitong exploration commitment
    
    
    188
    
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    25,565
    
    
    $
    1,523
    
    
    $
    9,628
    
    
    $
    4,534
    
    
    $
    7,749
    
    
    $
    2,131
 Off Balance Sheet Arrangements
  Outstanding Share Data
  Quarterly Financial Data In Accordance With Canadian and U.S. GAAP (Unaudited)
 QUARTER ENDED2007
    
    2006
    
    20053rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th Qtr
    
    3rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th QtrTotal revenue
    
    $
    8,823
    
    
    $
    9,589
    
    
    $
    9,257
    
    
    $
    11,137
    
    
    $
    14,015
    
    
    $
    13,084
    
    
    $
    9,864
    
    
    $
    8,651Net loss:Canadian GAAP
    
    $
    (7,232
    )
    
    $
    (6,579
    )
    
    $
    (6,547
    )
    
    $
    (11,323
    )
    
    $
    (4,388
    )
    
    $
    (4,405
    )
    
    $
    (5,376
    )
    
    $
    (8,885
    )U.S. GAAP
    
    $
    (2,551
    )
    
    $
    (1,211
    )
    
    $
    (7,536
    )
    
    $
    (18,255
    )
    
    $
    (5,422
    )
    
    $
    (2,329
    )
    
    $
    (16,416
    )
    
    $
    (7,545
    )Net loss per share:Canadian GAAP
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )U.S. GAAP
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.03
    )
    
    $
    (0.08
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.07
    )
    
    $
    (0.03
    )
 TM
 34




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    35




---



##### Table of Contents



Part II  Other Information
 
 Item 1. Legal Proceedings:
 
 Item 1A. Risk Factors:
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
 
 Item 3. Defaults Upon Senior Securities:
 
 Item 4. Submission of Matters To a Vote of Security Holders:
 
 Item 5. Other Information:
 
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION10.15
    
    Facility Agreement, dated September 14, 2007 between Pan-China Resources Ltd., Sunwing
Energy Ltd., Sunwing Holding Corporation, Sunwing Zitong Energy Ltd., Standard Bank PLC and
Standard Bank Asia Limited31.1
    
    Certification by the Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification by the Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 36




---



##### Table of Contents



/s/ W. Gordon
Lancaster
  37




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.15
    
    Facility Agreement, dated September 14, 2007 between Pan-China Resources Ltd., Sunwing
Energy Ltd., Sunwing Holding Corporation, Sunwing Zitong Energy Ltd., Standard Bank PLC and
Standard Bank Asia Limited31.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 38